Indian Institute of Management Rohtak

Session 1
Management Accounting
-Introduction

By
Prof Archana Patro
 Course Objectives
• To enable students understand the role and functions
of Management accounting and costing in the
organization
• Learn Various cost concepts, costing methods and
its use in Managerial decision making
• To understand control implications of costing and
management accounting
• To appreciate decisional, behavioral and strategic
implications of cost and management accounting
 REQUIRED MATERIAL
Text: (Main Reference)
“Cost accounting – A managerial Emphasis”
by Charles T Hongrane, Srikant M.Datar, & Madhav
V.Rajan, Pearson
Course Pack: Harvard Cases and Reading articles, Text book
exercises
Keep Calculator
Laptop (When asked for by email for that particular session)
 Time for CFOs to step up

• chief financial officer’s job has become

more complex in recent years as mergers
and acquisitions, financial structuring, and
managing relations with investors and
analysts
• potential value that the CFO adds in a
more traditional role—as guardian and
leader of good planning and performance
management—has lapsed into neglect

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 Time for CFOs to step up

• shareholder value comes from internally

generated growth, through new products or
services, new business, or cost and capital
efficiencies.
• executives have been exposed to value-
based management (VBM); economic value
added (EVA), also known as economic profit;
the balanced scorecard; cash flow return on
investment (CFROI); and a flurry of other
performance measures.

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Four principles that CFOs can rely
on to keep themselves—and their
companies—on track.
1. Understand how your company creates
value
2. Integrate financial and operational
measures
3. Keep the measurement system
transparent and uniform
4. Focus on the dialogue
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DEFINE MANAGERIAL ACCOUNTING

A field of accounting that provides

financial and economic information for
managers and internal users -
the people who are mainly responsible for
making decisions.
DEFINE MANAGERIAL ACCOUNTING

Managerial accounting is the process of

 Identifying
 Measuring
 Analyzing
 Interpreting
 Communicating information
 Management Accounting and Financial
Accounting
PRIMARY USERS
Financial Management
• External • Internal Managers of the
• Investors, Creditors, business
Government authorities • Assist managers in
formulation and
• Provides summary of an
implementation of
entity’s financial organization’s strategy
condition and results of
• Use both quantitative and
activities. qualitative information
 Management Accounting and Financial
Accounting
PURPOSE OF INFORMATION

Financial Management
• Help investors and • Help managers plan and
creditors make control business
investment, and credit operations, make
decisions decisions, communicate
strategy, evaluate
performance, control/
align behaviour.
 Management Accounting and Financial
Accounting
FOCUS AND TIME DIMENSION OF THE INFORMATION

Financial Management
• Relevance and • Relevance
reliability • Focus on future
• Focus on the past • May use projections
• Primarily uses historical about the future
data
 Management Accounting and Financial
Accounting
SCOPE OF INFORMATION
Financial Management
• Summary reports • Detailed reports on parts
primarily on the of the company
company as a whole • Often on daily or
• On quarterly or annual weekly basis
basis
 Management Accounting and Financial
Accounting
REGULATIONS
Financial Management
• Must follow GAAP and • Need not follow GAAP
prescribed formats or any prescribed format
• Regulated by the
Financial Accounting • unregulated, since it is
Standards Board, and, to intended only for
a lesser degree, the management.
Securities and Exchange
Commission.
Management Accounting and Financial
Accounting
VERIFICATION
Financial Management
• Annual independent • No independent audit
audit by CPAs
• Emphasis on • Emphasis on
verifiability relevance for
planning and control
 Management Accounting and Financial
Accounting
BEHAVIORAL
Financial Management
• Concern about adequacy • Concern about how
of disclosure reports will affect
• Behavioral implications employee behavior
are secondary
 Strategy and Management Accounting

• Strategy – specifies how an organization

matches its own capabilities with the
opportunities in the marketplace to accomplish
its objectives

• Strategic Cost Management – focuses

specifically on the cost dimension within a
firm’s overall strategy
 Strategy and Management Accounting
Management accounting helps answer important
questions such as:
Who are our most important customers, and how do we
deliver value to them?
What substitute products exist in the marketplace, and
how do they differ from our own?
What is our critical capability?
Will we have enough cash to support our strategy or
will we need to seek additional sources?
 Management Accounting and Value

• Creating value is an important part of planning

and implementing strategy

• Value is the usefulness a customer gains from

a company’s product or service
 Management Accounting and Value

• Value Chain is the sequence of business functions in which

customer usefulness is added to products or services
• The Value-Chain consists of:
Research & Development
Design
Production
Marketing
Distribution
Customer Service
The Value Chain Illustrated
Supply Chain Analysis
 Key Success Factors

• The dimensions of performance that customers

expect, and that are key to the success of a
company include:
Cost and efficiency
Quality
Time
Innovation
 A Five-Step Decision Making Process in
Planning and Control

1. Identify the problem and uncertainties

2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing between alternatives
5. Implement the decision, evaluate performance,
and learn
 Planning and Control Systems
• Planning selects goals, predicts results, decides
how to attain goals, and communicates this to the
organization
Budget – the most important planning tool

• Control takes actions that implement the planning

decision, decides how to evaluate performance,
and provides feedback to the organization
 Key Management Accounting Guidelines
• Cost – Benefit approach is commonly used:
benefits generally must exceed costs as a basic
decision rule
• Behavioral & Technical Considerations – people
are involved in decisions, not just dollars and
cents
• Different definitions of cost may be used for
different applications
A Typical Organizational Structure and the
Management Accountant
 Line and Staff Positions

• A line position is • A staff position supports

directly involved in and assists line
achieving the basic positions.
objectives of an – Example: A cost
organization. accountant in the
manufacturing plant
– Example: A
production supervisor
in a manufacturing
plant.
 The Chief Financial Officer (CFO)

A member of the top management team

responsible for:
– Providing timely and relevant data to
support planning and control activities.
– Preparing financial statements for external
users.
 Treasurer
Responsible for raising capital and safeguarding
the organization’s assets.
– Supervises relationships with financial
institutions.
– Work with investors and potential
investors.
– Manages investments.
– Establishes credit policies.
– Manages insurance coverage
 Internal Auditor
Responsible for reviewing accounting
procedures, records, and reports in both the
controller’s and the treasurer’s area of
responsibility.
– Expresses an opinion to top management
regarding the effectiveness of the
organizations accounting system.
 Controller

The chief managerial and financial accountant

responsibility for:
– Supervising accounting personnel
– Preparation of information and reports,
managerial and financial
– Analysis of accounting information
– Planning and decision making
 Professional Ethics

• The four standards of ethical conduct for

management accountants as advanced by the
Institute of Management Accountants:
Competence
Confidentiality
Integrity
Credibility
 IMA Guidelines for Ethical Behavior
Recognize and
communicate professional
limitations that preclude
responsible judgment.

Maintain Follow applicable

professional Competence laws, regulations
competence. and standards.

Provide accurate, clear,

concise, and timely decision
support information.
 IMA Guidelines for Ethical Behavior
Do not disclose confidential
information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
unethical or illegal
advantage.

Ensure that subordinates do

not disclose confidential
information.
IMA Guidelines for Ethical Behavior
Mitigate conflicts of
interest and advise others
of potential conflicts.

Refrain from
conduct that
would prejudice Integrity
carrying out
duties ethically.
Abstain from activities that
might discredit the
profession.
IMA Guidelines for Ethical Behavior
Communicate information
fairly and objectively.

Disclose delays or
deficiencies in information
Credibility timeliness, processing, or
internal controls.

Disclose all relevant

information that could
influence a user’s
understanding of reports
and recommendations.
 Review Questions

1.How is management accounting different from

financial accounting?
2.How do management accountant support
strategic decisions?
3.How do companies add value and what are the
dimensions of performance that customers are
expecting of companies?
 Review Questions
4. How do managers make decisions to
implement strategy?
5.What are the guidelines do management
accountant use?
6. Where does an Management accounting
function fit in to an organization structure
7.What are the ethical responsibilities of
management accountants?