Managerial Accounting

Class 1

WHY

MANAGERIAL ACCOUNTING

AND

FINANCIAL CONTROLS?

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Adding Value in a Complex World

Change affects every enterprise. A key issue currently facing organizations is how to
adapt to the increasingly rapid pace of change. New commercial spaces are emerging
and maturing at previously unimagined speed. Old product markets are vanishing or
are being revitalised by new products and novel production processes and delivery
techniques. A dramatic alteration in the commercial climate facing organizations has
also been in evidence over recent years. The search for new drivers of economic gain
challenges traditional organizational environments and creates novel ways of growing
corporate performance, confronting competitors and re-framing business models.

One question considered key in the global economic environment is how should
organizations engage in financial analyses of opportunities and corporate possibilities
given their primary objective of sustaining a profitable and competitive posture within
the industries they operate in. Management accounting practices have in this light
taken the lead in helping enterprises add value via a range of financial management
activities which provide informational and decision making support to operational
managers and senior corporate executives. In many companies, managers set
themselves targets across an array of organizational activities. Reaching those targets
is an increasingly complex task. The finance function in these companies tries to help
managers achieve high levels of performance through a variety of techniques and also
to bring strategic insight to those parts of their activities most crucial to them. This
course is concerned with management accounting, cost management and controls
used by modern enterprises. The terms “finance function” and “management
accounting function” are used here to cover managerial accounting and financial
control expertise firms rely on. Do not assume that because this is an accounting
course, you will only see numbers and learn how to perform specific calculations.
Management accounting involves engaging in organizational control and deals
primarily with issues of strategy, identifying the best way to allocate resources to
achieve objectives and so determining what those objectives are, and also aiming for
enterprise effectiveness given uncertainty in the market and issues of behaviour and
organizational culture. So this course considers all these elements and will very likely
require less quantitative analyses than you might anticipate.

Traditionally, the principal objective of financial controls had traditionally been to assist
organizations plan their future and then monitor performance to ensure that the
planned objectives are achieved. The emphasis was on internal processes (see Figure
1.1.). Control as part of financial management activities mainly invo;ved analysing,
investigating and forecasting information of a financial and non-financial nature and
particularly with examining deviations from expected performance and their
implications. Management accounting and financial control practices in many
enterprises today encompass much wider and diverse roles in addition to this focused
view. This work carried out by finance professionals who be management
accountants, financial managers, controllers, as well as using other titles. Strategic
concerns, enterprise structures, flexible technologies, e-business activities,
management style and organizational culture change are facets of organizational
concerns which impact the activities of the finance function. These activities have

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drawn from diverse disciplinary bodies including management accounting, financial
management and cost management. This course captures their essence under the
umbrella label of “management accounting and financial control”.

The long established term “management accounting” has been ascribed to

professional activities encompassing many of the above concerns. The UK-based
Chartered Institute of Management Accountants (CIMA) for instance defines
management accounting as:

The application of the principles of accounting and financial management to create,

protect, preserve and increase value so as to deliver that value to the stakeholders of
profit and not-for-profit enterprises, both public and private. Management accounting is
an integral part of management, requiring the identification, generation, presentation,
interpretation and use of information relevant to:

 formulating business strategy;

 planning and controlling activities;
 efficient resource usage;
 performance improvement and value enhancement;
 safeguarding tangible and intangible assets;
 corporate governance and internal control.

Such a view confirms the very wide reach which management accounting activities can
have within organizations. There is no compulsion on organizations to follow externally
defined management accounting standards as is the case with external corporate
financial reporting since management accounting information users are ordinarily
internal parties with highly specific information needs. This renders the management
accounting function highly diverse across organizations.

Figure 1.1 Traditional Financial Control Emphasis

ANALYSE

CONTROL Internal PLAN

Focus

IMPLEMENT

The management accounting function in many firms tries to be more operationally

engaged where its role could be to provide an advisory service to other parts of the
organization where it can add value to activities or decisions made. So the function

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could in certain enterprises, become that of a consultative business partner. Its
activities can be more strategy oriented and more focused on performance
enhancement in some firms.

Table 1.1 The Transformation of Financial Control Priorities

Traditional Approach Emerging Practice

Control is the responsibility of the Control is the responsibility of every
accounting function manager and employee. Accounting’s role
is to highlight risk areas and monitor the
application of controls
Control is focused on financial Control is exercised through raising
accounting controls and procedures employees’ understanding of how they fit in
to the organization, encouraging staff to
take greater responsibility for activities in
their area, focusing on quality levels by
monitoring failure rates, and emphasising
self-checking
Control checks are applied at the end Controls are built into business processes
of discrete business activities (i.e., rather than ‘added on’. This is assisted by
post-event) reorganising activities into business
processes rather than discrete functions, so
that staff have a better understanding of the
significance of their role
Responsibilities are segregated so that Segregation of duties is an outmoded
few people understand a complete concept in some industries, e.g., the IT
process industry. As manpower levels are reduced,
businesses focus more on system checks
(where processes are heavily automated)
and control checks embedded in the
business processes
Control problems are addressed by The sources of risk are identified and
adding more people and by exercising performance measures put in place to
greater control centrally monitor activity in the areas of greatest risk,
e.g., focusing on cash flows, margins, stock
levels, asset movements. Managers are
responsible for complete business
processes; this responsibility increases their
insight and awareness of control issues

The structuring of management accounting activities is changing under the pressure of

various forces. The need to manage outsourced activities and service centres and to

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cope with new business alliances and partnerships causes finance and accounting
staff to introduce specific structures to deal with novel management issues.
Environmental matters and the demands of corporate governance where the social
pressures are often far ahead of the strictly legal ones also necessitate new types of
information and facilities for its exchange. Possibly, the increased demand for
information transparency which is today evident brings with it additional costs and
leads to expectations that they be countered with the search for additional savings.
Financial transparency raises costs and raised costs incite further transparency to
promote cost containment.

Management and financial control practices within enterprises are in a continual state
of adaptation as the knowledge base in the field increases and becomes dispersed
and as business environmental changes take effect (see Table 1.1). But although
many management accounting techniques and control approaches have been and
continue to be developed (activity accounting, target costing, the balanced scorecard
and strategic cost analysis, which are discussed later in the course), the problem
seems not always to be one of too few solutions, but rather of inadequately applied or
outdated financial controls which are at odds with the realities of organizational
contexts and the longer term pursuits of enterprises.

One approach to better considering the long term is firms making management
accounting activities more strategy-oriented. Here, management accountants
participate extensively in the formulation and implementation of strategy, and they help
translate strategic intent and capabilities into operational and managerial measures. So
management accountants move away from just being scorekeepers of the past and
instead, they become the designers of the organization’s critical management
information systems. There is thus more operational engagement and also a desire for
more ‘balanced’ analysis. The balanced scorecard (see later class in the course)
focuses on what new processes are needed to achieve breakthrough performance
objectives for customers and shareholders.

The call for “strategizing” management accounting has been accompanied by other
exhortations to alter management accountants’ activities. In the past, management
accountants focused on how to disclose and report financial accounting numbers,
especially cost numbers, so that managers could draw on them for more useful
information. Management accounting systems are now more focused on enabling
managers to retrieve, manipulate, and analyse new problems as they arise.
Implementing organization-wide integrated information systems allow more extensive
capture of information that matters. In a complex and fast-changing digital and
information technology based economy, accounting professionals are called upon to
be increasingly integrative and holistic.

The role of the finance function has moved away from traditional responsibilities and
narrow control areas. Management accountants are finding that they are expected to
be actively formulating business objectives and strategies, and help enhance
competitive advantage through, for example, re-designing business processes,

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analysing market trends, implementing quality measurement systems and engaging in
big data business analytics.

Management Accounting Differs across Enterprises

Different organizations address their managerial needs in different ways. Approaches

to management accounting and financial control generally differ across countries also.
Finance and accounting-related tasks, responsibilities and goals reflect their
organizational and social contexts. Enterprises arrange responsibilities for managing
organizational resources in different ways. In certain companies, the management
accountant’s prime interest in financial records is to determine trends in costs,
revenues, etc. and deviations from forecast performance. In other enterprises, the
finance function is called upon to provide control support for both operational tasks and
strategic management activities. In some firms, management accounting practices
focus less on internal processes and on past priorities becoming more strategically and
market oriented. The strategic cost management priorities in some modern
organizations require more interface between internal and external sources of
information.

The management accounting function has no monopoly over the achievement of

corporate performance. How organizations achieve their objectives varies depending
on enterprise context and the business intelligence they rely on. Different organizations
will use the finance function in different ways. This course will discuss management
accounting approaches for increasing enterprise performance. But naturally, in all
firms, the finance function continuously changes to ensure that the business is
controlled in line with evolving management expectations and appreciations of what is
essential for effective management. There exists many systems, operations, activities
and practices which managers regard as relevant in achieving high performance. But
these managers have their own ideas of what is right and so management accounting
processes are organizationally specific and dynamic.

There is, in many companies, an increasingly shared responsibility for financial work
and the operation of control systems. Finance and accounting teams participate more
and more in the management of the business and, conversely, other executives are
becoming increasingly aware of financial issues. Greater emphasis is also being
placed in many organizations on the use of emerging technologies and systems as
‘enablers’ to drive down the cost of commercial and administrative control activities as
well as for marketing and revenues generation purposes. Some professional
accountants believe that we are moving towards corporate structures with small
numbers of:

 highly skilled finance and accounting professionals working as a

part of management teams to develop strategy, plan the
business and manage performance
 there will be specialists in tax, internal audit, Mergers and
Acquisitions etc.;

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  specialist information technicians will ensure the integrity of
financial transactions and management information across
integrated systems run by non-financial personnel

Understanding such changes and the technologies being newly deployed will be a
growing part of effective managerial control.

There are many factors that affect how management accounting relates to and works
with the rest of the business. These include the culture and history of the organization,
the way in which the business is organised, the influence and personal style of both the
chief financial officer, chief accounting officer and the chief executive officer, and the
performance management practices adopted in the industry. In addition, an important
consideration for the finance and accounting staff revolves around achieving a
balance between the organizational culture and the receptivity to cost management
and financial controls. How far the finance function is able to integrate and support
other business activities and units is going to be influenced by the view managers have
of management accounting techniques. Ultimately, some firms can be financially
successful using little or very extensive management accounting because of the
training and preferences of different managers. But ultimately, financial performance
must always be presented using accounting tools – so few firms would opt to have no
management accounting intelligence to guide their activities.

Should Management Accountants Make Business Decisions?

There are businesses which consider that to create and sustain competitive
advantage, it is desirable to ensure the effective execution of core business processes
– that is, those key processes which generate an outcome valued by customers. In
supporting the effective design and operation of the core business processes,
management accouting activities will focus on ways to enhance service, quality and
cost control in such enterprises. The finance function is seen by many to be uniquely
positioned to aid the process by which measures are established to help the business
convert strategy into performance. Information can be collected from diverse sources
to provide a balanced view of financial business performance and offer also measures
of say customer loyalty, organizational learning and business environment changes.
Performance measurement systems have been of principal importance to finance and
accounting specialists traditionally. But the indicators are not just financial. They can
also be non-financial to provide a more rounded view to decisions makers.

There is great diversity in the ways in which organizations structure themselves and
how their finance function is designed and run. Some organizations opt for a functional
form with a dedicated financial management function. Others attempt to achieve the
advantages of both the centralised and the decentralised approaches via a small team
of specialists at the centre, strong analytical and advisory support at business unit or
process level, and the establishment of service centres for volume transaction
processing on behalf of a number of business units.

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There is ample evidence according to analyses of management accounting practices
that the role of the finance professional differs across firms. Management accountants
often spend large amounts of their time as internal consultants or business analysts
within their companies. Technological advances have shifted the balance between
wider organizational concerns and the purely mechanical aspects of accounting. In
many firms, less time is spent by management accountants preparing standardised
reports and more time is devoted to analysing and interpreting information. Many
management accountants have moved from operating as isolated accounting
departments to becoming physically positioned in the operating departments they
serve. They work within cross-functional teams, have extensive face-to-face
communication with people throughout their organization, and are more actively
involved in decision-making. They also take on leadership roles in their teams.

In some organizations, the role of the management accounting professional has

changed from serving the information needs of other managers to being a business
partner in their own right. A business partner could be part of the decision-making team
and can have responsibility just to advise an operating executive on why particular
business decision should be taken as opposed to another based on accounting
information. So here the focus is on showing ways to improve the quality of decisions.
But there are firms where the management accountant is so much part of the team that
decision making is also part of their responsibility and the outcomes will become part of
their performance assessment. So how far the management accountant provides
information to others and their role in actually acting on the information differs in
different enterprises. Changes in the level of business and support-oriented
management accounting engagement has in many firms changed the expectations of
the accountant and how far decision making teams integrate the accounting
professional. For some firms, there is real stress on management accountants
needing to have very sharp communication, interpersonal and analytical skills
combined with broad business knowledge. And of course, many companies have
promoted the accounting or finance executive to senior level management positions
including to that of CEO.

How Has Management Accounting Transitioned?

Since the 1950s there has been a massive change in the way in which financial
transactions are processed. Accounting labour input for processing transactions has
fallen. Technological advances have had a huge impact on the resources required
and the complexity of technical developments. These can be summarised as:

1950s
 card-posting ledger machines with no calculating capability
 labour was cheap and plentiful
 detailed standard costing systems were used

1960s
 punched card-driven computers and ledger posting machines

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  more sophisticated standard costing systems

1970s
 mainframe computers more widespread
 beginnings of financial modelling
 financial application packages for ledger systems

1980s
 personal computers/spreadsheets used extensively by
management accountants
 activity-based costing emerged
 novel cost management methods deployed

1990s
 trend towards financial transaction processing
centres/outsourcing
 managers needed better performance measurement systems
 improvements to budgeting and forecasting
 further development of activity-based management, strategic
cost analysis and balanced scorecard measures.

2000s
 the increased use of web-based technologies to link intra- and
extra-organizational processes;
 altered economies of scale and scope being effected by
organizational reconfigurations;
 enhanced core value focus and interconnectedness via different
information routings and accelerated information exchange
possibilities;

2010s
 More collection of non-economic transactions
 Big Data led insights and business analytics
 Artificial Intelligence produced financial guidance

Management accounting practices have changed radically over the past two decades
and continue to do so. Some of the changes which we have seen that are shown
above will continue their march. The advent of internet-based commercial
approaches are driven in part by technological changes in hardware structures,
software platforms and the emergence of altered economics of information retrieval,
processing and presentation. Technological advances and the application of
innovative business models within the digital economy are continuously changing

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 business models and changing the types of cost management information required.
New technologies such as artificial intelligence, 3-D printing, blockchain, augmented
reality and robotics as challenging ways of managing businesses and thereby also
the accounting information reliance. Outsourcing was only the beginning of significant
changes in the work performed by management accountants, initially done because
labour was cheaper in remote emerging countries but novel technologies such as AI
and robotics and 3-D printing are again altering commercial opportunities to do more
much more effectively with much less. We can expect to see management
accounting practices change in the next decade with greater speed and magnitude.
Core fundamentals covered in this course will likely always be essential but novel
accounting practices will also be pursued to enhance corporate performance.

Today’s strategic management changes translate into management accounting

changes in the near future . There will remain pressure for finance professionals to
make a valuable contribution perhaps by increasing their role of raising awareness of
the strategic possibilities for the growth of the enterprise and by understanding
technology changes.

The finance function is increasingly expected to:

 develop an understanding of the strategic goals of the

organization and the ways in which chosen change initiatives
contribute to those goals;
 identify current financial management practices that are most
complementary to the company’s desired change initiatives;
 assess hard, soft and on-line sources of information in order to
keep current on strategic change initiatives, best practices and
competitive performance metrics;
 develop a discussion framework for strategic control initiatives,
including, where relevant, the most important accounting
concerns;
 identify reliable in-house and external professional sources that
can resolve those questions and/or concerns;
 establish a due diligence corporate policy, and an approval
framework for corporate financial management initiatives; and
 communicate the above to senior management as well as to
other segments of the business organization.

Many finance professionals are working to move away from focusing on financial
efficiency to concentrating on financial effectiveness. This involves:

 undertaking an assessment of where the company is on its

journey to strategic relevance;
 conducting a diagnostic of required corporate management

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 accounting practices changes;
 identifying, with assistance from IT, data scinetists, strategy,
marketing, production and human resource experts, the skill
sets and competencies required for an effective management
accounting operation;
 suggesting ways in which the finance function can help the
organization to continuously learns and grow the economic
value of the firm.

The management accountant will have to be involved in:

 sensitising management to risk exposures;

 setting objectives and providing financial planning in relation to
corporate strategy and asset/liability management;
 formulating new ways of using and/or raising capital using
various capital and debt structure alternatives and looking at the
strategic implications of these choices;
 considering responsibility accounting and incentive issues;
 keeping track of insights from Big Data, business analytics and
novel technologies
 providing internal accounting for reporting and control uses;
 integrating information for corporate governance purposes.

Such activities span very wide management accounting responsibilities and expertise.
Management accountants in many enterprises may thus require skills in accounting
and highly technical areas as well as develop an understanding of the practice of
management in terms of softer management and communicative skills. This translates
into enhancing their comprehension of the role of marketing, sales, production,
distribution, research and development plus other support functions such as human
resources and IT. As an increasing number of companies move to a digitised
operational environment, the management accountant will be required to understand
and support such emerging forms of web enabled and networked organizational
structuring. Little can be said of where the next decade will take the field but
increasing enterprise performance will always be essential.

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 Class 1 Questions

1. What is the role of management accounting within an organization?

(1) Adding value through participation in management and business process within
enterprises
(2) Providing proactive support to operational and senior managers and to the board.
a. (1) (2)
b. (1)
c. (2)
d. None
Answer: a

2. Which of these are objectives of management accounting?

(1) Assisting organizations plan their future

(2) Monitor performance to ensure that the planned objectives are achieved
a. (1)
b. (2)
c. (1) (2)
d. None
Answer: c

3. What are the key issues facing today’s management accountants?

(1) Strategy and enterprise performance

(2) Design and flexible technologies
(3) Risk and soft management skills
(4) Organisation culture issues
a. (1) (2)
b. (3) (4)
c. (2) (3) (4)
d. (1) (2) (3) (4)
e. (1) (3)
Answer: d

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4. Which of the following do management accountants tend to be concerned
with in terms of financial records?

(1) To set up and run proper books of account for historical bookkeeping
(2) To determine trends in costs, revenue and other internal and external financial data
(3) To determine deviation from planned performance
(4) To complete statutory accounts
a. (1) (2)
b. (2) (3)
c. (1) (3)
d. (1) (2) (3)
e. (1)
Answer: b

5. Management accounting is an integral part of management, requiring the

identification, generation, presentation, interpretation and use of information
relevant to :-

(1) Formulating business strategy

(2) Planning and controlling activities
(3) Efficient resource usage
(4) Performance improvement and value enhancement
(5) Safeguarding tangible and intangible assets
(6) Corporate governance and internal control
a. All of the above
b. (1) (2) (3) (4) (5)
c. (2) (3) (4) (5) (6)
d. (2) (4) (5) (6)
e. (1) (2) (4) (5)
Answer: a

6. Which of the following statement is true?

a. Management accountants should follow externally determined standards of

accounting.
b. Management accountants need not follow externally determined standard of
accounting principles because the management accounting information user is
ordinarily an internal party with highly specific information needs
c. Management accountants should follow externally determined standards of
accounting practice if their basic principles correspond to internal ones
d. Management accountants should not follow externally determined standards of
accounting if they contradict internal ones
e. None of the above is correct
Answer: b

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7. What statements below are true about the role of management accountants
in firms?

(1) They may provide advice regarding business plans and actions.
(2) They can prepare financial forecasts.
(3) Financial accounting and management accounting are both directly responsible for
external accountability and technical compliance with rules and regulations.
(4) Some work is focused on providing information for short term decision making by
business managers.
a. (2) (3) (4)
b. (1) (2) (4)
c. (3) (4)
d. (2) (4)
e. (2) (3)
Answer: b

8. Which of the following statement is true?

(1) Management accounting can provide information on pricing, quality and cost.
(2) Management accounting may develop activity based costs and balanced
scorecards for managers.
a. (1) (2) are both true
b. (1) is true
c. (2) is true
d. Neither is true
Answer: a

9. The trend is towards management accounting being more concerned with:

(1) Non-economic transactions
(2) Artificial Intelligence based information
(3) Big Data
(4) Business analytics
a. (1) (4)
b. (2) (3)
c. (1) (2) (3) (4)
d. (2) (3) (4)
e. (3) (4)
Answer: c

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10. Which of the following has occurred during the past fifty years
1) The accounting transaction labour input has decreased.
2) Staff required to process financial transactions has increased.
3) The role of management accountants differs across enterprises.
4) The management mix within accounting department has decreased.
5) In some sectors, participation by accountants in management decision making
activities has increased.
a. (1), (2)
b. (2), (3)
c. (1), (2) (3)
d. (1), (3), (5)
e. (1), (5)
Answer: d

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