Introduction to Management Accounting

MANAGEMENT ACCOUNTING MANAGEMENT ACCOUNTING VS. COST

ACCOUNTING
• Management accounting or also called
management accounting, Management accounting and cost accounting are
• a branch of accounting that focuses on closely related, with cost accounting being a subset
providing financial information and analyses to of management accounting.
help management make informed business
decisions. MANAGEMENT
COST ACCOUNTING
• It plays a crucial role in providing timely and ACCOUNTING
relevant information to support the effective and The accounting in
The recording,
efficient management of an organization and it which the both financial
classifying and
is primarily used for internal purposes. and non-financial
summarizing of cost
• By providing relevant and timely information, information are
data of an organization
Management Accounting empowers decision- provided to managers
makers to identify strengths, weaknesses, and Quantitative and
Quantitative
areas of improvement within the organization Qualitative.
and enable managers to make informed Providing information to
Ascertainment of cost
choices that align with the company's objectives managers to set goals
of production
and strategies. and forecast strategies
• An important function of Management Concerned with
Accounting is to support decision-making ascertainment,
Impart and effect
processes within the organization. allocation, distribution,
aspect of costs.
and accounting
OBJECTIVE OF MANAGEMENT ACCOUNTANTS aspects of cost.
It gives more stress on
• The main objectives of management Records past and
the analysis of future
accounting include providing relevant and present data
projections.
timely financial information, aiding in strategic
Short range and long-
planning, budgeting, and performance Short range planning
range planning
evaluation.
Cannot be installed Can be installed without
• It involves the preparation of various reports,
without cost management
budgets, and analyses that help management
accounting. accounting.
make informed decisions to achieve
organizational goals.
ORGANIZATION STRUCTURE OF THE
• Management accountants often work closely
with different departments within a company to MANAGEMENT ACCOUNTANT
gather and analyze data, offering insights that
1. CHIEF FINANCIAL OFFICER – this person
support effective and efficient business
manages all financial activities and is usually at
operations.
the top of the finance structure and reports
COMPARISON OF FINANCIAL ACCOUNTING AND directly to the firm owner or CEO and ensures
MANAGEMENT ACCOUNTING that accounting and finance follow corporate
policies.
MANAGEMENT FINANCIAL 2. FINANCIAL CONTROLLER – financial controllers
ACCOUNTING ACCOUNTING report to the CFO but have accounting-specific
External and internal duties in many firms. The controller controls daily
Internal users
users income and expense ledgers, assigns
Optional Mandatory accounting assignments, and works with the
Need not follow PFRS Follow PFRS CFO to make company-wide financial decisions
Timeliness Precision 3. DIVISION MANAGERS - these accounting
Flexibility Consistency department titles or divisions manage income,
Relevant information Reliable information expenses, and salaries, making up the
Detailed Summarized accounting system.
Future oriented Historical 4. ACCOUNTANTS AND CLERKS - according to
Intervals (no specific Quickbooks, division managers may employ
Annual (specific period) accountants and clerks. These experts specialize
period)
in revenue tracking, cost management, payroll,
and HR policy. To reduce workload, larger
companies split these sections, but smaller
companies may simplify them with one
accountant or clerk reporting to the division
manager.
5. INTERNAL AUDIT TEAM – some organizations
have an internal audit team that works closely
with management accountants to ensure
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 compliance with internal policies and
procedures.
6. REST OF THE ACCOUNTING DEPARTMENT
STRUCTURE – companies of various sizes use
interns to assist with accounting and finance
tasks. Paid or unpaid interns usually work at the
bottom of the ladder. Their managers, usually
division supervisors or the controller, may give
them research, filing, data entry, and other
administrative chores.
CODE OF CONDUCT FOR MANAGEMENT
ACCOUNTANTS
1. COMPETENCE – management accountants are
expected to continually enhance their
professional competence and skills. They should
perform their duties with diligence, objectivity,
and a commitment to keeping their knowledge
up-to-date. Provide decision support and
business analysis information and
recommendations that are accurate, clear,
concise, and timely.
2. CONFIDENTIALITY – management accountants
are required to safeguard sensitive information
and maintain confidentiality regarding financial
and non-financial data. They should not disclose
confidential information unless legally required
to do so.
3. INTEGRITY – management accountants should
maintain honesty and avoid conflicts of interest.
they are expected to provide accurate and
truthful information in their reporting and
communication. they should also refrain from
engaging in any conduct that would prejudice
carrying out duties ethically.
4. CREDIBILITY – communicate information fairly
and objectively; disclose all relevant information
that could reasonably be expected to influence
an intended user’s understanding of the reports,
analyses or recommendations; disclose delays or
deficiencies in information, timeliness,
processing, or internal controls in conformance
with organization policy and/or applicable law
MANAGEMENT ACCOUNTING ACTIVITIES
1. PLANNING
• strategy formulation and tactics
• This involves setting goals, developing
budgets, and creating strategies to achieve
organizational objectives.
• Management accountants assist in
forecasting future financial performance,
analyzing different scenarios, and
recommending courses of action to support
the organization's goals.
2. REPORTING
• provide report to internal users
• Management accountants prepare financial
reports and analysis for internal stakeholders,
such as managers and department heads.
• These reports provide insights into the
organization's financial performance,
including budget variances, profitability, and
key performance indicators (KPIs).
3. CONTROLLING
• if the goals/plans are achieved
• Management accounting activities related
to controlling involve monitoring
performance against plans and taking
corrective actions as needed.
• This includes analyzing variances between
actual and budgeted figures, identifying
areas of concern, and implementing
strategies to improve performance and
achieve desired outcomes.
4. RESOURCE MANAGEMENT
• needs of the company
• Management accountants play a crucial role
in optimizing the use of resources within the
organization.
• This includes managing costs, allocating
resources effectively, and identifying
opportunities to improve efficiency and
productivity.
5. TECHNOLOGICAL IMPLEMENTATION
• new machineries
• In today's digital age, management
accountants often leverage technology to
streamline processes, improve data analysis,
and enhance decision-making.
• This may involve implementing accounting
software, using data analytics tools, and
adopting automation technologies to
increase efficiency and accuracy in
financial management.
6. VERIFICATION
• reliability
• Verification involves ensuring the accuracy
and reliability of financial information.
• Management accountants perform audits,
reconcile accounts, and conduct internal
controls to verify the integrity of financial
data and compliance with relevant
regulations and standards.
7. ADMINISTRATION - authority/delegation of
works
• Management accounting activities related
to administration encompass overseeing
financial operations, establishing internal
controls, and ensuring compliance with
regulatory requirements.
• Administrators in management accounting
also play a role in coordinating activities
across departments, communicating
financial information to stakeholders, and
fostering a culture of accountability and
transparency within the organization.
KEY FUNCTIONS OF MANAGEMENT
ACCOUNTING
1. STRATEGIC MANAGEMENT
• Management accounting plays a crucial
role in strategic decision-making by
providing financial analysis, insights, and
recommendations to support the
organization's long-term goals and
competitive advantage.
• This involves assessing market trends,
evaluating investment opportunities, and
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 aligning financial strategies with overall
business objectives.
2. PERFORMANCE MANAGEMENT
• Management accounting is responsible for
measuring, monitoring, and evaluating the
performance of various aspects of the
organization, including departments,
projects, and individuals.
• This involves establishing performance
metrics, analyzing variances, and identifying
areas for improvement to enhance
efficiency, productivity, and profitability.
3. RISK MANAGEMENT
• constraint analysis (possible limitations)
• Management accounting helps identify,
assess, and manage risks that may impact
the organization's financial performance
and objectives.
• This includes analyzing market risks,
operational risks, and financial risks, and
developing strategies to mitigate these risks
effectively.
• Management accountants also ensure
compliance with regulatory requirements
and internal controls to minimize exposure to
risks.
MANAGEMENT ACCOUNTING
TECHNIQUES
1. BUDGETING – Budgeting involves the process of
setting financial targets and allocating resources
to different activities within an organization.
⎯ It provides a framework for planning and
controlling operations, as well as for
evaluating performance against
predetermined goals.
2. VARIANCE ANALYSIS – Variance analysis
compares actual financial results to budgeted or
expected figures to identify differences
(variances) and analyze their causes.
⎯ It helps management understand why
actual performance deviates from the
planned targets and take corrective actions
as necessary.
3. FORECASTING – Forecasting uses historical data
and statistical techniques to predict future
financial outcomes.
⎯ It helps management anticipate trends,
plan for contingencies, and make informed
decisions about resource allocation, pricing
strategies, and other business activities.
4. COST-BENEFIT ANALYSIS – Cost-benefit analysis
evaluates the potential costs and benefits of a
proposed project or decision to determine its
economic viability
⎯ It helps management assess whether the
benefits outweigh the costs and provides a
basis for decision-making.
5. PRODUCT COSTING AND VALUATION – product
costing involves calculating the total cost of
producing a product, including direct materials,
labor, and overhead costs.
⎯ Valuation techniques are used to determine
the monetary worth of assets, liabilities, and
equity items on the balance sheet.
6. MARGINAL COSTING – Marginal costing focuses
on analyzing the incremental costs associated
with producing additional units of a product or
service
⎯ It helps management make short-term
decisions, such as pricing, production
volume, and sales mix, by considering the
variable costs and contribution margin.
7. CASH FLOW ANALYSIS (insights/inflow of cash
analysis) – kCash flow analysis examines the
inflows and outflows of cash within an
organization over a specific period
⎯ It helps management monitor liquidity,
assess financial stability, and make decisions
about capital expenditures, financing, and
dividend payments.
8. INVENTORY TURNOVER ANALYSIS – Inventory
turnover analysis measures how quickly a
company sells its inventory within a given period.
⎯ It helps assess inventory management
efficiency, identify excess or obsolete
inventory, and optimize working capital.
9. CONSTRAINT ANALYSIS – identifies bottlenecks
or constraints that limit the performance of a
system or process.
⎯ It helps management prioritize resources,
optimize throughput, and improve overall
efficiency and productivity.
ROLES AND OBJECTIVES OF MANAGEMENT
ACCOUNTING
1. PROVIDING RELEVANT INFORMATION –
Management accountants gather, analyze,
and present financial and non-financial
information to support decision-making
processes within the organization.
⎯ This information includes cost data, financial
performance metrics, forecasts, and other
relevant data that help management
understand the current state of the business
and make informed decisions.
2. FACILITATING PLANNING AND BUDGETING –
Management accounting plays a crucial role in
the planning and budgeting process.
⎯ Management accountants assist in setting
financial goals, developing budgets, and
allocating resources effectively to achieve
organizational objectives.
⎯ They provide insights into cost drivers,
revenue projections, and resource
requirements to support the planning
process.
3. SUPPORTING DECISION-MAKING –
Management accountants provide decision-
makers with relevant data and analysis to
support strategic and operational decisions.
⎯ They conduct cost-benefit analysis, scenario
modeling, and sensitivity analysis to
evaluate different options and assess their
potential impact on the organization.
⎯ Management accountants help
management make well-informed decisions
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 that align with the organization's goals and manufacturers to set competitive prices and
objectives. maximize profitability.
4. EVALUATING PERFORMANCE – Management 2. SERVICE INDUSTRIES (e.g., Consulting,
accounting involves evaluating the Banking) – In service industries, activity-based
performance of various aspects of the costing (ABC) is often used to allocate costs to
organization, such as departments, projects, or different services or customers based on the
products. activities required to deliver them.
⎯ Management accountants measure ⎯ This helps organizations understand the true
performance against predetermined cost of providing services and make pricing
targets, analyze variances, and identify decisions accordingly. Additionally, service
areas for improvement. industries rely on management accounting
⎯ By assessing performance metrics and key for budgeting, performance evaluation,
performance indicators (KPIs), and strategic planning. (activity-based
management accountants help analysis)
management monitor progress and take 3. HEALTHCARE – Management accounting is
corrective actions as needed. essential in healthcare for cost accounting,
5. COST ANALYSIS AND CONTROL – Management resource allocation, and performance
accounting focuses on analyzing costs and measurement.
implementing cost control measures to optimize ⎯ Cost accounting techniques, such as
resource allocation and improve profitability. activity-based costing (ABC) and relevant
⎯ Management accountants identify cost costing, help hospitals and healthcare
drivers, analyze cost behavior, and providers allocate resources efficiently,
implement cost reduction strategies to evaluate the cost-effectiveness of medical
minimize expenses while maintaining or treatments or procedures, and make
improving product quality and service decisions about investing in new
levels. technologies or facilities.
6. ASSISTING IN STRATEGY FORMULATION – 4. RETAIL – In the retail industry, management
Management accountants contribute to the accounting is used for inventory management,
formulation of organizational strategies by pricing strategies, and performance analysis.
providing financial insights and analysis. ⎯ Retailers use techniques like sales
⎯ They assess the financial implications of forecasting, inventory turnover analysis, and
strategic initiatives, evaluate investment margin analysis to optimize inventory levels,
opportunities, and help management align set prices, and maximize profitability.
financial goals with overall business 5. HOSPITALITY – Hospitality businesses, such as
objectives. hotels and restaurants, rely on management
⎯ Management accountants play a key role accounting for cost control, revenue
in developing strategies that enhance the management, and customer profitability
organization's competitive position and analysis.
long-term sustainability. ⎯ Cost control techniques help hospitality
7. ENSURING COMPLIANCE AND ETHICAL businesses manage expenses and maintain
STANDARDS – Management accountants profitability, while revenue management
ensure that financial reporting and strategies optimize pricing and capacity
management practices comply with relevant utilization to maximize revenue.
regulations, accounting standards, and ethical ⎯ Management accounting also helps
guidelines. hospitality businesses evaluate the
⎯ They establish internal controls, conduct profitability of different customer segments
audits, and monitor compliance to mitigate and marketing initiatives (cost control and
financial risks and maintain the integrity of revenue management)
financial information. 6. TECHNOLOGY – In the technology industry,
⎯ Management accountants uphold ethical management accounting is used for product
standards and promote a culture of costing, project budgeting, and performance
transparency, integrity, and accountability measurement.
within the organization. ⎯ Cost accounting techniques help
technology companies determine the cost
MANAGEMENT ACCOUNTING IN DIFFERENT of developing and producing new products
INDUSTRIES or services, allowing them to set pricing
strategies and make investment decisions.
1. Manufacturing – In manufacturing, ⎯ Additionally, management accounting
management accounting techniques like helps technology companies evaluate the
standard costing, variance analysis, and financial performance of research and
inventory management are commonly used to development projects and allocate
control costs, optimize production processes, resources effectively to drive innovation and
and ensure efficient use of resources. growth.
⎯ Cost accounting methods help determine
product costs accurately, allowing

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7. NONPROFIT SECTOR – Management
accounting is crucial in the nonprofit sector for
budgeting, resource allocation, and
performance measurement.
⎯ Nonprofit organizations use management
accounting techniques to allocate program
expenses accurately, assess the impact of
programs or initiatives, and ensure financial
sustainability.
ADVANTAGES OF MANAGEMENT
ACCOUNTING
1. INFORMED DECISION-MAKING – management
accounting provides relevant and timely
information to decision-makers, enabling them
to make informed decisions about resource
allocation, strategic initiatives, and operational
improvements.
2. PERFORMANCE EVALUATION AND CONTROL –
management accounting facilitates the
evaluation of organizational performance
against predetermined goals and targets. it
helps identify areas of strength and weakness,
enabling management to implement controls
and corrective actions as needed.
3. COST OPTIMIZATION – management
accounting helps organizations identify cost
drivers, analyze cost behavior, and implement
cost-saving measures. by optimizing costs,
organizations can improve profitability and
competitiveness in the market.
4. RESOURCE ALLOCATION – management
accounting assists in allocating resources, such
as capital, labor, and materials, efficiently to
maximize productivity and achieve
organizational objectives.
5. STRATEGIC PLANNING – management
accounting provides financial analysis and
insights to support strategic planning initiatives. it
helps organizations identify opportunities, assess
risks, and develop strategies to achieve long-
term goals and objectives.
6. FLEXIBILITY AND ADAPTABILITY – misunderstandings or misinterpretations of
management accounting allows organizations
to adapt to changing business environments
and market conditions. it provides tools and
techniques to analyze trends, evaluate
alternative courses of action, and adjust
strategies as needed.
7. CONTINUOUS IMPROVEMENT – management
accounting promotes a culture of continuous
improvement within organizations by providing
performance metrics, identifying areas for
improvement, and supporting initiatives to
enhance efficiency and effectiveness.
8. EFFECTIVE COMMUNICATION – management
accounting facilitates communication and
collaboration among different departments and
levels of management within an organization. it
provides a common language for discussing
financial performance, goals, and strategies,
fostering alignment and coordination.
DISADVANTAGES OF MANAGEMENT
ACCOUNTING
1. SUBJECTIVITY IN COST ALLOCATION – bias / it
should be free from error
⎯ Cost allocation methods can be subjective
and prone to biases, leading to
misrepresentation of costs and inaccurate
decision-making. It's essential to ensure that
cost allocation processes are transparent
and free from errors.
2. FOCUS ON FINANCIAL INFORMATION – relies on
financial data
⎯ Management accounting primarily relies on
financial data, which may not provide a
comprehensive view of organizational
performance.
⎯ Non-financial factors, such as customer
satisfaction, employee morale, and market
share, may not be adequately captured in
financial reports.
3. SHORT-TERM ORIENTATION – immediate plans
⎯ Management accounting often focuses on
short-term goals and objectives, leading to
a lack of emphasis on long-term
sustainability and strategic planning.
⎯ This short-term orientation may hinder the
organization's ability to adapt to changing
market conditions and achieve long-term
success.
4. COSTLY AND TIME-CONSUMING – Implementing
management accounting systems and
processes can be costly and time-consuming for
organizations, especially smaller ones with
limited resources.
⎯ It requires investment in technology, training,
and personnel to effectively collect,
analyze, and interpret financial data.
5. COMPLEXITY IN INTERPRETATION –
Management accounting reports and analysis
can be complex and difficult to interpret,
especially for non-financial managers.
⎯ This complexity may lead to
financial information, resulting in suboptimal
decision-making.
6. ASSUMPTIONS AND ESTIMATES – Management
accounting often relies on assumptions and
estimates to fill gaps in data or predict future
outcomes.
⎯ These assumptions may not always be
accurate, leading to errors or inaccuracies
in financial analysis and decision-making.
7. NO GUARANTEE OF FUTURE PERFORMANCE –
no assurance of having favorable decision.
⎯ Management accounting provides insights
and analysis based on historical data and
assumptions about the future. However,
there is no guarantee that past
performance or projected outcomes will be
indicative of future results. This uncertainty
can pose challenges for decision-makers
relying on management accounting
information.
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8. ETHICAL CONCERNS - There may be ethical MANAGEMENT ACCOUNTING IN DIFFERENT
concerns associated with management INDUSTRIES
accounting practices, such as manipulating
financial data to portray a more favorable 1. Manufacturing
image of the organization or misrepresenting 2. Service Industries
performance to stakeholders. It's essential for 3. Healthcare
management accountants to adhere to ethical 4. Retail
standards and maintain integrity in financial 5. Hospitality
reporting and analysis. 6. Technology
7. Nonprofit Sector
SUMMARY
ADVANTAGES OF MANAGEMENTACCOUNTING
ORGANIZATION STRUCTURE OF THE MANAGEMENT
ACCOUNTANT 1. Informed Decision-Making:
2. Performance Evaluation and Control
1. Chief Financial Officer 3. Cost Optimization
2. Financial Controller 4. Resource Allocation
3. Division Managers 5. Strategic Planning
4. Accountants and Clerks 6. Flexibility and Adaptability
5. Internal Audit Team 7. Continuous Improvement
6. Rest of the Accounting Department Structure 8. Effective Communication

CODE OF CONDUCT FOR MANAGEMENT DISADVANTAGES OF MANAGEMENT ACCOUNTING

ACCOUNTANTS
1. Subjectivity in cost allocation
1. Competence 2. Focus on financial information
2. Confidentiality 3. Short-term orientation
3. Integrity 4. Costly and time-consuming
4. Credibility 5. Complexity in interpretation
6. Assumptions and estimates
MANAGEMENT ACCOUNTING ACTIVITIES 7. No guarantee of future performance
8. Ethical concerns
1. Planning
2. Reporting
3. Controlling
4. Resource Management
5. Technological Implementation
6. Verification
7. Administration

KEY FUNCTIONS OF MANAGEMENT ACCOUNTING

1. Strategic Management
2. Performance Management
3. Risk Management
4. Management Accounting Techniques
5. Budgeting
6. Variance Analysis
7. Forecasting
8. Cost-Benefit Analysis
9. Product Costing and Valuation
10. Marginal Costing
11. Cash Flow Analysis
12. Inventory Turnover Analysis
13. Constraint Analysis

ROLES AND OBJECTIVES OF MANAGEMENT

ACCOUNTING

1. Providing Relevant Information

2. Facilitating Planning and Budgeting
3. Supporting Decision-Making
4. Evaluating Performance
5. Cost Analysis and Control
6. Assisting in Strategy Formulation
7. Ensuring Compliance and Ethical Standards

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End//

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