Management Accounting

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology).

Fig: Management Accounting Framework

It is clear that different businesses will have different management accounting needs and this will depend on the areas that the business finds are most important to them. A few examples of the areas that may be as follows; - The sales process: this includes distribution, debtors and pricing. - The purchasing process this area includes records of stock levels and creditors. - Records regarding employees. - A fixed asset registers Management accounting tasks Listed below are the primary tasks/ services performed by management accountants. The degree of complexity relative to these activities is dependent on the experience level and abilities of any one individual.

Variance Analysis Rate & Volume Analysis Business Metrics Development Price Modeling Product Profitability Geographic vs. Industry or Client Segment Reporting Sales Management Scorecards Cost Analysis Cost Benefit Analysis Cost-Volume-Profit Analysis Life cycle cost analysis Client Profitability Analysis IT Cost Transparency Capital Budgeting Buy vs. Lease Analysis Strategic Planning Strategic Management Advise Internal Financial Presentation and Communication Sales and Financial Forecasting Annual Budgeting Cost Allocation Resource Allocation and Utilization

Managerial accounting provides the essential data with which the organizations are actually run. Managerial accounting is also termed as management accounting or cost accounting. Financial accounting provides the scorecard by which a company's overall past performance is judged by outsiders. Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed-comparing actual results to plans and to benchmarks. Some reports provide timely, frequent updates on key indicators such as orders received, order backlog, capacity utilization, and sales. Other analytical reports are prepared as needed to investigate specific problems such as a decline in the profitability of a product line. And yet other reports analyze a developing business situation or opportunity. In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals operations are on track, is the key to effective control. In sophisticated organizations, this feedback is provided by detailed reports of various types. One of these reports, which compares budgeted to actual results, is called a performance report. Performance report suggests where operations are not proceeding as planned and where some parts of the organization may require additional attention. In contrast to financial accountancy information, management accounting information is:

Designed and intended for use by managers within the organization, whereas financial accounting information is designed for use by shareholders and creditors. usually confidential and used by management, instead of publicly reported; forward-looking, instead of historical; Computed by reference to the needs of managers, often using management information systems, instead of by reference to financial accounting standards.

This is because of the different emphasis: management accounting information is used within an organization, typically for decision-making.

Necessity of Management Accounting

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The benefits of preparing periodic management accounts may not be understood by all. Possibly the work may be considered an unwanted administrative chore or simply a cost and another source of cash outflow from the business.

Fig: Management Accounting decision making process

The practical role of managerial accounting is to increase knowledge within an organization and therefore reduce the risk associated with making decisions. Accountants prepare reports on the cost of producing goods, expenditures related to employee training programs, and the cost of marketing programs, among other activities. These reports are used by managers to measure the difference, or "variance," between what they planned and what they actually accomplished, or to compare performance to other benchmarks. Because of the need for detailed information about specific operations within a company, management accounting reports are typically much more in-depth than traditional financial accounting reports, such as balance sheet ratios and net income calculations.

The benefit of management accounting is that it is not constrained by generally accepted accounting principles, which means that approximate results can be generated quickly for decision-making activities. Which means while accuracy is valued in the data, relevance is more important for managerial accounting reporting. This is also helpful because it allows the managerial accountant to adapt to different economic climates, business strategies and departments changing needs. Managerial and cost accountants use a lot of the same data used by financial accountants. The difference lies in the fact that the data used for managerial accounting is more likely to be used for a future orientated purpose whereas the financial accounting process is showing what has already taken place. Examples of future orientated planning are budgets, benchmarking, and profit projecting. This also means that managerial accountants can take a more proactive approach when it comes to tackling business and economic troubles that can and due arise for many companies. Besides producing routine reports, management accountants also create special reports for other managers that help them to make decisions about proposed projects or problems that arise. Special reports are often created to analyze the relationship between costs and benefits related to different alternatives in the decision-making process. For instance, if a company's competitor drops its prices, management may ask the accounting department to produce a report comparing possible competitive responses, such as lowering prices, increasing advertising, or even changing its product or service. Such reports often involve forecasting as well as the collection of outside information. Most managerial reports also differ from financial reports in their frequency. Many internal reports, in fact, are generated monthly, weekly, or even daily in the case of information such as cash receipts and disbursements. Despite their emphasis on detail, a critical characteristic of most managerial accounting reports is that they are presented in summary format. Managers can read the summaries, efficiently identify possible problem areas, and then examine the details within those areas to determine a course of action.

How Management Accounting can help a typical Bangladeshi Manager to improve the performance of the business
Managerial accounting is concerned with the use of economic and financial information to plan and control many activities of an entity and to support the management decision course. Management accountants play important roles more specifically in planning & coordination with production, marketing and financial functions. A subset of the managerial accounting profession is cost accounting which relates to the determination and accumulation of products, processes, or service costs. Management and cost accountants are focused on the internal aspects of a business to keep it efficiently running and profitable. Most important benefit of Management Accounting to a manager is that it helps in decision making and planning also helps to determine which should be or should not be done by the manager. Decision Making and Planning: Planning is a key part of the management process and although there are many descriptions of that process, a generally accepted definition would include reference to the process of planning, organizing and controlling businesses' activities so that the organization can achieve its desired outcomes. Being able to anticipate what revenues will be and forecasting the expenses that will be incurred to achieve those revenues are critical activities in the budgeting process. That ability is crucial to many aspects of a company and allows employees' to make more educated business decisions. Just as in most managerial accounting applications, information produced for managers is used to make decisions about the future and to judge the effectiveness of past decisions and actions. In managerial accounting, the process of setting goals, determining resource requirements, and devising a means of achieving goals is referred to as "planning." Monitoring financial results and measuring the outcome of planning processes within the enterprise is called "controlling." The person in charge of an entity's accounting department is usually called the "controller." The controller generally plays a key role in both planning and controlling endeavors throughout the organization.

The plans of management are formally communicated as budgets, and the term "budgeting" typically refers to management planning. The controller oversees the development of budgets by the accounting department, usually on annual basis. Budgets are commonly prepared not only for the overall organization, but also for divisions and departments within a company or institution. Budgets are important to the goal-setting function of an organization because they express the wishes and objectives of management in specific, tangible, quantitative terms.

Fig: Management Accounting Focus Once a company's plans, or budgets, have been established, managerial accountants begin gathering information generated by the organization that indicates whether or not the company is achieving its goals. The accounting department presents its findings in the form of performance reports tailored for individual executives or departments. The detailed performance reports essentially compare budgets with actual results for a given time period, allowing managers to identify problem areas. For instance, a company's store

managers may utilize data such as inventory levels and sales volumes to direct advertising and promotional programs. Management accounts are usually for analyzing the recent past performances of the business and also usually study elements that look at the future of the company as well. This can include looking at profit forecasts, cash flow and sales. The figures found from this analysis are compared against figures that have been gathered from past forecasts and budgets. The information gathered for the management accounting is usually broken down so that the performance of different parts of the company can all be measured separately to ensure that they are all working to the best of their abilities. The internal orientation that management accountants have to their companies differs from the predominantly external orientation of financial accounting. Financial accounting is more externally important to such people as investors and shareholders. Management accountants work hand and hand with other internal departments such as merchandising, accounting, marketing, web and more. An example of this would be a managerial accountant working with a merchandiser to figure out how many units of a garment they can purchase in the next year and still have a good profit margin. There are also several benefits including: Business Control In some instances a healthy bank balance may not indicate a successful company. The cash balance is taken at one point in time, and may in the future be adversely impacted by current trading conditions. Unless the business owner can immediately identify adverse operating trends and take action to correct the situation, it may result in a severe cash flow shortfall later. Management accounts should provide sufficient information to detect positive and adverse trends in sales volumes, operating margins, costs and profit. Importantly this information will be available throughout the trading year and allow for informed business decisions to be taken.

Focus on Key Business Areas i) Sales Knowing at year end that sales may have increased or decreased in total against the previous period may be interesting, but is it sufficient to exercise control over key areas of the business? As part of the management accounts work it would be expected that an analysis of sales, by product is made available. This will allow the business owner to review objective data on product sales trends and to take informed decisions on divestment or investment in different product lines. ii) Costs The total business costs are of little value when managing a business. The need to have some cost analysis cannot be underestimated. A business owner/director should know where the company money is being spent and if costs are spiraling out of control. Directing and Motivating In addition to planning for the future, managers must oversee day-to-day activities and keep the organization functioning smoothly. This requires the ability to motivate and affectively direct people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and make many small decisions that affect customers and employees. In effect, directing is that part of the manager's work that deals with the routine and the here and now. Managerial accounting data, such as daily sales reports are often used in this type of day-to-day decision making. Tax Planning and Dividend Payments When up to date information is available, a director/owner can plan with greater confidence when transactions need to be made. This approach may be helpful in legitimately reducing the tax liability of the company, and to maximise the potential benefits by payment of dividends as opposed to salary. 9

Demonstrate the Owner is in Control Knowledge is power. Certainly if the owner can demonstrate to the professional people the business has contact with, that there is a comprehensive understanding of what is happening within the business then respect will be gained and the level of comfort in the business relationship will be heightened. This may be of particular importance in the relationship with the bank manager. Reduced Year End Audit and Accounting Costs During the process of preparing management accounts many queries will be identified and resolved. If this were not the case, at year end in addition to accounting for twelve month's work, all queries during the period will need to be addressed at the same time. Memories will fade and resolution of issues will take longer and cost more. Detection of Fraud A regular review of the financial performance of the business will increase the possibility of detecting fraud or other malpractices. Simply the longer time gap between financial reviews will allow wrong doings to remain hidden and more difficult to uncover.

Conclusion
The future possibilities for managerial accountants are endless. Since they are used so much in planning financial aspects of business they will always play a crucial role in a wide range of companies. From a management accounting point of view the primary purpose of management is to make decisions that may be classified as marketing, production, and financial. The tactical decisions which must be preceded by strategic decisions provide the historical data from which the accountant prepares financial statements. In addition to being statements summarizing historical transactions, financial statements may be regarded as a descriptive model for decision making. Every item or element on the financial statements is the result of a decision or decisions. For each decision, there exists a management accounting tool that may be used to make a good

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decision. However, the management accounting tools can be used only if the management accountant is successful in providing the information demanded by the particular tool.

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