pp16

Financial and Management Accounting
An introduction
Eighth Edition
MANAGEMENT
ACCOUNTING
Part 5
Setting the scene and
defining the basic tools of
management accounting
Chapter 16
Functions of management
accounting
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Definition of accounting
• The process of:
– Identifying.
– Measuring.
– Communicating financial information about an
entity.
• To permit:
– Informed judgements.
– Decisions by users of the information.
Management accounting
Identifying, measuring and communicating
for informed judgements and decisions by
internal users of the information.
Contingency approach
Control systems depend on:
•The external environment of the business;
•The production technology;
•The size of the organisation; and
•The corporate strategy.
Internal users’ questions
‘Shall I invest in manufacturing more soap
powder, or do I switch resources into
toothpaste?’
•Information required:
– Relative demand for each product.
– Actions of competitors.
– Costs of inputs (materials and labour).
– Availability of suitable labour.
(Continued)
‘Shall I continue offering a television repair service
as support for my sales of televisions?’
– Market research on demand.
– Sales with/without repair service.
– What competitors are doing.
– Cost of repairs.
– Profit margin.
(Continued)
‘Is it cost-effective to have three separate
locations at which my tenants can pay their
rent?’
– Cost of maintaining offices and staff.
– Cost of reducing staff.
– Rent payments may reduce cost of chasing.
(Continued)
‘Will this investment in a new factory pay for
itself over the next ten years?’
– Cost of investment.
– Cost of capital (borrowing/raising equity).
– Future cash flows.
– Discounted cash flow.
– Sensitivity analysis.
Strategic management accounting
Identification, measurement and
communication of cost data in situations
where the organisation is being judged
against the performance of competitors.
Management functions
• Planning
• Decision making
• Control
Planning
• Immediate future and longer term, for
example:
– Sales.
– Production.
– Capital expenditure.
Decision making
• About resources.
• About activities.
• Financial matters, particularly cost.
• Impact on employees.
• Impact on competitors.
Control
Is outcome in accordance with the initial plans
and objectives?
• Plans include:
– Costs and profit.
– Timely, relevant and accurate information.
– Cost measurement.
– Effective communication.
– Organisational structure.
– Responsibility and authority.
Cascade down/flow upwards.
Organisation chart
Chair of the board of directors
Managing
director
Production Personnel Finance Sales

director director director director
Production Personnel Financial Sales

supervisor manager controller co-ordinator
Salaries and Financial accounting

wages
co-ordinator
Creditors Debtors Credit

ledger ledger controller
supervisor supervisor
Management accounting
Management Project Systems

accountant accountant accountant
Interrelationships
Identify the objectives of the proposed shop
in terms of target sales, target profit and
target return on capital employed.
Locate suitable premises to rent or buy.

Planning
Collect data about expected customers,

similar shops in the area, complementary businesses,
access and expected demand.
Evaluate the options and make a decision,

Decision making
having regard to the objectives.
Implement the decision.
Control Compare the actual outcome with the plan.
Decide how to deal with divergences from plan.
Role of management accounting
• Directing attention
• Keeping the score
• Solving problems
Directing attention
• ‘Who should take action?’
• ‘Whose responsibility is this loss?’
• ‘Who is to be congratulated on this favourable
result?’
• Highlight those costs which have departed from
expectations.
• Fairness and timeliness.
• Responsibility.
• Recognise achievements.
• Demonstrate accountability.
Keeping the score
• ‘How much?’
• ‘How many?’
• Record-keeping and monitoring accounting
records against physical quantities and
measures.
• Completeness and fairness.
• Matching costs to a time period.
• Matching costs to an item of output.
• Matching costs against revenue of the period.
Solving problems
• ‘Why did that plan go well?’
• ‘Why did that action fail?’
• ‘Which of these three choices is the best to
take?’
• Relevance.
• Choices.
• Base for understanding the problem.
Cycle of profit planning and control
Measuring
performance
Implementing Examining the

plans Keeping the score environment
Solving problems Directing attention
Translating into operating plans Developing objectives
Formulating a
strategy
Language of management accounting
• No standard set of wording.
• CIMA (Chartered Institute of Management
Accountants) guidance and definitions.
• Use:
– Quick checklist, Appendix 1.
– Index.

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Financial and Management Accounting

Production Personnel Finance Sales

Production Personnel Financial Sales

Salaries and Financial accounting

Creditors Debtors Credit

Management Project Systems

Locate suitable premises to rent or buy.

Collect data about expected customers,

Evaluate the options and make a decision,

Implement the decision.

Control Compare the actual outcome with the plan.

Decide how to deal with divergences from plan.

• Keeping the score

Implementing Examining the

Solving problems Directing attention

Translating into operating plans Developing objectives

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