Managerial Accounting

College of Business and Economics

Dr Nazia Adeel
 Key topics
Conceptual Framework:
Meaning of Managerial Accounting, Major differences between Management and Financial accounting, Decision making
process, Key Management Accounting Guidelines.

Budgeting:
Meaning, Advantages and Disadvantages of Budget, Budgeting cycle and Master Budget, Preparation of Flexible and cash
budgets.

Cost concepts in Management accounting

Part A: Cost Classification (Fixed, variable, direct, indirect, Period cost, Opportunity cost, Sunk cost, Differential costs)
Part B: Numerical examples (Cost volume profit relationship, Break-Even Analysis CVP Graph, Analysis of Variances)

Balanced Scorecard:
Concept of Balance Score card, Time and the theory of constraints, just in time Inventory

Managerial accounting: Miscellaneous topics:

Job order costing, Process costing, Activity based costing, Performance measurement in decentralized organizations.

Ratio Analysis:
Introduction, Financial Ratios, Classification of Financial Ratios, Need for comparison, Calculation of various financial ratios.
 Managerial Accounting
• Definition/Meaning
“The identification, measurement, analysis, and interpretation of
accounting information for internal decision-making.”

• Managerial accounting (also known as cost accounting or management

accounting) is a branch of accounting that is concerned with the
identification, measurement, analysis, and interpretation of accounting
information so that it can be used to help managers make informed
operational decisions.
• Three key functions of management accounting are Planning, Controlling
and Decision making!
 Why it is different from Financial Accounting?

• Unlike financial accounting, which is primarily concentrated on the

coordination and reporting of the company’s financial transactions to
outsiders (e.g., investors, lenders), managerial accounting is focused on
internal reporting to aid decision-making.

• Managerial accountants need to analyze various events and

operational metrics in order to translate data into useful information
that can be leveraged by the company’s management in their decision-
making process. They aim to provide detailed information regarding
the company’s operations by analyzing each individual line of products,
operating activity, facility, etc.
Why it is different from Financial Accounting?
 Functions of Management Accounting?
Managerial accounting helps managers perform three vital activities— planning, controlling,
and decision making.
Planning involves establishing goals and specifying how to achieve them.
Controlling involves gathering feedback to ensure that the plan is being properly executed or
modified as circumstances change.
Decision making involves selecting a course of action from competing alternatives.
Assume that you work for Procter & Gamble (P&G) and that you are in charge of the
company’s campus recruiting for all undergraduate business majors. In this example, your
planning process would begin by establishing a goal such as: our goal is to recruit the “best and
brightest” college graduates. The next stage of the planning process would require specifying
how to achieve this goal by answering numerous questions such as:
• How many students do we need to hire in total and from each major?
• What schools do we plan to include in our recruiting efforts?
• Which of our employees will be involved in each school’s recruiting activities?
• When will we conduct our interviews?
 Functions of Management Accounting?
• How will we compare students to one another to decide who will be extended job offers?
• What salary will we offer our new hires? Will the salaries differ by major?
• How much money can we spend on our recruiting efforts?
As you can see, there are many questions that need to be answered as part of the planning
process.
Plans are often accompanied by a budget. A budget is a detailed plan for the future that is
usually expressed in formal quantitative terms. As the head of recruiting at P&G, your budget
would include two key components. First, you would have to work with other senior managers
inside the company to establish a budgeted amount of total salaries that can be offered to all
new hires. Second, you would have to create a budget that quantifies how much you intend to
spend on your campus recruiting activities.
Controlling
Once you established and started implementing P&G’s recruiting plan, you would transition to
the control process. This process would involve gathering, evaluating, and responding to
feedback to ensure that this year’s recruiting process meets expectations. It would also include
evaluating the feedback in search of ways to run a more effective recruiting campaign next year.
• The control process would involve answering questions such as:
• Did we succeed in hiring the planned number of students within each major and at
each school?
• Did we lose too many exceptional candidates to competitors?
• Did each of our employees involved in the recruiting process perform
• satisfactorily?
• Is our method of comparing students to one another working?
•As you can see, there are many questions that need to be answered as part of the
control process. When answering these questions your goal would be to go beyond
simple yes or no answers in search of the underlying reasons why performance
exceeded or failed to meet expectations.
Part of the control process includes preparing performance reports. A performance
report compares budgeted data to actual data in an effort to identify and learn from
excellent performance and to identify and eliminate sources of unsatisfactory
performance. Performance reports can also be used as one of many inputs to help
evaluate and reward employees.
 Decision-making process in Management Accounting
The task of management with the help of the management
accountant is to find the best alternative. The process of
making decisions is generally considered to involve the
following steps:

1 Identify the various alternatives for a given type of decision.

2. Obtain the necessary data necessary to evaluate the various

alternatives.

3. Analyze and determine the consequences of each

alternative.

4. Select the alternative that appears to best achieve the

desired goals or objectives.

5. Implement the chosen alternative.

6. At an appropriate time, evaluate the results of the decisions

against standards or other desired results.
 Decision-making process in Management Accounting
Decision-making in Management Accounting is very important and critical. In management
accounting, decision‑making may be simply defined as choosing a course of action from
among alternatives
“A basis assumption is that the best decision is the one that involves the most revenue or
the least amount of cost”
.
Decision-making process in
Management Accounting
 Decision-making process in Management Accounting
• Example from manufacturing business:
• The assumption that there are three types of important decisions,(marketing, production,
and financial) requires that management identify the specific decisions under each
category. The identification of specific decisions is critical because only then can the
appropriate managerial accounting technique be properly used. Some typical
management decisions of a manufacturing business include:
Examples of decisions associated with specific financial statement items from
Income Statement or Balance Sheet
 Strategic Vs Tactical Decision making

Strategic decisions Tactical decisions are

are broad‑based, quantitative
qualitative type of executable decisions
decisions which result directly
which include or from
reflect goals and the strategic
objectives. decisions. The
Strategic decisions distinction between
are non quantitative strategic and tactical
in nature. is important in
Strategic decisions management
are based on the accounting because
subjective thinking the techniques of
of management management
concerning goals accounting pertain
and objectives. primarily to tactical
decisions
 Strategic Vs Tactical Decisions
Some examples of Strategic decisions
include:
• Whether to enter a new market or
exit an existing market or not?
• Should we launch a new
product/service / withdraw an
existing product/service or not
• Whether to target a new/abandon
an existing customer segment or not
• Should the business enter into/exit
from a significant partnership or not
• Should we change/modify the
attributes of a product/service or not
Some examples of Tactical decisions
include:
• Whether to hire more staff or less
staff
• To change business name for
improvement or reflect your services
in a better way
• Whether the business should issue
more shares to increase the capital
• To increase sales in the future