Introduction to Managerial

Accounting

Managerial Accounting
Introduction to Managerial Accounting

A. DEFINITION, PURPOSE, CONCEPTS AND SCOPE OF MANAGERIAL

ACCOUNTING
Definition
Managerial Accounting or Management Accounting is the
systems and processes used to gather data, process data, and
provide useful quantitative information to management. It also
refers to reports designed to meet the needs of internal users,
particularly the managers.
According to the AAA Committee on Management Accounting,
it is the application of appropriate techniques and concepts in
processing the historical and projected economic data of an entity
to assist management in establishing a plan for reasonable
economic objectives and in the making of rational decisions with a
view towards achieving these objectives.
Purpose
Management Accounting supplies the information needs of
management. This information should be more detailed, forward
looking, and presented and analyzed differently to suit the unique
informational needs of management. To meet these requirements,
management accounting should have the following purposes:
1. Profit Measurement
Business performances should be measured. In the short-run,
business performance is normally expressed in terms of
profitability.
2. Guide for planning
Managers plan to ensure that organizational resources and
systems fit with what is needed in the future to deliver
profitability and sustained growth.
3. Standards for controlling
Actions are to be made in accordance with the plan. Errors
should be prevented from the very start. Deviations or
planning gap that are encountered while things are put into
action should be immediately remedied or corrected to execute
plans as intended.

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4. Basis for decision making

The primary tool of management in getting its job done is
decision making. A decision that is based on inadequate
information may lead to inferior or even damaging results. A
rational decision based on quality information would most
likely lead to increased shareholders value.
Concepts
1. Accountability
Management accounting presents information measuring the
achievement of the objectives of an organization and
appraising the conduct of its internal affairs in that process. In
order that further action can be taken, based on this
information, it is necessary at all times to identify the
responsibilities and key result areas of the individuals within
the organization.

2. Controllability
Management accounting identifies the elements of activities
which management can or cannot influence, and seeks to
assess risk and sensitivity factors. This facilitates the proper
monitoring, analysis, comparison and interpretation of
information which can be used constructively in the control,
evaluation and corrective functions of management.

3. Reliability
Management accounting information must be of such quality
that confidence can be placed in it. Its reliability to the user is
dependent on its source, integrity and comprehensiveness.

4. Interdependency
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Management accounting, in recognition of the increasing

complexity of business, must access both external and internal
information sources from interactive functions such as
marketing, production, personnel, procurement, finance, etc.
This assists in ensuring that the information is adequately
balanced.

5. Relevancy
Management accounting must ensure that flexibility is
maintained in assembling and interpreting information. This
facilitates the exploration and presentation, in a clear,
understandable and timely manner, of as many alternatives as
are necessary for impartial and confident decisions to be
taken. The process is essentially forward looking and dynamic.
Therefore, the information must satisfy the criteria of being
applicable and appropriate.

Scope
Management accounting is concerned with presentation of
accounting information in the most useful way for the management.
Its scope is, therefore, quite vast and includes within its fold almost
all aspects of business operations such as:
1. Financial Accounting
Management accounting is mainly concerned with the
rearrangement of the information provided by financial
accounting. Hence, management cannot obtain full control
and coordination of operations without a properly designed
financial accounting system.
2. Cost Accounting
Standard costing, marginal costing, opportunity cost analysis,
differential costing and other cost techniques play a useful role
in operation and control of the business undertaking.
3. Revaluation Accounting

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This is concerned with ensuring that capital is maintained

intact in real terms and profit is calculated with this fact in
mind.
4. Budgetary Control
This includes framing of budgets, comparison of actual
performance with the budgeted performance, computation of
variances, finding of their causes, etc.
5. Inventory Control
It includes control over inventory from the time it is acquired
till its final disposal.
But Management Accounting covers a much broader scope and
it goes beyond the boundaries of accounting. It may also extend its
scope and draw upon Finance, Economics, Operations Research,
Statistics, Mathematics or other discipline as necessary.
B. Recent Developments in Management Accounting
Today rapidly changing business environment stipulates the
need of companies shareholders and managers making decisions as
fast as possible following the local/global changes of science,
business, technologies, politics and society as well as internal
companys situation.
Studies disclosed the significance of
Management Accounting as a stimulus for organizational change,
progress
and
substantiated
the
benefit
of
performance
measurement process not only for financial results (improving
financial indicators, increasing market value) but also for ongoing
performance improvement, communication and control processes.
The main factors which probably had the strongest influence
on the development of Management Accounting were:
Different dominating theories of management
Different views to management accounting
Changing situation in the global economy such as
globalization, financial crisis, etc.
Expectations of shareholders, managers, society, scientists,
etc.

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Such factors brought development in Management Accounting

as follows:
Different sets of Management Accounting tools are used in
different types of organizations
There were some changes of Management Accounting
depending
on
the
financial
results
and
expectations/objectives of shareholders and management
External factors such as situation in the global economy,
competition, changes of science, business, technologies,
politics, society and financial results of
organizations
became closely related to Management Accounting.
C. Ethical Conducts of Management Accountants
Following is the Standards for Ethical Conduct for Practitioners
of Management Accounting and Financial Management published in
1997 by the Institute of Management Accountants, previously
National Association of Accountants.

Competence
Practitioners of management accounting and financial
management have a responsibility to:
Maintain an appropriate level of professional competence by
ongoing development of their knowledge and skills.
Perform their professional duties in accordance with
relevant laws, regulations and technical standards.
Prepare complete and clear reports and recommendations
after appropriate analysis of relevant and reliable
information.
Confidentiality
Practitioners of management accounting and financial
management have a responsibility to:
Refrain from disclosing confidential information acquired in
the course of their work, except when authorized, and
legally obligated to do so.
Inform
subordinates
as
appropriate
regarding
the
confidentiality of information acquired in the course of their
work and monitor their activities to assure the maintenance
of that confidentiality.
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Refrain from using or appearing to use confidential

information acquired in the course of their work for
unethical or illegal advantage either personally or through
third parties.

Integrity
Practitioners of management accounting and financial
management have a responsibility to:
Avoid actual or apparent conflict interests and advise all
appropriate parties of any potential conflict.
Refrain from engaging in any activity that would prejudice
their ability to carry out their duties ethically.
Refuse any gift, favor, or hospitality that would influence or
would appear to influence their actions.
Refrain from actively or passively subverting the attainment
of the organizations legitimate and ethical objectives.
Recognize and communicate professional limitations or
other constraints that would prejudice responsible judgment
or successful performance of an activity.
Communicate unfavorable as well as favorable information
and professional judgment or opinion.
Refrain from engaging in or supporting any activity that
would discredit the profession.
Objectivity
Practitioners of management accounting and financial
management have a responsibility to:
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably
be expected to influence an intended users understanding
of the reports, comments and recommendations presented.
Resolution of Ethical Conflict
In applying the standards of ethical conduct, practitioners of
management accounting and financial management may encounter
problems in identifying unethical behavior or in resolving an ethical
conduct. When faced with significant ethical issues, practitioners of
management accounting and financial accounting should follow the
established policies of the organization bearing on the resolution of
such conflict. If these policies do not resolve the ethical conduct,
such practitioner should consider the following actions:
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Discuss such problem with the immediate superior except when it

appears that the superior is involved, in which case the problem
should be presented initially to the next higher managerial level.
If a satisfactory resolution cannot be achieved when the problem
is initially presented, submit the issues to the next higher
managerial level.
If the immediate superior is the Chief Executive Officer, or
equivalent, the acceptable reviewing authority may be a group,
such as the audit committee, executive committee, board of
directors, or owners. Contact with levels above the immediate
superior should be initiated only with the superiors knowledge,
assuming the superior is not involved. Except when legally
prescribed, communication of such problems to authorities or
individuals not employed or engaged by the organization is not
considered appropriate.
Clarify relevant ethical issues by confidential discussion wi an
objective advisor (e.g., IMA Ethic Counseling Services) to obtain a
better understanding of possible courses of action.
Consult your own attorney as to legal obligations and rights
concerning the ethical conduct.
If ethical conflict still exists after extinguishing all levels of
internal review, there may be no other recourse on significant
matters than to resign from the organization and to submit an
informative memorandum to an appropriate representative of the
organization. After resignation, depending on the nature of the
ethical conflict, it may also be appropriate to notify other parties.

D. Distinction between Financial Accounting and Management

Accounting
Management Accounting is significantly different from Financial
Accounting. Their distinction relates to their orientation, emphasis,
customer served, and body of knowledge applied. Below are the
basic differences between the two.
FINANCIAL ACCOUNTING
Historical in nature
Uses GAAP
Reports are wholistic
Reports
are
for
general
purpose
With unifying equation, A = L

MANAGEMENT ACCOUNTING
Deals about the future
Does not use GAAP
Reports are segmentized
Reports are for management
use only
No unifying equation
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+C
Multi-disciplinar, also deals
Focuses on accounting and
with
other
areas
of
finance
knowledgeand disciplines.
Focuses on the process of Concerns with the usefulness
preparing
the
financial
of financial statements
statements
Timeliness
Precision
E. Standards for internal accounting information
Internal decision makers employed by the enterprise, often
referred to as management, create and use internal accounting
information not only for exclusive use inside the organization but
also to share with external decision makers. The accounting
information created and used by management is intended primarily
for planning and control decisions. The following identifies internal
accounting information standard

1. Importance of Timeliness
In order to plan for and control ongoing business processes,
accounting information needs to be timely. The competitive
environment faced by many enterprises demands immediate
access to information.
2. Identity of Decision Maker
Information that is produced to monitor and control processes
needs to be provided to those who have decision-making
authority to correct problems.
3. Oriented toward the Future
Although
some
accounting
information,
like
financial
accounting information, is historical in nature, the purpose in
creating and generating it is to affect the future. The objective
is to motivate management to make future decisions that are
in the best interest of the enterprise, consistent with its goals,
objectives, and mission.
4. Measures of Efficiency and Effectiveness
Accounting
information
measures
the
efficiency
and
effectiveness of resource usage. An assessment can be made
on
how
effective
management
is
in
achieving
the
organizations mission.
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F. Applicability of the basic concepts of Financial Accounting to

Managerial Accounting
Financial management has its roots in accounting, although it
may also be regarded as a branch of applied economics. It is broadly
defined as the management of all the processes associated with the
efficient acquisition and deployment of both short- and long-term
financial resources. Financial management assists an organizations
operations management to reach its financial objectives.
The management of an organization generally involves the
three overlapping and interlinking roles of strategic management,
risk
management
and
operations
management.
Financial
management supports these roles to enable management to achieve
the financial objectives of the shareholders. Financial management
assists in the reporting of financial results to the users of financial
information, for example shareholders, lenders and employees.
Some of the important functions in which financial accounting
may be involved in management accounting include:
Forecasting revenues and costs
Planning activities
Managing costs
Identifying alternative sources and costs of funding
Measurement and control of performance
Costing
compliance
with
social,
environmental
and
sustainability requirements.
G. Management uses of accounting in organizing, planning,
directing and controlling
Managers make decision in all phases of their managerial
functions. The functions are illustrated as follows:
Planning
Decision
Making
Organizing and
directing

Controlling

The diagram below depicts the relationship of planning and

controlling and its relevance to management:
Goals
Objectives

Plans
Actions
Results

Budgets

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Revisions

Feedback

Standards

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Managerial Accounting
Introduction to Managerial Accounting

H. Controllership
Controllership may be defined as the function of business
management which combines the responsibility for accounting,
reporting, measurement, auditing, taxes, operating controls and
other related areas. The seven basic functions of a controller are
(i.e., PREGPET)

Planning and controlling

This means to establish, coordinate, and administer, as an
integral part of management, an adequate plan for the control
of operations.
Reporting and interpreting
The task is to compare performance with operating plans and
standards and to report and interpret the results of operations
to all levels of management and to owners of the business.

Evaluating and consulting

This includes consulting with al segments of management
responsible for policy or action concerning any phase of the
operation of the business.
Government Relations
This includes supervising or coordinating the preparation of
report of government agencies.
Protection of assets
This is assuring protection for the assets of business through
internal control, internal auditing and assuring proper
insurance coverage.
Economic appraisal
This includes continuously appraising economic and social
forces and government influences, and interpreting their effect
upon the business.
Tax administration

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Managerial Accounting
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This includes establishing and administering tax policies and

procedures.
I. Responsibility Accounting
Responsibility Accounting identifies the investment, revenues
and expenses assigned and controlled by a manager in a segment to
monitor and asses the performance of each part of an organization.
If a manager is to be held answerable or accountable on the
performance of the segment, then he should be given the right
information to make decisions accordingly. The content of the
information should be correlated with the level of details and
frequency of report to be provided within the overriding principle of
cost-benefit analysis.

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