CHAPTER

1
INTRODUCTION TO
MANAGERIAL
ACCOUNTING-OVERVIEW
OF COST ACCOUNTING
Definition of Management Accounting:
The Managerial Accounting is another name of Management Accounting so we have been
using Management Accounting in our discussion throughout.

Management Accounting may be defined as the “Process of identification, measurement,

accumulation, analysis, preparation, interpretation and communication of information
(both financial & operating) used by the management to plan, evaluate and control
within an organization and to assure use of and accountability for its resources.”

(IMAP by FMAC pg: 37)

Management accounting, therefore, is an integral part of organization process. It provides

information essential for:

 Controlling the current activities of an organization

 Planning its future strategies, tactics and operations
 Optimizing the use of its resources
 Measuring and evaluating performance
 Reducing subjectivity in the decision making process and
 Improving internal and external communication

The Concept:
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 necessary 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.

Controllability:

Management accounting identifies the elements of activities which management can or

cannot influence, and seeks to assess the 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.

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.

Interdependency:

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
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.

(IMAP by FMAC pg: 37)

Evolution of Management Accounting:

The field of organizational activity encompassed by management accounting has developed
through four recognizable stages.

• Stage 1 – Prior to 1950, the focus was on cost determination and financial control,
through the use of budgeting and cost accounting technologies.

• Stage 2 – By 1965 the focus have been shifted to the provision of information for
management planning and control, through the use of such technologies as decision
analysis and responsibility accounting:

• Stage 3 – By 1985, attention was focused on the reduction of waste in resources used in
business processes, through the use process analysis and cost management
technologies.

• Stage 4 – By 1995, attention had shifted to the generation or creation of value, through
the use of technologies which examine the drivers of customer value, shareholder value,
and organizational innovation.

While these four stages are recognizable, the process of change from one to another has
been evolutionary.

• Cost determination and financial control

• Information for management Planning and control

• Reduction of waste of resources in business processes

• Creation of value through effective resource use

(IMAP by FMAC pg: 29)

 Comparison of Financial Accounting with Managerial Accounting:-
Financial Accounting Management Accounting
th
1- Origin Since 1497- Double Entry book keeping
From 19 century.
System.
2. Purpose The main purpose of Financial Accounting The main purpose of management
is to prepare profit and loss account and accounting is to provide detailed
balance sheet. information.

3. Target Reporting to owner and outside agencies Mainly to management

Group

4. Statutory These accounts have to be prepared Maintenance of these accounts is

Requirements according to the legal requirements of voluntary.
Companies Acts.

5. Analysis of Financial account reveal the profit or loss
Cost and of the business as a whole during a
Profit particular period. It does not show the
figure of cost and profit for individual
products, departments and processes.
Managerial accounts show the
detailed cost and profit data for each
product line,department, process
etc.

6. Period of Financial Statements are prepared Management Reporting is a

reporting periodically, usually on an annual basis. continuous process that may be
daily, monthly, as required by
management.

7. Control It lays emphasis on the recording of It provides for a detailed system of

Aspect financial transactions and does not attach controls with the help of certain
any importance to control aspect. special techniques like standard
costing and budgetary control.

8. Nature It is concenrned almost exclusively with It is concenrned not only with

historical records. The historical nature of historical costs but also with
financial accounting can be easily predetermined costs. This is
understood in the context of the purposes because management accounting
for which it was designed. does not end with what has
happened in the past.

9-Audit There is an audit requirement of financial There is no such audit

statements. requirements.Cost audit concept is
getting importance in some
countries.

10. There are international accounting There are few guidelines issued by
International standards to be followed. MAC(Management Accounting
Standards Committee).
Role of a Management Accountant:-
Traditional Role:

In a traditional role, the Management Accountant is primarily concerned with the application
of accounting techniques and to the provision of information designed to assist all levels of
management in planning, reporting and controlling the activities of the organization.

Dynamic Role:

In today’s business environment, role of a Management Accountant is much more dynamic

than his traditional role. This is to create and enhance value of the organization through
stakeholders. This concept of value creation gives Management Accountant a more
dominant position in the organization. It includes:

 Suggesting ways and means to add more value

 Involvement in facilitating change processes in the organization
 Being a business advisor and not just a “corporate policeman”. Complete understanding
of organizational strategy, helping to solve problems and functioning as an effective
member of cross-functional teams.
 Being pro-active by following Feedforward control (i.e. forecasting of differences between
actual and planned outcomes, and the implementation of action, before the event, to
avoid such differences.
 Being able to address not only real concerns but also the perceived concerns, described
to include timeliness and trustworthiness.
 Fully participating in members of the Management team, playing pivotal role in
achievement of business objectives by expertise and diversified knowledge.
 Playing effective role in Project Management
 Preparing cashflow on the basis of realistic assumptions to determine debt-servicing
capability.
 Monitoring of growth initiatives and planning
 Conducting SWOT Analysis
 Strengthening the role as Cost auditor
 Assisting the government in developing audit process for income tax and sales tax.
(Management Accountant Executive Summary by Ali Imran Siddiqui Pg: 34)

Management Audit in a dynamic business environment:

A systematic assessment of methods and policies of an organization’s management in the
administration and the use of resources, tactical and strategic planning, and employee and
organizational improvement

The objectives of a management audit are to

1. Establish the current level of effectiveness

2. Suggest improvements

3. Lay down standards for future performance

Management auditors (employees of the company or independent consultants) do not
appraise individual performance, but may crtitically evaluate the senior executives as a
management team.