Act 207: Management Accounting Unit 1 Introduction PDF

ACT 207: MANAGEMENT ACCOUNTING UNIT 1 – INTRODUCTION TO MANAGEMENT ACCOUNTING Prepared by: Jacinth Dawes  OBJECTIVES At the end of this session, students will be able to:  Define Management Accounting  Know how Management Accounting relates to Cost Accounting...

ACT 207: MANAGEMENT ACCOUNTING UNIT 1 – INTRODUCTION TO MANAGEMENT ACCOUNTING Prepared by: Jacinth Dawes  OBJECTIVES At the end of this session, students will be able to:  Define Management Accounting  Know how Management Accounting relates to Cost Accounting and Financial Accounting  Understand the key terms of Management Accounting  OBJECTIVES  Describe the key themes on which Management Accounting is founded.  Explain the critical importance of analyzing internal and external data for management decision- making.  INTRODUCTION TO MANAGEMENT ACCOUNTING  An integral part of Management is concerned with identifying, presenting and interpreting information used for: Formulating strategies Planning and controlling activities Decision making Maximizing the use of organizational resources  INTRODUCTION TO MANAGEMENT ACCOUNTING Cont’d:  Making disclosures to shareholders and other external stakeholders  Making disclosure to employees  Safeguarding organizational assets  MANAGEMENT/COST AND FINANCIAL ACCOUNTING Effective participation is required from management to ensure the following:  Formulation of plans to meet objectives  Formulation of short term operation plans  MANAGEMENT/COST AND FINANCIAL ACCOUNTING Cont’d:  Acquisition and use of finances and recording the transactions.  Corrective action to bring plans and results into line (control).  Review and report on systems and operations.  MANAGEMENT/COST AND FINANCIAL ACCOUNTING  Management accounting— measures, analyzes, and reports financial and non-financial information to help managers make decisions to fulfill organizational goals.  Does not need to be GAAP compliant.  MANAGEMENT/COST AND FINANCIAL ACCOUNTING How will management accountant carryout the task effectively?  Pool data from financial and cost accounting  Use accounting techniques from statistics and operations research  Be aware of underlying economic logic & ensure that the information is relevant for the  MANAGEMENT/COST AND FINANCIAL ACCOUNTING Financial accounting—concerned with matters such as:  Financial record keeping  Preparation of final accounts  Dealing with debtors & creditors  Raising of finance  Dealing with aspects of taxation  MANAGEMENT/COST AND FINANCIAL ACCOUNTING Financial accounting—concerned with matters such as:  Financial record keeping  focuses on reporting to external users including investors, creditors, banks, suppliers, and governmental agencies.  Financial statements must be based on GAAP.  MANAGEMENT/COST AND FINANCIAL ACCOUNTING Cost accounting – measures, analyzes and reports financial and non-financial information related to the costs of acquiring or using resources in an organization. MANAGEMENT, COST AND FINANCIAL ACCOUNTING  A S S CL IT Y T IV AC  MANAGEMENT/COST AND FINANCIAL ACCOUNTING Management accounting helps answer important questions such as:  Who are our most important customers, and how can we be competitive and deliver value to them?  MANAGEMENT/COST AND FINANCIAL ACCOUNTING Cont’d:  What substitute products exist in the marketplace, and how do they differ from our own?  What is our most critical capability?  Will adequate cash be available to fund the strategy or will additional funds need to be raised? MANAGEMENT ACCOUNTANT GUIDELINES Three guidelines that help management accountants provide the most value to the strategic and operational decision- making of their companies:  Cost–benefit approach: benefits of an action/purchase generally must exceed costs as a basic decision rule. MANAGEMENT ACCOUNTANT GUIDELINES  Behavioral and technical considerations: people are involved in decisions, not just dollars and cents.  Different costs for different purposes: Managers use alternative ways to compute costs in different decision- making situations. CONCEPT OF CONSISTENCY Necessary for many aspects of accountancy, is inappropriate for Management Accounting purposes. CONCEPT OF CONSISTENCY  An asset might be valued in several ways depending on the purpose.  It might be historical cost, net book value, replacement cost, resale value, scrap value, whichever is the most relevant for the intended purpose.  E S H E M T OF E NT G E M AN A M ING N T OU A CC  THEMES OF MANAGEMENT ACCOUNTING  Future orientation  Economic Reality  Goal congruence  Information systems  Statistical & 0perational research techniques  Uncertainty FUTURE ORIENTATION  Much of the work of MA is concerned with the future eg. The provision of information for policy formulation The provision of information for planning purposes The provision of information for decision making purposes FUTURE ORIENTATION  It includes activities such as forecasting future costs and revenues, estimating future interest and inflation rates, analyzing changes in the cost structure.  Because of this concept, information from historical records may not be useful if it cannot help to determine future outcomes.  ECONOMIC REALITY  Accounting date and information are used to represent the underlying economic activities of the organization which include: buying materials, selling products and manufacturing products and financing organizations.  ECONOMIC REALITY  Therefore, the information that will be used to guide future planning and decision making must represent the economic realities.  Historical cost is often not relevant in the present.  GOAL CONGRUENCE  MA should encourage all employees, including management to act in a manner which contributes to the overall objective. The objectives of both should coincide. INFORMATION SYSTEM  Information systems and networks must be in place as they are critical in providing reliable information to management which is needed for planning, control and decision making. INFORMATION SYSTEM  Most times there is information for: Sales Production Personnel Finance Operations etc. STATISTICAL & OPERATIONAL RESEARCH TECHNIQUES  Certain aspects of Management Accounting lend themselves to the use of appropriate statistical and operational techniques that will help to improve or refine a solution.  Eg. Linear programming, statistical forecasting, EOQ STATISTICAL & OPERATIONAL RESEARCH TECHNIQUES  These techniques are implemented by means of computer packages and the accountant’s role is to provide relevant input data and to interpret and present the results produced. Eg. Forecasting cost, sales, solve inventory control problems.  UNCERTAINITY  There may be uncertainty about the economic climate, wage rates, performance levels, material costs, actions of the competitor, inflation rates, taxation rates, inflation rates etc.  MA must recognize these uncertainties and incorporate them into the decision making.  MAJOR ROLE OF DECISION MAKING  Decision making is the major factor involved in the activities of Management Accounting.  Planning, control systems, performance appraisal, resource allocation and all the other areas of the managerial task, directly or indirectly involve decision making. INFLATION AND MANAGEMENT ACCOUNTING  In preparing information for planning, control, and decision making for use within the organization attention must be paid to the effects of inflation.  Overstatement of profits and understatement of assets are effects of inflation. INFLATION AND MANAGEMENT ACCOUNTING  Inflation affects every aspect of accounting, but there are areas where its effects may be particularly significant, example: Investment appraisal Pricing decisions Budgeting THE END