Chapter-1

Introduction

Study Objectives:

 After studying this chapter, you should be able to:

1. Identify the major differences and similarities between
financial and managerial accounting.

2. Understand the role of management accountants in an

organization.

3. Understand the basic concepts underlying Just-In-Time

(JIT), Total Quality Management (TQM), Process
Reengineering, and the Theory of Constraints (TOC).
DEFINITION OF MANAGEMENT
ACCOUNTING

 Management accounting is concerned with preparing and

presenting accounting information in such a way as to
assist a firm’s management in designing policies,
planning, and controlling the operations of the
undertaking.
 Management accounting uses both financial and cost
information to advise managers in planning and
controlling the organization.
 It provides information to persons inside the organization.
Management accounting refers to accounting
information developed for managers within an
organization.
In other words, management accounting is the
process of identifying, measuring, accumulating,
analyzing, preparing, interpreting, and
communicating information that helps managers
fulfill organizational objectives.
This is the phase of accounting concerned with
providing information to managers for use in
planning and controlling operations and in decision
making.
 Managerial accounting is concerned
with providing information to managers-
that is people inside an organization
who direct and control its operations.
 Managerial accounting provides the
essential data with which organizations
are actually run.
FUNCTIONS OF MANAGEMENT
ACCOUNTING

 The major functions of management accounting are to-

 record financial transactions,
 compute the cost of goods sold and other expenses,
 prepare periodic financial statements,
 measure the performance of business units over time,
 allocate resources to business units or activities according to
profitability or some similar criteria,
 aid in planning future operations by projecting cash flows,
 plan for capital expenditures to replace assets that are being used
up,
 help estimate the cost of completing proposed new projects, and
 provide data to be incorporated into the budgeting process.
SCOPE OF MANAGEMENT
ACCOUNTING
 Management accounting covers a wide range of
areas, such as financial accounting, cost accounting,
budgeting, and taxes.
 The primary goal is to assist management in
performing its planning, directing, and managing
tasks.
 The following are some of the areas of management
accounting specialty.
SCOPE----

 Cost Accounting
 Financial Accounting
 Budget and Forecast
 Interpretation of Data
 Financial Management
 Management Reporting
 Financial Statement Analysis
 Inflation Accounting
1. Cost Accounting

 Cost accounting is a crucial accounting

technique because it provides cost analysis
tools for a business, such as marginal cost,
operational cost, inventory costing, budget
control, etc.
 These are required by business management to draft and
outline the business needs.
 Cost accounting assists in determining the total
budget for any firm and gives several methods
for estimating and calculating the entire cost of
providing a service to the consumer. 
2. Financial Accounting

 Financial accounting calculates and analyses

business transactions, including expenses,
inventories, assets, and reporting.
 It is critical for the organization's financial forecasts
because it provides the general financial
information incurred throughout the current fiscal
year.
 It assists management in operating successfully
and implementing coordination across corporate
processes to carry out business planning.
3. Budgeting and forecasting

 Budgeting and forecasting are also part of the management

accounting scope, including budget control and business
forecasting trends.
 Budget control aids in identifying and analyzing the causes and
weak points that slow down coordination and decrease business
performance.
 On the other hand, forecasting is an essential function of
management accounting because it provides a business view
from the stakeholders' perspective.
 Business budgeting and forecasting outline the company's goals
and plans and the expected outcomes of the activities carried
out to help prepare the company in case of an emergency.
4. Data interpretation
 Data interpretation is described as converting business
data into facts and statistics that business management
can easily understand.
 Interpreting one’s work is just as crucial to his/her
business as financial reporting because it helps him/her
to avoid drawing erroneous conclusions from his/her
business data.
 If the data is not appropriately understood and
evaluated, it might spell doom for a market business.
 The data for the current year is analyzed and compared
to past data to better understand the business's growth.
5. Financial Administration

 Financial management is the administration and

planning of a company's financial resources.
Raising cash and using them wisely is critical
for sound financial management.
 The purpose of considering financial
management as managerial accounting in
terms of scale is to optimize a company's
profits through the efficient use of cash.
 A business cannot function without effective
financial management.
6. Reporting
 Reporting is essential for each business manager.
 Obtaining reports on time is critical for managing
corporate growth and resources. The timely report
assists management in making successful decisions and
keeps management informed of ongoing operations.
 Data and reports are presented to management in
simple graphs, charts, and presentations.
 According to the company requirements, reports are
retrieved weekly, monthly, quarterly, and yearly, and
these reports are beneficial when examining corporate
data.
7. Accounting for Inflation

 Inflation analysis is critical in business

and is described as a drastic change
in financial results when market prices
change.
 Inflation accounting refers to inflation
analysis tools that aid in identifying
the causes of inflation and eliminating
them for improved performance.
8. Analysis of Financial Statement

 As mentioned earlier in financial accounting,

financial statements are prepared after each
fiscal year to study and analyze the financial
growth of a business.
 The financial accounts provide insights into the
business and aid in its growth through their
interpretations and conclusions.
THE WORK OF MANAGEMENT AND THE NEED FOR
MANAGERIAL ACCOUNTING INFORMATION

Managers in every organization carry out three major activities-

• Planning
• Directing and motivating
• And Controlling
Planning involves selecting a course of action and specifying
how the action will be implemented.
Directing and motivating involves mobilizing people to carry
out plans and run routine operations.
Controlling involves ensuring that the plan is actually carried
out and is appropriately modified as circumstances change. In
carrying out the control function, managers seek to ensure that
the plan is being followed.
EVOLUTION OF MANAGEMENT
ACCOUNTING

Source:
Managerial Accounting VS
Financial Accounting

Managerial accounting Financial accounting

provides information provides information
for managers inside an to stockholders,
organization who creditors and others
direct and control who are outside
its operations. the organization.
Differences Between Financial
and Managerial Accounting
COST ACCOUNTING VS
MANAGEMENT ACCOUNTING

 Cost Accounting is all about the Cost and it includes

things like Cost control, Cost computation and Cost
reduction.
 Whereas Management Accounting is about
managing the organization and making effective
decisions. 
 Cost Accounting has a narrow scope whereas
Management Accounting has much broader scope. 
 The differences between cost accounting and
management accounting are stated in the following
table-
MANAGEMENT ACCOUNTANT

 Management accountants work in both

the public and private sectors.
 They prepare data—recording and
crunching numbers—that their
companies use for budgeting and
planning purposes.
 They are also responsible for managing
risk, planning, strategizing, and decision
making.
CONTROLLING FUNCTION OF
MANAGEMENT ACCOUNTANTS

 Management accountants assist in the control of

an organization's performance through the use
of
 standard costing,
 accounting ratios,
 budget control,
 revenue and funds flow statements,
 cost-cutting initiatives, and assessing capital expenditure
proposals and
 returns on investment.
TREASURER FUNCTION OF
MANAGEMENT ACCOUNTANTS

 The treasurer, being the person best suited to

explain the company's financial position, is
tasked with communicating with potential and
current investors.
 It is up to the treasurer to explain
 how the company is doing financially and
 how it plans to remain profitable and beneficial to its
investment.
COMPARISON BETWEEN TRADITIONAL AND
CONTEMPORARY ROLE OF MANAGEMENT
ACCOUNTANTS

 There are several differences between modern and traditional

management accounting. 
 [1].In traditional management accounting, the main aim
is to analyze, summarize, and record expenses and
companies were not seeking expense behavior, drivers,
and fluctuations.
 In modern management accounting, the aim is to record,
summarize, and analyze expenses and analyze the
expense behavior, drivers, and fluctuations. Modern
management accounting allows companies to record
their expenses, break them down into different
categories, and analyze them at every business or
production stage. 
 [2]. Under traditional management accounting,
there are numerous opportunities to manipulate
because the expense was directly recorded to the
account when the product was sold. Therefore,
managers were able to manipulate the production
process in pursuit of bonuses.
 In contrast, under modern management
accounting, manipulations are almost impossible
because expenses are debited directly to their
relevant accounts at the time of occurrence,
resulting in less opportunity for misrepresentation. 
MANAGEMENT ACCOUNTING IN NON-
PROFIT ORGANIZATION

 Managerial Accounting plays very important role in a

nonprofit organization.
 Accounting analysis techniques will help managers
within organization
 to make better management decisions.
 With the help of these techniques managers making
decisions about
 selecting equipment,
 determining whether costs are being efficiently incurred,
 monitoring financial and nonfinancial performance measures, and
 developing strategic plans.
 Managerial Accounting normally covers
the following fields in nonprofit
organizations.
 Making Financial Decisions
 How to Save Money?
 Control Cash Flow
 Efficient Planning
 Auditing
MANAGEMENT ACCOUNTING
PROFESSION

 Management accountants work for public companies,

private businesses, and government agencies.
 These professionals may also be called cost
accountants, managerial accountants, industrial
accountants, private accountants, or corporate
accountants.
 Preparing data for use within a company is one of the
features that distinguishes a management accountant
from other types of accounting jobs such as public
accounting.
 They will be recording and crunching
numbers for internal review to help
companies budget and perform better.
 They may help the company choose and
manage its investments along with other
company managers.
 Management accountants are risk
managers, budgeters, planners,
strategists, and decision-makers.
 They do the work that helps the
company's owner, manager, or board of
directors make decisions.
 Management accountants often supervise
lower-level accountants who handle basic
accounting tasks, such as recording income
and expenses, tracking tax liabilities.
 This information is used to prepare income
statements, cash flow statements,
and balance sheets..
 A management accountant performs
analysis to forecast, budget, and measure
performance and plans, then presents
them to senior management to assist in
operational decision making.
1-31

Code of Conduct for

Management Accountants

 The Institute of Management Accountants’ (IMA’s) Statement of

Ethical Professional Practice consists of two parts.
 The first part provides general guidelines for ethical behavior. In
a nutshell, a management accountant has ethical responsibilities in
four broad areas:
 first, to maintain a high level of professional competence;

 second, to treat sensitive matters with confidentiality;

 third, to maintain personal integrity; and

 fourth, to disclose information in a credible fashion.

 The second part of the standards specifies what should be done

if an individual finds evidence of ethical misconduct.
IMA Statement of Ethical
Professional Practice
 Members of IMA shall behave
ethically.
 A commitment to ethical
professional practice includes: main
principles that express values, and
standards that guide conduct.
PRINCIPLES

 IMA’s main ethical principles

include: Honesty, Fairness,
Objectivity, and Responsibility.
 Members shall act in accordance
with these principles and shall
encourage others within their
organizations to follow to them.
STANDARDS
 A member’s failure to comply with the following standards may
result in disciplinary action.
 I. COMPETENCE (Capability or Fitness)
 Each member has a responsibility to:
 1. Maintain an appropriate level of professional expertise by continually
developing knowledge and skills.
 2. Perform professional duties in accordance with relevant laws, regulations,
and technical standards.
 3. Provide decision support information and recommendations that are
accurate, clear, concise, and timely.
 4. Recognize and communicate professional limitations or other constraints
that would preclude responsible judgment or successful performance of an
activity.
 II. CONFIDENTIALITY (Privacy)
 Each member has a responsibility to:
 1. Keep information confidential except when disclosure is
authorized or legally required.
 2. Inform all relevant parties regarding appropriate use of
confidential information. Monitor subordinates’ activities to
ensure compliance.
 3. Refrain from using confidential information for unethical or
illegal advantage.
 III. INTEGRITY (Honesty)
 Each member has a responsibility to:
 1. Mitigate actual conflicts of interest. Regularly communicate
with business associates to avoid apparent conflicts of
interest. Advise all parties of any potential conflicts.
 2. Refrain from engaging in any conduct that would prejudice
carrying out duties ethically.
 3. Abstain from engaging in or supporting any activity that
might discredit the profession.
 IV. CREDIBILITY (Reliability)
 Each member has a responsibility to:
 1. Communicate information fairly and
objectively.
 2. Disclose all relevant information that could
reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or
recommendations.
 3. Disclose delays or deficiencies in information,
timeliness, processing, or internal controls in
conformance with organization policy and/or
applicable law.
1-36

IMA Guidelines for Resolution

of an Ethical Conflict
• Follow employer’s established policies.
• For unresolved ethical conflicts:
 Discuss the conflict with immediate supervisor or
next highest uninvolved manager.
 If immediate supervisor is the CEO, consider the
board of directors or the audit committee.
 Contact with levels above the immediate supervisor
should only be initiated with the supervisor’s
knowledge, assuming the supervisor is not involved.
End of Chapter 1