Introduction to Management Accounting

Management
Management is the process of allocating an organization's inputs, including human and
economic resources, by planning, organizing, directing, and controlling for the purpose of
producing goods or services desired by customers so that organizational objectives are
accomplished.

Accounting
Accounting is and information system that identifies, records, and communicates the
economic events of an organization to interested users.

Management Accounting
I. M Pandey - The part of accounting system which facilitates the management process of
decision-making is called Management Accounting.

The Institute of Management Accountants defines management accounting as the process

of identification, measurement, accumulation, analysis, preparation, interpretation, and
communication of financial [as well as nonfinancial] information used by management to
plan, evaluate, and control within the organization and to assure appropriate use and
accountability for its resources.

Differences Between Financial and Managerial Accounting:

Financial Accounting Management Accounting

1.Primary Users Persons and organizations Various types of internal
outside the business management
2. Accounting Double-entry system Any useful system, not
 System restricted to double entry system

3. Requirements Must follow GAAP and Need not follow GAAP or any
prescribed formats prescribed format
4. Time Focus Historical perspective Future emphasis
5. Subject Primary focus is on the Focuses on segments of an
whole organization organization
6. Frequency of Periodically on a regular Whenever needed; may not be
Reporting basis on a regular basis
7. Degree of Demands objectivity Heavily subjective
Objectivity
8. Compulsion Mandatory for external Not mandatory
reports

Management’s
Needs for financial information
Managers need financial information for the following three purposes:
 First, manufacturing and service companies need product and service costing
information to identify unit cost price and fixing selling price.
 Second, to accomplish their objectives, all companies need data to plan and
control operation.
 Third, managers need special reports and financial analyses to support their
decisions.

Decentralization
Decentralization is the delegation of decision-making authority throughout an
organization.

Difference between line position and staff position

 Line positions are directly related to achievement of the basic objectives of an
organization. Example: Production supervisors in a manufacturing plant.
  Staff positions support and assist line positions. Example: Cost accountants in the
manufacturing plant.

The Changing Business Environment

 Growth of the internet
 Just-In-Time production
 Total Quality Management (TQM)
 International competition

Just-in-Time (JIT) Systems

Steps of JIT system are as follows:
1. Receive customer orders
2. Schedule production
3. Receive materials just in time for production
4. Complete production in time
5. Ship products to customers in time

Pre-requisites of JIT System

i. Improved plant layout

ii. Zero production defects
iii. Reduced setup time
iv. Fewer but more ultra-reliable suppliers, Frequent JIT deliveries in small lots,
Defect-free supplier deliveries
Benefits of a JIT System
1. Freed-up funds .
2. Reduced inventory costs
3. Higher quality products
 4. Increased throughput (more production in short time)
5. More rapid response to customer orders
6. Greater customer satisfaction
Limitations of JIT System
1. JIT system depends on confirm supply of materials. Therefore, unexpected
disruption in supply may create severe problem.
2. Production would be held-up and a deadline for shipping a product would be
missed if a key part was missing or was found to be defective.
3. In JIT system, the typical plant layout needed to be improved that requires more
fund, which is not possible for all firm.
4. Where there exists political unrest, unimproved transportation and communication
system, implementation of JIT system is impossible there.

Total Quality Management (TQM)

There are two characteristics of TQM:
1. A focus on serving customer
2. Systematic problem solving using teams made up of front line workers.

Problem solving tools

Benchmarking: studying organizations that are among the best in the world at
performing a particular task.
PADC cycle: a systematic, fact-based approach to solve problem.

Importance of Ethics in Accounting

1. Ethical accounting practices build trust and promote loyal, productive
relationships with users of accounting information.
2. Many companies and professional organizations, such as the Institute
of Management Accountants (IMA), have written codes of ethics, which
serve as guides for employees.
Code of Conduct for Management Accountants/ IMA Code of Ethics for
Management Accountants
Four broad areas of responsibility:
1. Maintain a high level of professional competence
2. Treat sensitive matters with confidentiality
3. Maintain personal integrity
4. Be objective in all disclosures

1. Competence:
a. Maintain appropriate level of professional competence by ongoing
development of knowledge and skills.
b. Prepare complete and clear reports after appropriate analysis.
c. Follow applicable laws, regulations, and standards.

2. Confidentiality
a. Do not use confidential information for personal advantage
b. Ensure that subordinates do not disclose confidential information
c. Do not disclose confidential information unless legally obligated to do so.

3. Integrity
a. Do not subvert/threaten organization’s legitimate objectives
b. Recognize and communicate personal and professional limitations that would
hamper successful performance of an activity
c. Avoid conflicts of interest and advise others of potential conflicts
d. Avoid activities that could affect your ability to perform duties
e. Refrain from activities that could discredit the profession
f. Communicate unfavorable as well as favorable information
g. Refuse gifts or favors that might influence behavior
4. Objectivity
a. Communicate information fairly and objectively
b. Disclose all information that might be useful to users especially the management.

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 conflict. When faced with significant ethical issues,
practitioners should follow the established policies of the organization bearing on the
resolution of such conflict. If these policies do not resolve the ethical conflict, such
practitioner should consider the following courses of action:
 Discuss the conflict with immediate superior
 If immediate superior is the CEO, consider the board of directors or the
audit committee
 Consult your own attorney as to legal obligations and rights concerning
the ethical conflict.
 If the ethical conflict still exists after exhausting all levels of internal
review you should resign from the organization
 Except where legally prescribed, maintain confidentiality.