MODULE 1

MANAGEMENT ADVISORY SERVICES I

SESSION TOPIC 1: INTRODUCTION TO MANAGEMENT ACCOUNTING

LEARNING OUTCOMES:
The following specific learning objectives are expected to be realized at the end of the session:
a. Differentiate Management Accounting to Financial Accounting
b. Identify functions under controllership and treasurership
c. Identify the position under staff authority and line authority

KEY POINTS
Management Controllership Treasurership Line Authority
Accounting
Staff Authority

CORE CONTENT
Introduction:
This module covers the discussion of
a. Definition of Management Accounting
b. Functions of Management
c. Areas and Scope of Management Accounting:

IN-TEXT ACTIVITY

Management Accounting is the area of accounting managers which helps the management of the
organization to formulate policies, plan, and control the business operations.

Comparison of Financial Accounting Management Accounting

Definition Financial accounting is the
system that focuses on the
preparation of the financial
statements of the organization
Required This is required and mandatory
Focus information Information generally is
monetary and from past event
Objective To provide financial reports to
external users
The accounting system which
provides relevant information
to the managers to make
decision involving policies, plans
and strategies of the business
Not mandatory
Included in the reports are
monetary and non-monetary
information – and may include
future amounts
To assist the management in
planning and decision making

Format In accordance with financial
reporting standards
Users Primarily for external users
Reports Summarized and consolidated
report involving the general
needs of the external users
Regularity The financial reports should be
published regularly, at least per
annum
by giving detailed information
on various matters
No specific format, it will
depend on the needs and wants
of the managers and decision-
makers
For internal users
Complete and detailed report, a
tailored-fit report, regarding
various information
Internal reports are not
required to be published
regularly, but it is according to
the need of the user.

Five Functions of management include:

(1) Planning

Planning is future-oriented and determines an organization’s direction. It is a rational and systematic

way of making decisions today that will affect the future of the company. It is a kind of organized
foresight as well as corrective hindsight. It involves predicting of the future as well as attempting to
control the events. It involves the ability to foresee the effects of current actions in the long run in the
future.

Peter Drucker has defined planning as follows:

“Planning is the continuous process of making present entrepreneurial decisions systematically and with
best possible knowledge of their futurity, organizing systematically the efforts needed to carry out these
decisions and measuring the results of these decisions against the expectations through organized and
systematic feedback”.

An effective planning program incorporates the effect of both external as well as internal factors. The
external factors are shortages of resources; both capital and material, general economic trend as far as
interest rates and inflation are concerned, dynamic technological advancements, increased
governmental regulation regarding community interests, unstable international political environments,
etc.

The internal factors that affect planning are limited growth opportunities due to saturation requiring
diversification, changing patterns of the workforce, more complex organizational structures,
decentralization, etc.

(2) Organizing: Organizing requires a formal structure of authority and the direction and flow of such
authority through which work subdivisions are defined, arranged and coordinated so that each part
relates to the other part in a united and coherent manner so as to attain the prescribed objectives.

According to Henry Fayol, “To organize a business is to provide it with everything useful or its
functioning i.e. raw material, tools, capital and personnel’s”.

Thus the function of organizing involves the determination of activities that need to be done in order to
reach the company goals, assigning these activities to the proper personnel, and delegating the
necessary authority to carry out these activities in a coordinated and cohesive manner.

It follows, therefore, that the function of organizing is concerned with:

• Identifying the tasks that must be performed and grouping them whenever necessary
• Assigning these tasks to the personnel while defining their authority and responsibility.
• Delegating this authority to these employees
• Establishing a relationship between authority and responsibility
• Coordinating these activities

(3) Staffing

Staffing is the function of hiring and retaining a suitable work-force for the enterprise both at
managerial as well as non-managerial levels. It involves the process of recruiting, training, developing,
compensating and evaluating employees and maintaining this workforce with proper incentives and
motivations. Since the human element is the most vital factor in the process of management, it is
important to recruit the right personnel.

According to Kootz & O’Donnell, “Managerial function of staffing involves manning the organization
structure through the proper and effective selection, appraisal & development of personnel to fill the
roles designed in the structure”.
This function is even more critically important since people differ in their intelligence, knowledge, skills,
experience, physical condition, age and attitudes, and this complicates the function. Hence,
management must understand, in addition to the technical and operational competence, the
sociological and psychological structure of the workforce.

(4) Directing

The directing function is concerned with leadership, communication, motivation, and supervision so that
the employees perform their activities in the most efficient manner possible, in order to achieve the
desired goals.

The leadership element involves issuing of instructions and guiding the subordinates about procedures
and methods.

(5) Controlling

The function of control consists of those activities that are undertaken to ensure that the events do not
deviate from the pre-arranged plans. The activities consist of establishing standards for work
performance, measuring performance and comparing it to these set standards and taking corrective
actions as and when needed, to correct any deviations.

According to Koontz & O’Donnell, “Controlling is the measurement & correction of performance
activities of subordinates in order to make sure that the enterprise objectives and plans desired to
obtain them as being accomplished”.

The controlling function involves:

a. Establishment of standard performance.

b. Measurement of actual performance.
c. Measuring actual performance with the pre-determined standard and finding out the
deviations.
d. Taking corrective action.

All these five functions of management are closely interrelated. However, these functions are highly
indistinguishable and virtually unrecognizable on the job. It is necessary, though, to put each function
separately into focus and deal with it.
Functions and Positions of Management Accountants:

Controllership vs Treasurership

The management accountant,

often referred to as controller, is
the manager of accounting
information used in planning,
control and decision-making
areas. He is responsible for
collecting, processing and
reports; g information that will
help managers/decision makers
in their planning, controlling and
decision-making activities. He
participates in all accounting
activities within the organization.

Line vs. Staff Position:

The role and responsibility of a management accountant is one of support. They provide help to those
managers who have primary responsibility to fulfil basic mana-gerial functions. Positions that have
direct responsibility for the basic objectives of an organization are known as line positions. Positions that
are-supportive in nature and have only indirect responsi­bility for an organization’s basic objectives are
called staff positions. For instance, a manager of a production department holds a line position and has
responsibility and authority to make decisions concerning his department.

The production manager and similar other managers holding line positions formulate policies and goals
and make decisions that have impact on production. The management accountant, however, has no
authority over the production manager and other line positions managers. But since the management
accountants have the responsibility of providing and interpret-ing accounting information, they can have
significant influence on the policies and decisions made by production and similar line managers.

Functions: Management accountants perform many vital responsibilities and functions within an
organization such as:

(i) Providing help in the design of an accounting information system.

(ii) Collecting data.

(iii) Helping in the maintenance of accounting records, preparation of financial statements.

(iv) Helping in the budget preparation.

(v) Preparation of performance reports, control reports, special managerial reports/analyses for
planning, control and decision-making.
(vi) Coordinating budget-making and report preparation activities.

(vii) Interpreting accounting data based on the particular requirements of a manager in a given situation.

(viii) Ensuring that the accounting information system is adequate and useful in accordance with the
budgets, plans, policies and decision requirements.

The communication must be open both ways so that the information can be passed on to the
subordinates and the feedback received from them.

Motivation is very important since highly motivated people show excellent performance with less
direction from superiors.

Supervising subordinates would lead to continuous progress reports as well as assure the superiors that
the directions are being properly carried out.

Tools of Management Accounting

Management accounting employs various tools to forecast business trends, and may include the:

• Ratios
• Skills and ability to read and analyze financial statements
• Management information systems (MIS)
• Key performance indicators (KPIs)
• Simulations
• Financial modeling
• Game theory
• Balance scorecards, and any other set of data that the company can produce can be used to
complete the analysis.

SESSION SUMMARY
Management Accounting are of great significance, in fact, they help the organisation in various ways. the
management accounting is helpful in analyzing the performance, making a strategy, taking an effective
judgement and preparation of policies for the future.

SELF-ASSESSMENT
Activity 1

REFERENCES
Refer to the references listed in the syllabus of the subject.
Essay Questions:

1. What is management accounting, explain by giving examples?

2. Explain the benefits of management accounting in the business?
3. Explain the limitations of management accounting.