FUNDATION MANAGERIAL ACCOUNTING AND ETHICAL STANDARDS

1.1 DEFINITION OF MANAGERIAL ACCOUNTING

Managerial accounting is the presentation of accounting information in such a way as to assist

management in the creation of policy and the day-to-day operation of an undertaking. It is also known as
management accounting. “Management accounting is concerned with accounting information that is
useful to management.” Thus, Managerial accounting is concerned with providing information to
managers for use within the organization

Managerial accounting is very useful for the managers in taking decisions of the internal matters of the
organization. It facilitates in internal reporting. Managerial accounting does not follow any particular set
rules and methods. It basically follows special rules and methods according to the suitability of the
management.

Managerial accounting provides information regarding the objectives achieved or to be achieved. This
information helps to make a performance evaluation of various departments. Managerial accounting
makes use of standard costing, budgetary control, project appraisal and 4 other techniques and concepts
which makes the provided accounting information to be more relevant for decision making.

SIGNIFICANCE OF MANAGERIAL ACCOUNTING

1. Managerial accounting basically provides information on various things like cost, financial gains,
specialized i.e., non-technical language and so on which is needed by the management for carrying out
the business operations.

2. Managerial accounting highlights and displays the accounting information in a manner which
helps the management in policy making process.

3. Managerial accounting is actually much more than numbers which does not need any explanation
and can be clearly and easily understood.

4. Managerial accounting is an expansion of the cost accounting concepts. It makes use of those
rules and methods which are used in cost and financial accounting.

GOAL OF MANAGERIAL ACCOUNTING

The goal of managerial accounting is to provide the information they need for planning, control, and
decision making. If your goal is to be an effective manager, a thorough understanding of managerial
accounting is essential.
1. Planning

Planning is a key activity for all companies. A plan communicates a company’s goals to employees aiding
coordination of various functions, such as sales and production. A plan also specifies the resources needed
to achieve company goals.

2. Control

Control of organizations is achieved by evaluating the performance of managers and the operations for
which they are responsible. The distinction between evaluating managers and evaluating the operations
they control is important. Managers are evaluated to determine how their performance should be
rewarded or punished, which in turn motivates them to perform at a high level. Based on an evaluation
indicating good performance, a manager might receive a substantial bonus. An evaluation indicating a
manager performed poorly might lead to the manager being fired. In part because evaluations of
managers are typically tied to compensation and promotion opportunities, managers work hard to ensure
that they will receive favorable evaluations.

Performance Reports for Control. The reports used to evaluate the performance of managers and the
operations they control are referred to as performance reports.

3. Decision Making

Perhaps the most basic managerial skill is the ability to make intelligent, data-driven decisions. Broadly
speaking, many of those decisions revolve around the following three questions. What should we be
selling? Who should we be serving? How should we execute?

Decision making is an integral part of the planning and control process—decisions are made to reward or
punish managers, and decisions are made to change operations or revise plans.

DIFFERENCES BETWEEN MANAGERIAL ACCOUNTING AND FINANCIAL ACCOUNTING

Point of Difference Financial Accounting Management Accounting

Meaning Financial accounting refers to
the accounting concerned with
recording financial data.
Objective Financial accounting records
all the transactions relating to
“Management accounting is
concerned with accounting
information that is useful to
management.”
Management accounting helps
the management in designing
 finance. plans and policies.
Periodicity It is prepared at the end of the It provides information
financial year. whenever it is required by the
management.
Importance It is compulsory to prepare It is not compulsory.
final accounts in every
organization.
Principles It follows only some Principles and procedures are
accounting principles and not followed in management
standards., accounting.
Analysis or report It discloses the financial It prepares the budget and tax
position of the company as a plans from the reports provided
whole. by financial and cost
accounting.
Nature It mainly deals with the It deals with the future plans
historical data. and policies.
Scope In financial accounting, trading It formulates policies for
account, profit and loss account effective performance of
and balance sheet are prepared. management and covers cost
and financial accounting.

SIMILARITIES BETWEEN MANAGERIAL ACCOUNTING AND FINANCIAL ACCOUNTING

We should not overstate the differences between financial accounting and managerial accounting in
terms of their respective user groups. Financial accounting reports are aimed primarily at external users,
and managerial accounting reports are aimed primarily at internal users. However, managers also make
significant use of financial accounting reports, and external users occasionally request financial
information that is generally considered appropriate for internal users. For example, creditors may ask
management to provide them with detailed cash-flow projections.
 ROLE OF MANAGEMENT ACCOUNTANT

1. Planning

Planning can become a management process, concerned with defining goals for a future direction. The
Management Accountant facilitates in;

(a) Framing the plans of future by utilizing important information like type of products to be sold,
market condition, fixation of prices etc.

(b) Assists management in achieving future goals by providing past performance record.

(c) Helps in planning the short term budget for the concern.

(d) Preparing master budget and presents it for approval to top management.

2. Controlling

The Management Accountant helps in;

(a) Preparing performance reports of every responsibility center in order to control the performance-
of the organization.

b) Identify the areas that do not go along with plans and recognize weak and troubling points, so
that top management can take necessary steps.

3. Organizing

Organizing is the function of management which follows planning. Management Accountant use
responsibility accounting system to represent the design and implementation of accounting system to
have better definition and consideration.

4. Communicating

Management Accountant use budget and performance reports for the purpose of communication.

5. Motivating

Both budgets and performance reports motivate the personnel of the organization. Budgets encourage
managers in achieving targets and performance reports encourage the personnel.
 CONTROLLER FUNCTION

The controller functions are as follows,

1. He should create, manage and control the plans which helps in estimating sales, expenses,
budgets and standards that allows profit planning, capital budgeting and financing.

2. He should prepare accounting policy and procedures which also includes submission of operating
data and special reports and comparison of performance with plans and standards. Comparison enables
management properly assign responsibility and evaluate functional and divisional heads.

3. He should protect the assets of the business from external controls, internal auditing and
insurance coverage.

4. He should design tax policies and procedures to manage the reports that are needed by different
authorities.

5. He should be aware of all economic and social forces and impact of policies and actions of
governments affecting business activities.

ADVANTAGES AND LIMITATIONS OF MANAGERIAL ACCOUNTING

Advantages of Managerial Accounting

1. Managerial accounting helps the management in policy formulation and in taking decisions about
the future activities of the firm. Both financial and cost accounting information are used in the
management accounting.

2. It facilitates the management in controlling the business operations effectively with the help of
techniques like standard costing and budgetary control.

3. It helps the management in planning and forecasting the firm’s activities.

4. It guides the management in taking adequate actions as per the changing economic environment
of business.

5. It assists the management in coordinating the activities of different departments with the help of
techniques like budgeting, reporting and interpretation. This in tum helps in achieving the organizational
objectives.

6. It assists the management in organizing the firm’s activities.

7. It facilitates the management in evaluating the financial performance of the business.

8. It also creates employment opportunities for management accountants.

9. Financial accounting, cost accounting, statistics, economics and sociology are the related subjects
of management accounting.

Limitations of Managerial Accounting

1. As managerial accounting mostly considers the estimates and probabilities instead of actual data,
the accuracy of the data is not ensured/assumed.

2. It acts only as a tool for managers but not as a substitute for management.

3. The information provided by the managerial accounting is totally dependent on the financial
accounts, cost accounts and other reports.

4. The installation of managerial accounting system is an expensive process which is not suitable for
small and medium scale enterprises.

5. The existing or present accounting staff of the firm often resists the installation of managerial
accounting system.

6. As managerial accounting is still in the evolutionary stage it need well developed tools and
techniques for modification and refinement.

7. Managerial accounting is a long term process.

8. As managerial accounting requires the knowledge of the subjects like statistics, law, auditing etc.,
it is very essential for the management accountants to have adequate knowledge about all these subjects
for resolving the problems and issues.

ETHICS IN MANAGERIAL ACCOUNTING

Ethics deals with the moral quality, fitness, or propriety of a course of action that can injure or benefit
people. Ethics goes beyond legality, which refers to what is permitted under the law, to consider the moral
quality of an action. Because situations involving ethics are not guided by well-defined rules, they are
often subjective.
An Ethics Perspective

Ethical behavior is the lubricant that keeps the economy running. Without that lubricant, the economy
would operate much less efficiently—less would be available to consumers, quality would be lower, and
prices would be higher. In other words, without fundamental trust in the integrity of business, the
economy would operate much less efficiently. Thus, for the good of everyone—including profit-making
companies—it is vitally important that business be conducted within an ethical framework that builds and
sustains trust.

Codes of Ethics

Codes of ethics are often developed by professional organizations to increase members’ awareness of the
importance of ethical behavior and to provide a reference point for resisting pressures to engage in
actions of questionable ethics.

Institute of Management Accountants (IMA) Statement of Ethical Professional Practice

Members of IMA shall behave ethically. A commitment to ethical professional practice includes:
overarching principles that express our values, and standards that guide our conduct.

PRINCIPLES

IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members
shall act in accordance with these principles and shall encourage others within their organizations to
adhere to them.

STANDARDS

A member’s failure to comply with the following standards may result in disciplinary action.

I. COMPETENCE

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

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

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

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.
 RESOLUTION OF ETHICAL CONFLICT

In applying the Standards of Ethical Professional Practice, you may encounter problems identifying
unethical behavior or resolving an ethical conflict. When faced with ethical issues, you should follow your
organization’s established policies on the resolution of such conflict. If these policies do not resolve the
ethical conflict, you should consider the following courses of action:

1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is
involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution,
submit the issue to the next management level. If your immediate superior is the chief executive officer
or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive
committee, board of directors, board of trustees, or owners. Contact with levels above the immediate
superior should be initiated only with your superior’s knowledge, assuming he or she is not involved.
Communication of such problems to authorities or individuals not employed or engaged by the
organization is not considered appropriate, unless you believe there is a clear violation of the law.

2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor
or other impartial advisor to obtain a better understanding of possible courses of action.

3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

Corporate Governance

Corporate governance refers to the system of policies, processes, laws, and regulations that affect the
way a company is directed and controlled. At the highest level, the system of corporate governance for a
company is the responsibility of the board of directors, but it affects all stakeholders, including employees,
creditors, customers, vendors, and the community at large. The large number of corporate failures of the
last decade brought the topic of corporate governance to the forefront.

Corporate Social Responsibility

Closely related to the concepts of ethics and corporate governance is the topic of corporate social
responsibility, which can simply be defined as being a good corporate citizen. It entails balancing the
objective of profitability with the objective of giving proper attention to issues such as environmental
sustainability and energy conservation, and avoiding actions that would lower the quality of life in the
communities in which a company operates and sells its products or services. In earlier generations it would
have meant giving a day’s wage for a day’s labor, not hiring underage children, or not dumping untreated
waste into the local river.

Being a socially responsible company does not mean abandoning the profit motive or the goal of providing
an attractive return to investors. It means that while pursuing these essential objectives, a for-profit
company attempts to measure the total benefits and costs of its actions and accepts the responsibility for
those actions. Also, being a good competitor should not be confused with social responsibility. For
example, many companies offer certain fringe benefits, such as on-site childcare, because it attracts better
employees, not because they feel they have a social responsibility to provide such services.