Managerial Accounting and

Control

Introduction

1-1

Agenda
l Need For Management Accounting
l Basic Concepts
l Scope
l Contents
l Pedagogy

1-4

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-1
 Management Accounting

Measures and reports financial and

nonfinancial information that helps
managers make decisions to fulfill the
goals of an organization.
Work Horse

1-6

Financial Accounting

Its focus is on reporting to external parties.

It measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.

Show Horse

1-7

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-2
 Accounting for Taxation

 It focuses on reporting to Tax Man

 Make use of allowances in Tax laws to
book expenses and Recognize income
 To minimize profit tax liability
 It provides profit and loss statement using
the income and expenses recognition norms
of IRS, IT Dept
1-8

Cost Accounting

It provides information for both management

accounting and financial accounting.
It measures and reports financial
and nonfinancial data.

1-9

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-3
 Cost Management

It describes the activities of managers in

planning and control of costs.
It includes the continuous reduction of costs.
It is a key part of general management
strategies and their implementation.

1 - 10

10

Link Between Managerial and

Financial Accounting
l Management Accounting offers cost
information required for financial reporting
l For e.g. to value inventories
l Reporting cost of labor

1 - 12

12

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-4
 Management Financial Accounting
Accounting

Necessity Optional Required

Purpose A means to the end of Produce Statements for
Assisting Management Outside users
User Relatively small Relatively large group;
group; known identity unknown
Underlying Varies according to use One basic Equation:
Structure of information Assets = Liabilities +
owners Equity

1 - 13

13

Management Financial
Accounting Accounting
Source of Whatever is useful to GAAP
Principle management (varies with
purpose)
Time Orientation Historical & Future Historical
estimates
Information Monetary and Non Primary Monetary
Content Monetary
Information Many Approximations Fewer
Precision Approximations
Report Varies with purpose; Quarterly and
Frequency Annually
1 - 14

14

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-5
 Management Financial
Accounting Accounting
Report Issued Promptly after Delays of Weeks or
Timeliness end of period even months
covered
Report Entity Responsibility Center Overall
– e.g. Functions, Organization
Divisions, Biz Units
Liability Virtually none Severe lawsuits,
Potential Threat is always
present

1 - 15

15

Management Accounting
major subdivisions

• Full Cost Accounting

• Traditional Absorption Costing and Activity Based
Costing
• Differential accounting (Relevant Accting)
• Marginal, Relevant cost and revenues for decision
making
• Management control or responsibility accounting
• Budgeting, KRA, Transfer Pricing, Resp Accounting

Anthony & Young (1999)

1 - 16

16

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-6
 Key Ideas of
Management Accounting
 Decision Making Relies on Incremental Analysis
 Different cost definitions are relevant for different purpose
 Accounting numbers are approximates
 Decision maker must often work with incomplete data
 Accounting evidence is only partial evidence
 People, not numbers, get things done
 You get what you measure
 Affects human behavior and decisions

1 - 17

17

Role of CFO/Finance Function

1 - 18

18

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-7
 Changing role of CFO
 Guardian and leader of good planning and performance
management
 Keep focusing on Control dimension
 Make the organizational capabilities, people, process and
system understand
How company/business creates value?
How operational performance (measures) translate to financial
performance?
Is there Clarity, uniformity and transparency in measurement?
Does it facilitate Effective dialogue to enhance understanding of
business and better decisions

1 - 19

19

Questions?
That Mgt Accounting Help answer ..
 What information do I need to do my job?
 When do I need it?
 In what form?
 From whom should I be getting it?
 What new task can I tackle now that I get all the
data?
 Which old task should I abandon?
 Which tasks should i do differently?
 What information do I owe? To whom? When? In
what form?
1 - 23

23

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-8
 Planning and Controlling
Management Decision Management Accounting System

Planning Budgets
Feedback

Accounting
Control System

Performance Performance
Evaluation Reports

1 - 26

26

Planning and Controlling

What is control?

Deciding Deciding on
and performance
taking evaluation
actions and feedback

1 - 28

28

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1-9
 Planning and Controlling

What are budgets?

They are They aid in the

quantitative coordination
expressions and
of a proposed implementation
plan of action. of the plan.
1 - 29

29

ROLES OF
MANAGEMENT ACCOUNTANTS

Distinguish among the problem-

solving, scorekeeping, and
attention-directing Roles.

1 - 35

35

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1 - 10

 Problem Solving

This involves comparative analysis

for decision making.
This role asks: Of the several alternatives
available, which is the best?

1 - 36

36

Scorekeeping

This involves accumulating data and

reporting reliable results to
all levels of management.
This role asks: How is the business doing?

1 - 37

37

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1 - 11

 Attention Directing

This involves helping managers

properly focus their attention.
This role asks: Which opportunities and
problems should be emphasized first.
Attention directing should focus on all
opportunities to add value to an organization,
not just cost-reduction opportunities.
1 - 38

38

Value Chain

R&D Design Production

Management Accounting

Marketing Distribution Service

1 - 49

49

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1 - 12

 Key Guidelines

1. Cost-benefit approach
2. Full recognition of behavioral as well as
technical considerations
3. Using different costs for different purposes

1 - 59

59

Cost-Benefit Approach

A cost-benefit approach should be used in order

to spend resources if they promote decision
making that better attains organization goals
in relation to the costs of those resources.

1 - 60

60

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1 - 13

 Behavioral and Technical
Considerations

A management accounting system should have two

simultaneous missions for providing information:
1. To help managers make wise economic decisions
2. To help managers and other employees to aim and
strive for goals of the organization

To align Managers goal with Organizational goals

1 - 61

61

Different Costs for

Different Purposes
A cost (benefit or any measurement)
concept used for the external reporting
purpose need not be the appropriate concept
for the purpose of internal routine reporting
to managers.

1 - 62

62

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1 - 14

 Line and Staff Relationships

Line management is directly responsible for

attaining the objectives of the organization.
Staff management exists to provide advice
and assistance to line management.

1 - 65

65

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 1 - 15