Introduction to

Management
Accounting-8

Prof. Athula Manawaduge

Objectives of the lecture
What is Management Accounting?
Describe differences between
financial accounting and management
accounting
Management accounting and
changing business environment
Management accounting processes
and techniques
Distinguish between the planning and
control decisions of managers.

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What is the Role of Accounting?

Discuss

2
Who are the Decision Makers?

Shareholders

Public Suppliers

Investors Customers
Firm
Managers

Government Employees

Banks Competitors

3
 Financial Accounting
Concerned with reporting financial information to
users external to an entity in order to help them to
make sound economic decisions about the entity’s
performance and financial position.

Management Accounting
Concerned with reporting financial and other
information to all level of management in an
organisation to enable them to carry out their
panning, controlling and decision-making
responsibilities
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 Distinction between
Financial Accounting and Management Accounting

Users of information

External users Internal users

Different information Different information

needs needs

General purpose FSs Special purpose FSs

Financial Accounting Management Accounting

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 IFAC Definition
Management accounting is defined as ‘the
processes and techniques that focus on the
effective use of organisational resources to
support managers in the tasks of enhancing both
customer value and shareholder value’
(International Federation of Accountants, 2002)
Customer value refers to the value that a customer places on
particular features of a good or service
Shareholder value is the value that shareholders, or owners,
place on a business
Managers need to understand what drives customer value and
shareholder value.
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 Management Accounting
Information System
•Collecting •Special reports
•Measuring •Product costs
•Storing •Customer costs
•Analysing •Budgets
•Reporting •Performance reports
Economic events •Managing •Personal communication

Inputs Processes Outputs

Users
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 Management Accounting Information System
Management accounting systems produce the information
required by managers to create value for customers and
shareholders

Examples of management accounting information include:

• The reported expense of an operating department, such
as the assembly department of an automobile plant or an
electronics company
• The costs and benefits of producing a product
• The costs and benefits of delivering a service
• The cost of performing an activity or business process –
such as creating a customer invoice
Difficult to extract this information from financial reports
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 Financial Accounting Vs. Management Accounting
Communicate financial position
Purpose Help managers make decisions
and operating results
Users External stakeholders Internal Managers and employees at
all levels
Rules Accounting standards and No rules, generate information to
corporations law satisfy managers’ information needs
Source of Exclusively from core transactions- Financial and nonfinancial data drawn
data based accounting system from many sources
Focus Past oriented Future oriented
Time Varies
Annual /Quarter
span
Reports General-purpose financial reports Special-purpose reports

Cost Accounting
Provides information for both management accounting and financial accounting. It
measures and reports financial and non-financial data.
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Management Accounting in a Changing
Environment

Accounting within
organizations

No fixed set of
Management rules to follow
Accounting
Continually
evolves to meet
organization needs

Customer Need Technological Change Globalization

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 Management accounting responses to
the changing business environment
Prior to 1800 – Small businesses operated by family members

After Industrial revolution

•The growth of large organizations
•Change in the organizational structure
•Need for accurate information.
•Motivating managers and employees
•Emergence management accounting in parallel with adaptation
of the organization to its environment

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 Management accounting responses to
the changing business environment

1825-1925 – Management accounting techniques were fine-

tuned.

1925-1975 – Financial accounting took precedence over

managerial accounting.

1975 – Rapid technological change, globalization and customer

needs caused major changes in management accounting.

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 Management accounting responses to
the changing business environment
By the 1990s –
 many organisations realised
that they needed to improve
their product and service
quality, delivery responsiveness
and cost performance in order
to improve market share and
profits
 Adoption of new
management structures,
systems and practices,
including new management
accounting techniques and
systems
Management Accounting Systems
Conventional management
accounting systems
Includes budgeting, costing systems and
financial performance measurement systems
In wide use for many decades and still used
in many organisations
Contemporary management
accounting systems
Includes activity-based costing, performance
measurement systems (such as balanced
scorecards), cost management systems
(such as business process re-engineering),
new approaches to customer profitability
analysis and supplier cost analysis
7&8
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Quick Check-1 

The greatest advantage of using historical cost for

accounting purposes is its:
A) Objectivity.
B) Accuracy.
C) Relevance.
D) General acceptance.

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Quick Check-2 

Management accounting is
A) concerned with providing information to current and prospective
shareholders, lenders, investment analysts, unions, consumer
groups and government agencies
B) based on past information that emphasises objectivity and
verifiability
C) constrained by accounting standards or regulations
D) not constrained by accounting standards or regulations

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 The key to company’s success?
 Creating value for customers while distinguishing
itself from competitors

Customer Value

Organizational Value

 Strategy of an organization will describe how an

organization will compete and the opportunities
its employees should seek and pursue.

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What Management Accounting can do?
1. Supports the formulation and The processes
implementation of strategy and techniques
that focus on
2. Improving the organisation’s the effective
competitive advantage in terms of use of
quality, delivery, time, flexibility, organisational
innovation and cost resources to
support
3. Provide information to help manage managers in
resources through systems of the tasks of
planning and control enhancing
both customer
4. Provide estimates of the costs to value and
support the strategic and operational share holder
decision needs of managers value
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 (1) Management accounting
and strategy
• Strategy is the direction that the organisation intends
to take over the long term to meet its mission and
achieve its objectives
• Management accounting can support the
organisation’s formulation and implementation of
strategy
• Focus on ways to manage the organisation's
resources to create value for customers and
shareholders
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 Strategy concepts
Vision
•The desired future state or aspiration of an organisation
•Used by senior managers to focus the attention and
energies of staff

Mission statement
Defines the purpose and boundaries of the organisation

Objectives
•Specific statement of what the organisation aims to
achieve
•Often quantified
•Relates to a specific period of time
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Formulating and implementing strategy
 Major decisions in formulating strategies (key
questions)
1. In what business will we operate? (Corporate
Strategy)
2. How should we compete in that business?
(Business or Competitive strategy)
3. What systems and structures should we have in
place to support our strategies? (Strategy
Implementation)

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A. Corporate strategy
Making choices about the types of businesses to
operate in, which businesses to acquire and divest,
and how best to structure and finance the
organisation
In publicly listed companies, the choice of
corporate strategy is influenced by the
expectations of major shareholders and securities
market
B. Business (or competitive) strategy
The way a business competes within its chosen
market
Distinct business strategies for each business unit
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C. Strategy implementation
Putting plans into place to implement and support
a chosen business strategy
New structures, new systems, new production
processes, new marketing approaches, new HRM
policies
Managers at all levels share the responsibility for
implementation
Long-term plans linked to budgeting systems
Performance measurement systems compare
actual outcomes to targets
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(2) What Management Accountants Can Do
in Achieving Competitive advantage
Advantages that a business may have over
another that are difficult to imitate, achieved
through business (or competitive strategy) ...
–Cost leadership
Economies of production, superior process
technologies, tight cost control
–Product differentiation
Superior quality, customer service, delivery
performance, product features
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 (3) Strategic Planning

Long-term planning, usually undertaken by

senior managers with a three- to five-year
timeframe
Involves corporate strategy decisions
Draws on management accounting information

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 Formulation
Mission
Vision of
Statement
objectives

Formulation
of strategy

Planning
(Managers prepare
plans to support
strategies)
Implement Control
(Managers evaluate
plans performance against
plans and take
corrective actions)

Customer Value

Organizational Value 25
 Planning
 A broad concept that is concerned with
formulating the direction for future operations
 Allows an organisation to consider and specify
all resources needed in the future
 Occurs at all levels of the organisation
 A budget is an example of a short-term plan that
summarises the consequences of an
organisation’s operating activities for a specified
time period

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 Controlling
 Involves putting mechanisms in place to ensure
that operations proceed according to plan and
that objectives are achieved
 Management accounting information provides
information for control by comparing actual
performance with plans, targets or budgets
 Control systems are the systems and procedures
that provide regular information to assist in
control

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 What Management Accountants Can Do with
Manager’s Planning and Controlling

Management Decision Management Accounting System

Planning Budgets
Feedback

Control Accounting
Action System

Performance Performance
Evaluation Reports

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 What is planning?

Management Decision MAS Setting

Planning Budgets
goals
Feedback

Accounting
Action System

Performance Performance
Reports
Predicting
Evaluation
results

Deciding how
to attain goals
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 What are budgets?

Management Decision MAS

They are quantitative
Planning Budgets
Expressions of a
Feedback

Accounting
Action System Proposed plan of action.
Performance Performance
Evaluation Reports

They aid in the

Coordination and
implementation
of the plan.
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 What is control?

Management Decision MAS

Budgets
Deciding
Planning
and
Feedback

Accounting
Action System
taking
Performance Performance actions
Evaluation Reports

Deciding on
performance
evaluation
and feedback
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 What are performance reports?

Management Decision MAS

Planning Budgets
These are reports
Feedback

Action
Accounting
System that compare
actual results
Performance Performance
Evaluation Reports with
budgeted amounts.

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 Performance Report Example-1

Boone Shop, July 2010

Budget Actual Variance
Revenues $59,000 $60,000 $1,000 F
Cost of goods sold 42,000 43,400 1,400 U
Wages 6,700 7,000 300 U
General 1,300 900 400 F
Fixed costs 5,000 5,000 0
Operating income $ 4,000 $ 3,700 $ 300 U
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 Performance Report Example-2

Actual cost of goods sold were

72% of revenues instead of the budgeted 71%.
Budget % Actual %
Revenues $59,000 100 $60,000 100
Cost of goods sold 42,000 71 43,400 72
Gross margin $17,000 29 $16,600 28

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 What is feedback?

Management Decision MAS

This involves managers
Budgets
Planning
examining past
Feedback

Accounting
Action System performance
Performance Performance
and systematically
Evaluation Reports
exploring alternative
ways to
make better informed
decisions in the future.

11:54 35
 Example: A Daily News Paper

Management Decision Management Accounting System

Planning Budgets
# increase advertising rates # Expected advertising pages sold,
rates per page, and revenue
by 4%

Accounting System
Feedback

Control # Source documents

(1) Implement 4% rate #recording in general and
increase to relevant Subsidiary ledgers
parties
(2) Performance
Evaluation: Performance Reports
#Advertising #Comparing actual advertising pages
revenues 7.2% sold, average rate per page, and
lower than revenue to budgeted amounts
budgeted.

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Quick Check-3 

Michael Porter of Harvard University suggests that

sustainable competitive advantage can be attained
through:
A) adopting a customer and shareholder value strategy
B) adopting a business strategy of profit maximisation
C) adopting a business strategy of cost leadership or
product differentiation
D) adopting a business strategy of cost maximisation

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Quick Check-4 

Which of the following involves the

implementation of mechanisms to ensure that
operations proceed according to plan and that
objectives are achieved?
A) Decision making.
B) Planning.
C) Formulating business strategy.
D) Controlling
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 (4) Costing goods and services
 Estimates of the cost of producing goods and services are
needed to support a range of operational and strategic
decisions
 Routine costing systems form part of the financial
accounting system, so product costs are prepared to meet
external reporting purposes
 Product costs are sometimes produced outside of the
financial accounting system, to better meet managers’
decision-making needs
These costs may not comply with GAAP or accounting
standards

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Important considerations in
the design of management
accounting systems

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 Important considerations in the design of
management accounting systems
1. Full recognition of behavioral considerations

 Behavioural issues
Information may impact on individual behaviour, so
management accounting systems may have expected as
well as unexpected outcomes
A key purpose of management accounting systems is to
motivate managers and employees to direct their efforts
towards achieving the organisation’s goals
– Budgeting systems, performance measurement and reward
systems may be used as motivational tools
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 Important considerations in the design of
management accounting systems
2. Cost-benefit approach

 There are costs and benefits of generating and

providing management accounting information
Costs
Salary of accounting personnel
Purchasing and operating computers
Gathering, storing and processing data,
Managers’ time to read, understand and use the information
Benefits
Improved decisions
More effective planning
Greater operational efficiency at lower costs
Better control
Improved customer and shareholder value 42
 Important considerations in the design of
management accounting systems
3. Using different costs for different purposes

A cost concept used for the external reporting

purpose need not be the appropriate concept for the
purpose of internal routine reporting to managers.

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 Summary
 Management accounting supports managers in
enhancing customer value and shareholder value
Systems to support formulation and implementation of
strategy
Process improvements and cost management techniques
Information for planning and control
Product costs for strategic and operational decisions
 Contemporary management accounting techniques
have developed to support new organisational
structures, systems and practices, which are a
response to a rapidly changing business environment
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