The place of management

accounting in the business

management system
Lect. Erika Besusparienė
erika.besuspariene@vdu.lt

2022-08-22 1
Questions

1. What are the differences between management accounting and financial accounting?
2. How does management accounting support planning decisions?
3. How is management accounting used for control decisions?
4. What has caused management accounting procedures to evolve over time?
5. Why might historical costs from financial reports be inappropriate for making
planning decisions?

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 Types of
Types of Accounting Accounting

Financial Management Tax

Accounting Accounting Accounting

Management Financial Income Cost

Tax Planning
Statement Accounting
Accounting Accounting

Cost Tax Balance Sheet Budgeting Filling Return

Accounting Accounting

Cash Flow Defending Tax

Internal Audit
Statement Case

Statement of Investment
Owner Equity Analysis

Responsibility
End Notes
Accounting 3
Managerial Accounting Definition (1/3)

 The academic phrases Managerial Accounting and Management Accountancy

are exactly the same to Management Accounting (Niu, Du, 2015).
 A formal and overall definition had been given by The Chartered Institute of
Management Accountants (CIMA) of UK, who describe management
accounting as an internal section offering data to plan and control over
activities, make full use of resources, support strategy-making and decision-
making (Arora, 2009, cited Niu, Du, 2015).
 Institute of Management Accountants (IMA) is as follows, “Management
accounting is a profession that involves partnering in management decision
making, devising planning and performance management systems, and
providing expertise in financial reporting and control to assist management
in the formulation and implementation of an organization’s strategy.”
(Cokins, 2013, cited Niu, Du, 2015). 4
Managerial Accounting Definition (2/3)
Authors Definition

Gupta, K. M., & „One of the critical roles of managerial accounting is to identify and eliminate (or at least try to
Gunasekaran, minimize) non‐value adding activities throughout the value‐chain. The ultimate goal is to promote
A. (2005) value‐adding activities. The mismatch between strategies and tactics, largely unintentional, with
the overall goals and objectives of the organization trigger most of the non‐value adding activities
in operations. Non‐value adding activities lead to higher production costs, inefficiencies, and hence
the loss of profitability.“
Maher, M. W., „Managerial accounting has no rules and regulations, such as generally accepted accounting
Stickney, C. P., principles. Unlike financial accounting, which must use historical data, managerial accounting can
& Weil, R. L. and does use projections about the future. After all, managers make decisions for the future, not
(2012) the past.“
Mihăilă, M. „Managerial Accounting is the branch of accounting that supports company management in
(2014) planning, decision making, control and analysis.“
Alexandru, C. G. „The traditional role of management accounting is to function as a rational system, to provide
(2016) information for decision-making and promoting businesses experience. In recent decades, the
evolutions from the economic and management background led to an enrichment of
management accounting role, which serves the strategic goals, being analyzed and considered
as a social product.“ 5
Managerial Accounting Definition (3/3)
 IFAC Definition of enterprise
financial management
concerning three broad areas:
 cost accounting;
 performance evaluation
and analysis;
 planning and decision
support.
 Managerial accounting is
associated with higher value,
more predictive information
(International Federation of
Accountants, 2009)

6
Managerial Accounting Definition (3/3)
 Management accounting provides information that helps managers control activities within the firm, and to
decide what products to sell, where to sell them, how to source those products, and which managers to entrust
with the company’s resources (Caplan, 2006). “In other news, General Motors’ common stock rose $1.10
today following the announcement that the company has successfully installed an improved management
accounting system.”
 Management accounting is the process of measuring and reporting information about economic activity within
organizations, for use by managers in planning, performance evaluation, and operational control (Caplan,
2006):
 Planning: For example, deciding what products to make, and where and when to make them.
Determining the materials, labor, and other resources that are needed to achieve desired output. In not-
for-profit organizations, deciding which programs to fund.
 Performance evaluation: Evaluating the profitability of individual products and product lines.
Determining the relative contribution of different managers and different parts of the organization. In not-
for-profit organizations, evaluating the effectiveness of managers, departments and programs.
 Operational control: For example, knowing how much work-in-process is on the factory floor, and at
what stages of completion, to assist the line manager in identifying bottlenecks and maintaining a smooth
flow of production.

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Management Accountants Associations

 IMA (Institute of Management Accountants) is the worldwide association

founded in 1919. IMA has 125,000+ members from 150 countries. Privode the
best certification – the CMA (Certified Management Accountant). More about
IMA https://www.imanet.org/about-ima?ssopc=1
 CGMA (Chartered Global Management Accountant) designation distinguishes
professionals who have advanced proficiency in finance, operations, strategy
and management. More than 150,000 accounting and finance professionals
hold the CGMA designation, making it the most widely held management
accounting designation in the world. More about CGMA
https://www.cgma.org/aboutcgma.html

8
Management Accounting Theories (1/6)

Conventional wisdom Agency theory

• Before the 1960’s • 1960’s and 1970’s,
involved accurate Contracts between the
accumulation of costs and various parties in the firm
systems based on
standards

Strategic management Contingency theory

accounting • 1980’s – 1990’s –
• 1990’s to date Recognizes Universalistic rules are
the external environment not appropriate Source: Waweru, N. M. (2010).
of the firm
9
Management Accounting Theories (2/6)

Conventional wisdom:
 Emerson (1912, cited Waweru, 2010) first meaningful contribution to the development
of 20th century management control theory was ‘The Twelve Principles of
Efficiency’ where he heavily stresses the importance of control.
 Lawson (1920, cited Waweru, 2010) wrote the first text of management control.
 Urwick (1928, cited Waweru, 2010) became the first author to identify a set of five
control principles: responsibility, evidence, uniformity, comparison and utility.
 Management accounting systems evolved in the late 1880s to provide information
about internal transactions, and by mid 1920s they were being used for diverse
activities like planning, controlling, motivating, analyzing and evaluating (Boritz,
1988, cited Waweru, 2010).
 “Old traditional and conventional concepts are still at the very heart of any
management accounting textbook” (Waweru, 2010).
10
Management Accounting Theories (3/6)

Agency theory (1/2):

 Agency theory and transaction costs are a refinement of the mathematical modeling
based on economic concepts and theory. The agency theory assumes that there exists
a contractual relationship between members of a firm. (Waweru, 2010).
 Agency theory is further developed into three models: principal-agent model,
transaction cost economics model, and the Rochester model. Most of the MA studies
are based on principal-agent model. The three main assumptions on individual
behaviors in principal-agent model are self-interest, rationality, and unlimited
computational ability (Gong et al., 2009).
 Despite its popularity, principal-agent agent model is subjected to a number of
criticisms such as unrealistic assumption of unlimited computational ability, ignorance
of the interaction between optimal contract and the capital markets as well as role of
discretionary compensation in the model. In response to criticisms of the model,
transaction cost economics model and the Rochester model are developed with more
realistic assumptions (Gong et al., 2009). 11
Management Accounting Theories (4/6)

Agency theory (2/2):

 Agency theory is based on several assumptions (Waweru, 2010):
 Individuals are assumed to be rational and to have unlimited computational ability.
They can anticipate and assess the probability of all possible future contingencies.
 The contracts are assumed to be costless and accurately enforceable by courts. The
contracts are expected to be comprehensive and complete in the sense that for each
verifiable event, they specify the actions to be taken by the contracting parties.
However, this assumption may not hold in most developing countries where
judicial systems still lack the necessary resources to act efficiently.
 Both principals and agents are motivated solely by self-interest.
 The agent is assumed to have private information to which the principal cannot
gain access without cost.

12
Management Accounting Theories (5/6)

Contingency Theory:
 Contingency theory explains how an appropriate accounting information system can be designed
to match the organization structure, technology, strategy and environment of the firm (Waweru,
2010).
 MA practices are components of organizational structure. MA practice is the process between a
particular MA practice and variables associated with organization. Traditional "hard" variables
are like external environment, technology, organizational structure and size. “Soft" variables are
such as culture and strategy (Gong et al., 2009).
 Hofstede (1981, cited Waweru, 2010) use four criteria to come up with six types of management
control:
 routine control (prescribed in precise rules and regulations),
 expert control (entrust control to an expert),
 trial-and-error control (learn to control through its own failures),
 intuitive control (management control is an art rather than a science),
 judgmental control (control of the activity is subjective),
 and political control (use of hierarchy, rules and policies and negotiation to solve ambiguities).
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Management Accounting Theories (6/6)

Strategic management accounting:

 Strategic accounting is the last stream of thought that had an important impact on management
accounting (Waweru, 2010).
 Porter (1985, Waweru, 2010) has developed a good tool to perform a strategic cost analysis that
involves the following steps:
 1) define the firm's value chain and assign costs and assets to value activities,
 2) investigate the cost drivers regulating each value activities, and
 3) examine possibilities to build sustainable competitive advantage either through controlling
cost drivers or by reconfiguring the value chain.
 Kaplan and Cooper (1997, Waweru, 2010) identified three areas of action of strategic activity
based management, namely:
 product mix and pricing,
 customers and supplier relationships, and
 Product development.

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Management Accounting (MA) & Financial Accounting (FA)
 “Both are very important, because are providing valuable information for management” (Mihăilă, 2014).

Mihăilă, 2014 MA FA

Purpose of Help managers to make decision to Communicate organisation’s financial

information fulfil the organisation’s goals. position: investors, banks, regulators
and other external.
Primary users Managers of the organization. External users.

Focus and emphasis Future – oriented. Past oriented

Rules of measurement Internal measures and reports. Financial statements must be prepared
and reporting according Accounting Law.
Behaviour Designed to influence behaviour of Primarily reports economic events, but has
implications manager and employees. influence, also, on employees, as often
employees are paid function economic
results of the company.
Information for Is based on primary accounting Is based on primary accounting information
management information and is providing and is providing information.
information. 15
Management accounting system (MAS) (1/6)

 MAS is also important in managerial activities. MAS produces management

information which has roles in predicting the consequences which occurs
over many alternative actions that can be done in a variety of activities like
planning, monitoring and decision-making (Gurendrawati et al., 2015).
 MAS is (Wilbowo, 2016):
 formal system to provide information from internal and external
environment;
 formal mechanisms for gathering, organizing and communicating
information about organization‘s activities;
 provides management accounting information;
 can have a very active role and influence in decision-making
processes of intervention in small and large;
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Management accounting system (MAS) (2/6)

 MAS consists of (Gnawali, 2017):

 Controlling and reporting;
 Planning and budgeting;
 Decision making;
 Performance evaluation system;
 Costing systems.
 MAS have indirect relationship
with (Hammad et al., 2010):
 Organization strategy;
 Technology;
 Organizational structure;
 External environment;
 Organization size.
Source: Waweru, Uliana (2008)
17
Management accounting system (MAS) (3/6)
Marketing
 Functional subsystems of
implementation of managerial Strategic
Logistics
accounting (Poma, Kovryakov, management

2011)

Management
accounting
Operational Staff
management management

Investment Financial
management management

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Management accounting system (MAS) (4/6)

 Controlling and reporting (Gnawali, 2017):

 It is a function that compares achieved results with planned goals.
 The control function is the process of ordering, evaluating, and providing feedback
to the management system of an organization.
 Control refers to monitoring and evaluation of performance to determine the
degree of conformance of actions to plans
 Planning and budgeting (Gnawali, 2017):
 important control system in almost all organizations and main purposes of
budgeting are planning future performance; planning the future financial
position; planning future cash flows; planning future day to day operations; and
controlling costs.

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Management accounting system (MAS) (5/6)

 Decision making (Gnawali, 2017):

 The decision support analysis can be divided into short term and long term
analysis.
 Regular or short-term decisions management accountants can use cost-volume-
profit (CVP) analysis, product profitability analysis, customer profitability
analysis, and stock control models.
 For longer-term capital investment decisions management accountants can produce
and review accounting rates of return and payback periods as well as complex
signals based on discounted cash flow.

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Source: Fomin et al., 2017
Management accounting system (MAS) (6/6)

 Performance evaluation system (Gnawali, 2017):

 Performance evaluation provides information for managers to support the
achievement of their organization‘s strategic objectives.
 highlighted the frameworks for performance measurement and management which
are the value-based management (VBM); ABC and activity-based management;
balanced scorecard; European Foundation for Quality Management (EFQM)
excellence model; benchmarking; strategic enterprise management (SEM); and six
sigma
 Costing systems (Gnawali, 2017):
 information on product costs generated by costing systems and includes pricing
decision, cost control, an evaluation of production processes; and transfer pricing

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Strategic management accouting place in information
processing

Bondar, M., Iershova, N., &

Chaika, T. (2019). Strategic
management accounting
as an information platform
for measuring innovation
of the enterprise. SHS Web
of Conferences.

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Main Definitions & Definitions Differences (1/4)

 Income. Excess of revenues and gains over expenses and losses for a period; net
income. The term is sometimes used with an appropriate modifier to refer to the
various intermediate amounts shown in a multiple-step income statement or to refer to
revenues, as in ‘‘rental income.’’
 Revenue. The owners’ equity increase accompanying the net assets increase caused by
selling goods or rendering services; in short, a service rendered; sales of products,
merchandise, and services and earnings from interest, dividends, rents, and the like.
Measure revenue as the expected net present value of the net assets the firm will
receive. Do not confuse with receipt of funds, which may occur before, when, or after
revenue is recognized. Contrast with gain and income.
 Turnover. The amount of money taken by a business in a particular period. The annual
sales volume net of all discounts and sales taxes.
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Main Definitions & Definitions Differences (2/4)

 Expenditure. Payment of cash for goods or services received. Payment may occur at
the time the purchaser receives the goods or services or at a later time. Virtually
synonymous with disbursement except that disbursement is a broader term and
includes all payments for goods or services. Contrast with expense.
 Expense. As a noun, a decrease in owners’ equity accompanying the decrease in net
assets caused by selling goods or rendering services or by the passage of time; a
‘‘gone’’ (net) asset; an expired cost. Measure expense as the cost of the (net) assets
used. Do not confuse with expenditure or disbursement, which may occur before,
when, or after the firm recognizes the related expense. Use the word ‘‘cost’’ to refer to
an item that still has service potential and is an asset. Use the word ‘‘expense’’ after the
firm has used the asset’s service potential. As a verb, ‘‘expense’’ means to designate an
expenditure—past, current, or future—as a current expense.
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Main Definitions & Definitions Differences (3/4)

 Cost. The sacrifice, measured by the price paid or to be paid, to acquire goods or
services. See acquisition cost and replacement cost. Terminology often uses ‘‘cost’’
when referring to the valuation of a good or service acquired. When writers use the
word in this sense, a cost is an asset. When the benefits of the acquisition (the goods or
services acquired) expire, the cost becomes an expense or loss. Some writers, however,
use ‘‘cost’’ and ‘‘expense’’ as synonyms. Contrast with expense. The word ‘‘cost’’
appears in more than 50 accounting terms, each with sometimes subtle distinctions in
meaning.

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Main Definitions & Definitions Differences (4/4)

 Direct cost. Cost of direct material and direct labor incurred in producing a product.
See prime cost. In some accounting literature, writers use this term to mean the same
thing as variable cost.
 Indirect costs. Production costs not easily associated with the production of specific
goods and services; overhead costs. Accountants may allocate them on some arbitrary
basis to specific products or departments.
 Fixed cost (expense). An expenditure or expense that does not vary with volume of
activity, at least in the short run. See capacity costs, which include enabling costs and
standby costs, and programmed costs for various subdivisions of fixed costs.

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• Bondar, M., Iershova, N., & Chaika, T. (2019). Strategic management accounting as an information platform for measuring innovation of the
enterprise. SHS Web of Conferences.

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