MANAGEMENT ACCOUNTING

- An overview

ASHUTOSH DASH
Structure
MA – What it is?

MA & MGT Functions

MA & Supply Chain

MA – Historical View

FA Vs MA
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 Categories of Information

 Operating Info

 Financial accounting.
Monetary Quantitative
 Management accounting. Information

Monetary
Tax accounting.

Non


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Management Accounting

Managerial accounting is the process of

 Identifying
 Measuring
 Analyzing
 Interpreting
 Communicating information

Measures and reports financial and

nonfinancial information that helps
managers make decisions to fulfill the
goals of an organization
Managing Resources, Activities, and People
An organization . . .

Directing

Acquires Resources Decision

Organized
Organized setset Making
of
of activities
activities

Controlling Planning
Hires People
Management Accounting
 Process that provides info used by managers for:
 Planning, implementing, and controlling.

 Applies to all organizations.

· Management needs more detailed info.
· Accounting systems provide operating info needed for
operating decisions.

· Managers are interested in summaries.

· In general, management accounting is summary information.
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How does MA add value?
Information
For
Assesses Planning
Competitive
Position

Assists
in
Controlling

Motivates
Managers

Measures
performance
 MA &
MGT FUNCTIONS
MA Information
 For internal users
 President,
 Marketing manager and
 Production Manager

 Used for three functions of managers:

 Planning.
 Implementation.
 Control.

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 Planning and Controlling

Management Decision Management Accounting System

Planning Budgets
Feedback

Accounting
Control System

Performance Performance
Evaluation Reports
1 - 10
 Reporting
(Valuation of inventory,
Reporting of Assets, Cost

Control
Flow Management)

Effective managers)

(Identifying efficient
operatio n, Rewardin g
Cost Management
CM Info & Mgt Functions
Objectives of Cost Management

Accurate
product
Managing Costing
Cost
Reduction

Pricing &
Cost
Projection

Profitability
Measurement

Operations
Performance
Measurement
Three ways MA supports the managers

Behavioral
Behavioral Costs
Costs and
and
Issues Benefits Different
Different Cost
Cost
Issues Benefits

Managerial
Accounting
Identify which of the three key management
guidelines would apply

 Considering the desirability of hiring another production supervisor.

 Introducing a new commission scale for salespersons.

 Deciding between the deluxe or the standard package of a new

billing software package.

 Reporting total company sales to shareholders, but sales by store to

the CFO.
Solution

 (1) Cost -benefit approach

 (2) Behavioral and technical considerations

 (1) Cost -benefit approach

 (3) Different costs for different purposes

 CM –
The Characteristics
Characterization of MA
 Historical information:
 Score keeping (How are we doing?) or
 Attention directing (What problems require looking
into?)

 Future estimates:
 Problem solving (What is the best way to deal with a
problem?)
 Influencing impact (influences actions of managers).

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Problem Solving

This involves comparative analysis

for decision making.

This role asks: Of the several alternatives

available, which is the best?

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Scorekeeping

This involves accumulating data and

reporting reliable results to
all levels of management.

This role asks: How is the business doing?

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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.

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Identify the role of accounting for each of
the following activities
 Analyzing the impact of introducing a new product on
production.

 Comparing results between actual costs and budgeted costs

for each step of manufacturing a product.

 Preparing a report that analyzes changes in cost resulting

from reducing the number of tubing sizes used during
production from six down to two.

 Reporting sales by branch for the sales manager.

Solution

 (1) Problem solving

 (3) Attention directing

 (1) Problem solving

 (2) Scorekeeping
 MA –
Role in Supply Chain
Management
Business Made Simple

 Managers need to know

 What do the customers want?
 What will they pay for it?
 What will it cost to provide it?
 Costly mistakes can be avoided with this
information.

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What Makes it to
be competitive??

Produce only what

customers want, when
they want it

Be able to stop any

process to correct
mistakes
-Tiichi Ohno
Changes in Business Environment
Contemporary Business Prior Business

Market Global Domestic

Competition Base Customer satisfaction Economies of Scale
Process Low Volume & Short High Volume & Long
Production Runs Production Runs

Products Variations with short life Less varieties with long

cycles life cycles

Emphasis Zero Defect Acceptance of normal

loss

Information Strategic (CSF) Financial

Commitment Long Term Short term
Efficiency Dynamic Static
Information is the Key to Success
 Must develop an integrated cost / quality / functionality
measurement system
 Traditional accounting information is not sufficient
 Backwards looking
 Fails to measure important items
 Much important information is not quantitative
 Designed to meet reporting requirements, not management needs

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Key Themes in Management Decision Making

Customer Focus

Value Chain Key Success Factors: Continuous

and Cost and Efficiency, Improvement
Supply Chain Time, Quality, and
Analysis Innovation Benchmarking
Cost Management and the Value Chain

Product
Product
Design
Design
Production
Production
Research
Research
and
and
Development
Development Marketing
Marketing
Securing
Securing raw
raw
materials
materials and
and Distribution
Distribution
other
other resources
resources
Customer
Customer
Start Service
Service
Classify each cost item into one of the
business functions
 Cost of customer order forms.
 Cost of paper used in manufacture of books.
 Cost of paper used in packing cartons to ship books.
 Cost of paper used in display at national trade show.
 Depreciation of trucks used to transport books to college
bookstores.
 Cost of the wood used to manufacture paper.
 Salary of the scientists attempting to find another source of
printing ink.
 Cost of defining the book size so that a standard-sized box is
filled to capacity.
Solution
 Marketing
 Production
 Distribution
 Marketing
 Distribution
 Production
 Research and development
 Design
 MA –
HISTORICAL
CONTEXT
Cost Accounting Vs Cost Management

Cost Accounting Cost Management

 Uses financial  Uses cost information
transaction based  To evaluate the
accounting efficacy of resource
 To cost products consumption
 For external financial  For creating products
reporting or services that add
value to consumers
CM – The Focus

●
Standardization ●
Developmental
& Standard Cost Objective

Prior Contemporar
Business y Business

Focus on
Focus on
Strategy
financial
reporting Implementati
on
●
Accountants are ●
Accountants are
scorekeepers partners
CM – The Historical Context
CM to CA – The Relevance Lost

 Post 1880- From economies of scale to scope

 Decision on product mix demanded product cost info
and profitability
 1910 – Info for efficiency and opportunities
 Cost Accounting developed after post world war
 Objective was to value inventory for reporting
CM Tools –An Overview
MA VS FA
Ma vs. fa (1 of 6)

 Necessity
· Financial Accounting (FA): Regulators (or banks or
suppliers) require publicly traded companies to publish
financial statements according to GAAP
· Management accounting (MA) is optional

· Purpose.
· FA: Produce financial statements for outside users
· MA: Help managers plan, implement and control

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Ma vs. fa (2 of 6)

· Users.
· FA: faceless group, external users, present or potential
shareholders.
· MA: Known managers who influence what
information is needed.

· Underlying structure.
· FA: built around: Assets = Liabilities + Stockholders’
Equity.
· MA: 3 purposes each with its own set of concepts and
constructs .
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Ma vs. fa (3 of 6)

· Source of principles.
· FA: GAAP.
· MA: whatever managers believe is useful.

· Time orientation.
· FA: historical, tell it like it was.
· MA: future/decision oriented, tell it like it will be.
(However, the past is often a good predictor of the
future.)

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 Ma vs. fa(4 of 6)

· Information content.
· FA: financial statements are the end product and include
primarily financial info
· MA: non-monetary as well as monetary info

· Information precision.
· FA: Uses approximations but as a generalization is
more precise than MA.
· MA: Management needs info rapidly to be useful in
decision making and therefore precision is sometimes
sacrificed.
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Ma vs. Fa (5 of 6)
· Report frequency:
· FA: Publicly traded, quarterly, with more detailed info
annually.
· MA: Up to management.

· Report timeliness.
· FA: Usually, several weeks to months after fiscal close of
accounting period.
· MA: Quickly to be useful for decision making.

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 Ma vs. Fa (6 of 6)

· Report entity.
· FA: Organization as a whole.
· MA: Relatively small parts (responsibilities centers
such as departments, product lines, divisions)

· Liability potential.
· FA: May be sued by shareholders if believed to be
misleading.
· MA: Used internally unlikely to give rise to legal
liability.

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THA
NK
YO
U
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