The Nature of Management

Accounting

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 Financial Accounting

 Focuses on preparation of FS required

by GAAP.
 Prepared for use by external users.
 Provides an overall picture of an entity’s
financial condition and results of activities.

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 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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 Management vs. financial
accounting (page 1 of 6)
• Necessity
 Financial Accounting (FA): SEC (or banks or
suppliers) requires 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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 Management vs. financial
accounting (2 of 6)

 Users.
 FA: faceless group, external users, present or
potential shareholders.
 MA: Known managers who influence information
needs.
 Underlying structure.
 FA: built around: Assets = Liabilities +
Stockholders’ Equity.
 MA: 3 purposes each with its own set of concepts
and constructs (addressed later).
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 Management vs. financial
accounting (3 of 6)
 Source of principles.
 FA: GAAP.
 MA: whatever managers believe useful.
 Time orientation.
 FA: historical, tell it like it was.
 MA: future/decision oriented, tell it like it will
be. (However, past is often a good predictor
of future.)

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 Management vs. financial
accounting (4 of 6)
 Information content.
 FA: summary of primarily monetary events
 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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 Management vs. financial
accounting (5 of 6)
 Report frequency:
 FA: Publicly traded, SEC: 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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 Management vs. financial
accounting (6 of 6)
 Report entity.
 FA: Organization as a whole.
 MA: Relatively small parts (responsibilities
centers such as departments, product lines,
divisions, subsidiaries as well as organization as a
whole.)
 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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 Similarities
• Most elements of financial accounting also
found in management accounting.
 Same considerations that make sense for
GAAP also make sense for MA.
 Systems are designed to reduce redundancies
and provide info for both FA & MA.
 Both are used for decision making, one by
investors and one by managers, so there are
similarity of uses.

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 Types of management accounting
info and their uses
 Purposes of MA system:
• Measurement of revenues, costs, and assets.
• Control.
 Aid decisions among alternative courses of
action.
 For each purpose there is a set of
principles and generalizations.

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 Characterization of Management
Accounting Reporting
• Historical information:
– Score keeping (How are we doing?) or
– Attention directing (What problems require
looking into?)
• Future estimates:
– Problem solving (What is best way to deal
with a problem?)
– Influencing impact (influences actions of
managers).

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 Measurement
• Full cost accounting measures resources
used in performing some activity.
 Full cost of producing goods or providing
services = direct costs + indirect costs.
 Direct costs = costs directly traced to goods or
services.
 Indirect costs = fair share of costs incurred
jointly in producing goods or services.

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 Control

• Costs (also, revenues and assets) are

identified to and measured by
responsibility center.
 A manager heads each responsibility center.
 Corrective action can only be taken by
individuals.
 To help identify problems (and opportunities)
actual costs are measured and compared to
a benchmark (budget, last year, industry
average).
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 Alternative choice decisions
• Differential costs of alternative possible
actions are developed.
 Management may only consider direct
costs for some short run decisions.

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 Databases
• Spreadsheets:
– Two dimensional arrays of data.
• Database systems:
– n-dimensional arrays and tailor made reports.
– Allows linkages among data, various
manipulations and sorts of data, and quickly
available reports to help decision making.

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 General observations on MA
• Different numbers for different purposes.
– Many different types of costs: historical,
standard, overhead, variable, fixed, differential,
marginal, opportunity, direct, estimated, full, etc.
 Clarify which type you are talking about.
 Accounting numbers are approximations.
 Best that we can with incomplete data.
 Accounting evidence is only partial evidence other
factors help make decisions.
 People not numbers get things done. How you use
the numbers is as important as how the numbers
are produced.
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