Chapter 15

The Nature of
Management
Accounting

McGraw-Hill/Irwin Copyright © 2011. The McGraw-Hill Companies. All Rights Reserved.

 Financial Accounting

 Focuses on preparation of financial

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

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 Management Accounting
• Assist managers in formulation and
implementation of organization’s strategy.
• Applies to all organizations.
 Use both quantitative and qualitative
information.
 Decision-facilitating information.
 Decision-influencing information.

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 Accounting Jobs

 Management accountant:
 Responsible for design and operation of
management accounting system.
 Certified Management Accountant (CMA)
 Professional designation of knowledge of
management accounting principles and
techniques.

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 Accounting Jobs
 Controller.
 Frequently highest level accountant.
 Usually has both financial and management
accounting responsibility.
 Reports to Chief Financial Officer (CFO).

 Treasurer.
 Responsible for cash management.
 E.g., raising cash when needed by borrowing or
issuing stock and investing excess cash.
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 Management Accounting vs.
Financial Accounting
Necessity
Management Accounting Financial Accounting
• Optional. • Required.
• Information’s value • Requirements of
to management. FASB, SEC, IRS, etc.

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 Management Accounting vs.
Financial Accounting
Purpose
Management Accounting Financial Accounting
• Produce information • Produce information
for planning, for outside users.
implementing, and
control functions.

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 Management Accounting vs.
Financial Accounting
Users
Management Accounting Financial Accounting
• Internal users. • External users.
• Managers. • Shareholders.
• Individuals who • Creditors.
assist in analysis. • Government
agencies.
• etc.
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 Management Accounting vs.
Financial Accounting
Underlying Structure
Management Accounting Financial Accounting
• Information to assist • Accounting Equation:
in decision making Assets = Liabilities +
related to: Shareholders’ Equity.
• Measurement.
• Control.
• Alternative choices.

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 Management Accounting vs.
Financial Accounting
Source of Principles
Management Accounting Financial Accounting
• Information • GAAP.
usefulness for decision
making.

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 Management Accounting vs.
Financial Accounting
Time Orientation
Management Accounting Financial Accounting
• Primarily future • Primarily past
oriented. oriented.
• E.g., forecasts, • Reporting of financial
estimates, plans. history.
• Some historical
information for
predictive value.
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 Management Accounting vs.
Financial Accounting
Information Content
Management Accounting Financial Accounting
• Both monetary and • Primarily monetary
nonmonetary events (i.e., accounting
information. transactions).

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 Management Accounting vs.
Financial Accounting
Information Precision
Management Accounting Financial Accounting
• Information • Uses some
frequently needed approximations.
quickly. • However, precision
•Precision sometimes usually greater than in
sacrificed for speed in Management
reporting. Accounting.
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 Management Accounting vs.
Financial Accounting
Report Frequency
Management Accounting Financial Accounting
• Can be monthly, • Annually with less
weekly, daily, or even detailed interim
more frequently. reports.
• May need real-time
access to information.

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 Management Accounting vs.
Financial Accounting
Report Timeliness
Management Accounting Financial Accounting
• Quickly to be useful • Usually, several
for decision making. weeks to months after
fiscal close of
accounting period.

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 Management Accounting vs.
Financial Accounting
Report Entity
Management Accounting Financial Accounting
• Usually relatively • Primarily
small parts of the organization as a
organization (e.g., whole.
departments, product
lines, divisions,
subsidiaries, etc.)
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 Management Accounting vs.
Financial Accounting
Liability Potential
Management Accounting Financial Accounting
• Little or none • Threat exists when
because reporting and there is misleading
supporting reporting to external
documentation is parties.
internal.

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 Similarities
Managerial vs. Financial
 Many of same considerations that
make sense for GAAP also make sense
for internal decision making.
 Accounting systems usually designed to
provide information for both.
 Reports from both are used in decision
making by users.

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 Purposes & Uses of Management
Accounting Information
 Measurement purpose.
 Measurement of revenues, costs, and assets.
 Control purpose.
 Evaluate operations and (if needed) assign corrective
action to person/organization unit responsible.
 Alternative courses of action purpose.
 Analyze information and choose best course of
action.

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 Characterization of Management
Accounting Information
• Historical information:
– Score keeping (How are we doing?).
– 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 = direct costs + indirect costs.
• Direct costs are costs directly traced to goods
or services.
• Indirect costs are fair share of costs incurred
jointly in producing goods or services.

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 Control
• Use of responsibility centers.
– Costs, revenues, and/or assets are
identified to and measured by
responsibility center.
– Actual results are compared to a budget
or benchmark.
– Corrective action taken by person(s)
responsible.

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 Alternative Choice Decisions

• Differential costs of alternative possible

actions are developed and analyzed.
 Focus on relevant costs.
 E.g., Only considering direct costs for some
short run decisions.

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 Databases

• Spreadsheets:
– Two dimensional arrays of data.
• Database systems:
– More powerful.
– Easily sorts data, links data, manipulates
data, and quickly make reports available to
help in decision making.

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 General Observations on
Management Accounting
• Different numbers for different purposes.
• What “cost” are we talking about?
• Historical?, standard?, overhead?, variable?,
differential?, marginal?, opportunity?, direct?,
estimated?, full?, etc.
 Accounting numbers are approximations.
 Some numbers are more accurate than others.
 Working with incomplete data.
 Often must make decisions without all pertinent
information.
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 General Observations on
Management Accounting
 Accounting evidence is only partial evidence.
 Other more qualitative factors are also important
in decision making.
 People, not numbers, get things done.
 How you use the numbers is as important as how
the numbers are produced.

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