Chapter 1

Book Cover Here Cost and Management

Accounting
Fundamentals: a southern African approach
2e
Ferina Marimuthu
978 1 48513 120 5
 Chapter Learning objectives
● Understand the concept of management accounting
● Explain the role of the management accountant in an organisation
● Explain the financial information requirements for companies, public
organisations and societies
● Understand the importance of ethics
● Understand the role of CIMA as a professional body
● Identify key information that management would require from management
reports
● Calculate the main performance measures used in management reports
● Understand how and why reports differ for different types of organisations
● Identify different responsibility centres and their uses.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 2

What is management accounting?
• Management accounting
– is the process of preparing management reports that
provide accurate and timely financial and statistical
information required by management to make decisions;
– embraces the use of accounting and other information by
management in the planning and control of the activities
of the organisation;
– is focused on providing relevant information to managers,
who are people inside an organisation;
– provides the essential information to the managers in the
form of a variety of reports.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 3
Purpose of Management Accounting
• The purpose of management accounting is to
provide useful information to management which
assist them in
– planning,
– directing,
– motivating and
– controlling the operations.
• Management accounting identify, generate,
present and interpret relevant information to
assist in decision making.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 4
Planning
• Planning involves setting objectives of an organisation and
formulating strategies to achieve those objectives.
• Different levels of planning;
– Strategic – long - term planning performed by the top
management.
– Managerial – short to medium - term planning done by the
middle management.
– Operational – short - term planning for daily operations.
• The effects of revenue and costs are considered by
management in the planning process.
• Management accountants collects, analyses and summarises
data for management use in the form of budgets.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 5
Decision making
• Decision making involves analysing the information
provided and making informed decisions.
• Decision making process involves choosing between
two or more alternatives.
• Managers require reliable information to compare
each alternative and assess the impact of choosing
each of them.
• Management accountant is responsible to provide
that information.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 6

Decision making cont.….
• Management accountants collects, analyses
and interpret data and submit reports to the
management for decision making.
• Management accounting data such as daily
sales report are often used in day-to-day
decision making.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 7

Control
• Control involves evaluation of performance by
comparing actual results with the targets.
• The differences can be reported to the management to
facilitate control in their operations.
• Some common performance measures:
– Variances: compares actual results against budgeted
results.
– Profitability: is measured by gross profit or net profit or
gross margin percentage.
– Returns: are measured by means of ratios such as return on
capital.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 8
Control cont.…
– Management Accounting provides information to
assist in
• performance reports which compares the budgeted
and actual results prepared by management
accountants.
• if the actual performance falls below the target
management is alerted so that appropriate control
actions can be taken.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 9

Financial Accounting and Management Accounting.

• Financial accounting reports are prepared for

the use of shareholders, investors and
creditors who are external to the organisation.
• Management accounting reports are prepared
for managers inside the organisation.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 10

Comparison of Financial Accounting and
Management Accounting
Financial Accounting Management Accounting

External focus. Reports to those outside the organisation Internal focus. Reports to those inside the organisation for
such as shareholders, lenders, tax authorities and planning, decision making, controlling and performance
regulators. evaluation.

Emphasis is on historical data Emphasis is on future decisions

Objectivity of data is emphasised Relevance is emphasised

Precise information is required Timely information is required

Must follow GAAP Need not follow GAAP

Summarised data for the entire organisation is prepared Detailed reports about different departments and functions
are prepared

Mandatory for external reports Not mandatory

Governed by many rules and regulations Not governed by rules and regulations

© Juta & Company 2021 ISBN: 978 1 48513 120 5 11

The linkage between cost accounting, financial
accounting and management accounting.
• Cost accounting
– Accounting for costs which is used for determining
profitability and for decision making.
– It includes the accounting procedures relating to
recording of all income and expenditure
– It also includes preparation of periodical statements
and reports with the aim of determining and controlling
costs.
– It helps the internal management by highlighting
inefficient operations and assisting in a day-to-day
control of business activities.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 12
The linkage between cost accounting, financial
accounting and management accounting cont..
• Financial Accounting
– Is the process to communicate the financial
information of an organisation to various parties
interested in its progress.
– One of the main objective of financial accounting is to
find out the profitability and to provide information
about the financial position of the organisation.
– The information presented in financial statements is
used to determine the performance of the
organisation and make investment or divestment
decisions.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 13
The linkage between cost accounting, financial
accounting and management accounting cont..
• Management accounting
– It is a systematic approach to assist in managerial decision making.
– It generates information for establishing plans and controls.
– It provides for a system of setting standards, targets and reporting
variances between planned and actual performances for
corrective actions.
– It is the process of identifying, measuring, analysing, preparing,
interpreting and communicating financial information to the
management.
– Management accounting consists of cost accounting, budgetary
and inventory controls, statistical measures, internal appraisals
and reporting.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 14

Characteristics of good information
• Good information is needed to make good decision. Characteristics of good
information can be easily remembered using the acronym ACCURATE.
– A – Accurate: The degree of accuracy varies with the reason the information is needed.
– C – Complete: Managers require all information that they need to make decisions.
– C – Cost beneficial: Management information become valuable when it assists in decision
making. The cost of generating information should not exceed the value of it.
– U – Understandable: Limited use of jargons and technical language improves
understandability of the information.
– R – Relevant: Relevant information should be contained in the report. The information
should be relevant to its purpose.
– A – Authoritative: Information should be obtained from a reliable source so that the users
can have assurance in decision making.
– T – Timely: Information should be available to a manager in time for them to make
decisions based on that information.
– E – Easy to use: Information provided should be easy to use by the person using the
information.
• (Adapted from: CIMA)

© Juta & Company 2021 ISBN: 978 1 48513 120 5 15

Non-financial information

• The management requires both financial and

non-financial information for decision making.
• Financial information is important for
management such as costs and profit.
• Non-financial information is also needed by the
management such as number of orders
processed and number of complaints received.
• Non-financial information is valuable in decision
making.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 16
Financial information requirements for
different types of organisations.
• Commercial organisations
• The main objective of commercial organisations is to
maximise shareholders wealth.
• The type of information required by this type of
organisations include:
• costing of departments and products,
• profit measurement and
• calculation of return on capital.
• Shareholders are interested in the growth of their
investment and they evaluate the performance of the
organisation by inspecting the financial statements.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 17
Financial information requirements for
different types of organisations.
• Public organisations
– These organisations objective is to serves the public
which is evaluated by government and public.
– Information requirement of public organisations are
different from commercial organisations.
– Public organisations are non-profit organisations
and their focus should be on cost management.
– Accurate and detailed information is required for
these organisations to assess the efficiency and
effectiveness of its operations.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 18
Financial information requirements for
different types of organisations.
• Society
– Societies require financial information relating to
the organisations it deals with.
– Society will be interested in the impact
organisations have on local community.
– Environmental reporting is of good use to the
public since it measures and report on impact of
organisations on the environment.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 19

Environmental Management Accounting (EMA)

• Organisations are under growing pressure to reduce

their environmental impact.
• It is important for organisations to understand the
environmental costs to deal with this.
• EMA involves the production and study of both
financial and non-financial information to support
internal environmental management processes.
• Management are often unaware of the magnitude
of environmental costs and unable to identify
opportunities for cost savings.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 20
Environmental Management Accounting
(EMA)
• EMA can be applied in the assessment of;
– environmental costs;
– product pricing;
– budgeting;
– investment appraisal; and
– setting quantified performance targets.
• Environmental costs may be incurred as regulatory
costs or compliance costs which can results in
expenditure to meet legal or regulatory
requirements.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 21
Environmental Management Accounting
(EMA)
• Voluntary costs
– Incur when an organisation undertakes
environmental spending on its own initiative,
either for social or for business reasons.

– For example some environmentally friendly

operations may create goodwill and some may
satisfy customer expectations.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 22

Categories of environmental costs
• Internal costs and external costs.
• Internal costs impacts directly on the profit of
the company.
• Examples
• improved systems and checks in order to avoid
penalties;
• waste disposal costs;
• product take back costs and
• regulatory costs such as taxes.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 23

Categories of environmental costs
• External cost
– imposed on society at large, but not borne by the company that
generates the costs.
• Example of external costs are
– carbon emissions costs;
– usage of energy and water;
– health care costs and
– social welfare costs.
• Some governments are becoming increasingly aware of
these external costs and implementing measures to convert
them to internal costs by means of taxes and regulations.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 24

The Role of Management Accountant

• The role of management accountant

– is changing from that of reporting performance to enhancing
performance.
– Traditional management accountant was mainly involved in
reporting business results to management.
– But today management accountants are seen as value adding
partners of the organisation.
– They are expected to forecast the future of the business as well as
identifying opportunities for enhancing organisational
performance.
– Nowadays management accountants function as mentors, advisors
and drivers of performance along with business managers.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 25

The work of the Chartered Management
Accountant
Chartered management accountants assist organisations to establish feasible strategies which translate into profit in a
commercial organisation or into value for money in a non-profit organisation. To achieve this they work as an integral part of
multi-skilled management teams in carrying out the following functions.

 Developing policy and setting of corporate objectives;

 Formulating strategic plans derived from corporate objectives;
 Drafting of short term operational plans;
 Acquisition and use of finance;
 Systems design, recording of transactions and management of information systems;
 Generating, communicating and interpreting financial and operating information for management ;
 Provision of specific information and analysis on which decisions are based;
 Monitoring of outcomes against plans and other benchmarks and initiate responsive action for performance improvement;
 Developing performance measures and benchmarks, financial and non-financial, quantitative and qualitative, for
monitoring and control; and
 Improvement of business systems and processes through risk management internal audit review.

Management accountants help organisations improve their performance, security, growth and competitiveness through the
application of their expert knowledge and skills.

Adapted from CIMA

© Juta & Company 2021 ISBN: 978 1 48513 120 5 26

The positioning of Management Accountant within the organisation.

• The management accountant as a dedicated business partner.

• The business relationship between the managers and
management accountants are key to the success of the
business.
• They have to work together to achieve the objectives and their
relationship must be based on trust, honesty and respect.
• From the accountant’s perspective, they must act
professionally all the time and demonstrate technical and
business awareness.
• From the manager’s perspective, they must trust the
accountant and information provided by him, respect his
knowledge, experience and professionalism.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 27
The positioning of Management Accountant within the organisation.

• The management accountant as an adviser

• Management accountants are expected to advice management on
financial and non-financial analysis, costing and pricing, business process
reengineering and performance management.
• Advantages:
– This approach helps to build strong relationships between the accountants and
the business.
– This will results in better knowledge of the business area and its requirements.
• Disadvantage
– This approach results in duplication of efforts across the organisation.
– Lack of knowledge sharing can occur with larger diversified teams.
– The accountants may secluded within the organisation and they tend to develop
their own way of working.
– They may also tend to overlook the overall objectives of the organisation.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 28

The positioning of Management Accountant within the organisation.

• Shared service centre (SSC)

• In this approach the whole finance function is brought together as
one centre which provides all the accounting needs of the
organisation.
• It is often known as ‘internal sourcing’.
• The advantages are:
– Reduced cost because of reduction in staff, premises and other related
costs.
• For example SSC may be located in an area where labour and property rates are
favourable.
– Improved quality of service due to the experience of the team and
adoption of best practices.
– Improved consistency of management information throughout the
organisation.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 29
The positioning of Management Accountant within the organisation.

• Business Processes Outsourcing centres (BPO)

• Business process outsourcing involves contracting an external supplier to
provide all or part of the business process. Usually procurement, ordering and
reporting functions are outsourced.

• The advantages of BPO are;

– Cost reduction because of reduced staff, premises and other related costs.
– Use of specialist service providers bring new expertise into the organisation.
– The available capacity as a result of outsourcing routine processes can be used on
more value adding processes.
• The disadvantages are;
– Loss of control since management is unable to supervise the function closely.
– Over dependence on service providers.
– Confidentiality is at risk because important information could end up in wrong hands.
– Quality may be compromised.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 30

Ethics and Professional Standards in
Management Accounting
• The ethical standards provide sound, practical
advice for management accountants and
mangers.
• Management accountants and financial managers
are obligated to the public, their profession, the
organisation they serve and themselves to
maintain the highest standard of ethical conduct.
• Code of ethics are developed by professional
bodies for its members.

© Juta & Company 2021 ISBN: 978 1 48513 120 5 31

Code of ethics example
• Integrity: Practitioners of management accounting and financial management have a
responsibility of being straight forward, honest and truthful in all professional and
business relationships.
• Objectivity: Practitioners of management accounting and financial management have a
responsibility of not allowing bias, conflict of interest or the influence of other people to
override your professional judgement.
• Professional competence: Practitioners of management accounting and financial
management have a responsibility to maintain an ongoing commitment to improve the
level of professional knowledge and skill.
• Confidentiality: Practitioners of management accounting and financial management have
a responsibility to not disclose professional information unless there is specific
permission, or legal or professional duty, to do so.
• Professional behaviour: Practitioners of management accounting and financial
management have a responsibility to comply with relevant laws and regulations and also
avoid any action that could negatively affect the reputation of the profession.

• Adapted from CIMA

© Juta & Company 2021 ISBN: 978 1 48513 120 5 32
The Chartered Institute of Management
Accountants (CIMA).
•
• CIMA is the world's largest professional body of management
accountants with 183,000 members and students in 160 countries.
• CIMA offers a professional accounting qualification with an emphasis
on strategic management.
• Students study for the qualification after completing a degree or
start straight from school as there are no minimum entry
requirements.
• CIMA’s members are key role players in helping businesses to
maintain financial control and stability at all stages of the business
cycle.
• They work in all sectors of the economy which includes private,
public and non-profit organisations.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 33
Role of CIMA in developing practice of
Management Accounting.
• CIMA qualification
• CIMA qualification is highly regarded across the world and members
hold many high level finance positions.
• The syllabus is constantly updated to make sure that it continues to
meet the needs of business.
• Students must demonstrate their practical experience by completing
their professional experience record before admission to
membership.
• This ensures that the members have both technical and practical
knowledge of the business.
• Members are required to undertake continuing professional
development (CPD) to ensure that they maintain and develop their
knowledge.
© Juta & Company 2021 ISBN: 978 1 48513 120 5 34
Role of CIMA in developing practice of
Management Accounting.
• Chartered Global Management Accountants (CGMA)
• CIMA recently entered into a joint venture with AICPA (American Institute of Certified
Public Accountants), which resulted in the creation of a new designation for management
accountants known as CGMA.
• All qualified CIMA members are entitled to use the CGMA designation.
• The purpose of this designation is to elevate the profession of management accounting
around the world.
• CGMA designation will be recognised by businesses around the world and will be
confident that members of CGMA will be able to assist them in making critical business
decisions and will contribute to driving strong business performance.
• The work of CIMA ensures that the public and business are protected, and members are
trained to the highest levels and adhere to the highest ethical and professional standards.
• CIMA continues to work developing management accounting for the benefit of businesses
across the world as it has done for more than 90 years.

• Adapted from CIMA

© Juta & Company 2021 ISBN: 978 1 48513 120 5 35