CHAPTER ONE: NATURE AND PURPOSE OF MANAGEMENT

ACCOUNTING
Learning Objectives

By the end of this chapter the learner should be able to:

Distinguish between managerial accounting, cost accounting and financial accounting
State objectives of management accounting
Describe the management accounting system
Explain the role of management accounting in management process

Definitions
ManagerialAccounting
Management accounting is the application of the professional knowledge and skills in
preparation and presentation of accounting information in such a way as to assist
management in formulation of policies and planning and control of the operations of
undertakings. It measures and reports financial and non-financial information that helps
managers make decision to fulfill the goals of an organization.
It is focused on internal reporting.
It is concerned with the provision of information to people within the organization so as
to help them make decision and improve efficiency and effectiveness of existing
operations.
Management accounting provides information required by management for such
purposes as:-
1. Formulation of policies
2. Planning and controlling activities of the enterprises
3. Decision making on alternative causes of action.
4. Disclosure to those external to the entity
5. Disclosure to employees
6. Safeguarding assets
The above involves participative management to ensure that there is effective:-
1. Formulation of long tern plans to meet objectives
2. Formulation of short term operation plans
3. Recording of actual transactions
 4. Corrective actions required to bring future actual transactions into line.
5. Obtaining and controlling finance
6. Reviewing and reporting on systems and operations
Cost Accounting
Cost accounting measures and reports financial and non-financial information that relates
to the cost of acquiring or consuming resources by an organization, it includes those parts
of management and financial accounting where information cost is collected or analyzed.
It provides information both managerial accounting and financial accounting.
Financial Accounting
It focuses on reporting to external parties. It measures and records business transactions
and provides financial statements that are based on generally accepted accounting
principles.
It is defines as that part of accounting which covers the classification and recording actual
transactions of an entity in monetary terms in accordance with established concepts,
principles, accounting standards and legal requirements and present as accurate view as
possible of the effect of those transactions over a period of time and at the end of that
time.
Note: - All the above three branches of the accounting should be integrated into the
company’s reporting system where:
Financial accounting maintains records of each transaction and helps control the firm’s
assets and liabilities e.g. plant, equipment, stock, debtors and creditors.
It satisfies the legal and taxation requirements and also provides input into the costing
system.
Cost accounting analyses the financial data into more detail and provides a lot of other
information used for control
It also provides key data such as stock valuation and cost of sale which are fed back into
the financial accounting system so that accounts can be finalized.
Managerial accounting gets information from financial and cost accounting system and
uses this and other available information in order to advice management on matters such
as cost control, pricing, investment decisions and planning.

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 Evolution of Management Accounting
Financial accounting used to be considered adequate for making information needs of the
management for the control of the business operations.
The annual financial statements which comprised of a balance sheet and profit and loss
account are still prepared and presented to management by the financial accountant.
However the management needs much more detailed information than those supplied by
this financial statement.
Management accounting compared to financial accounting is a young discipline and so
management accounting concept and tools are still evolving as new ways are found to
provide information that assists management. Management accounting evolved as a
result of rapidly changing business environment. Several changes that are especially
pertinent to management accounting are:-
Globalization, deregulation, emergency of new industries, just in time inventory
management, continuous improvement, computer integrated manufacturing, product
quality etc.
Objectives of Management Accounting
1. Planning
All organization should plan a head in order that they can set objectives and decide how
they can meet them. Management accounting uses past data to predict the future
2. Control
The production of the company internal accounts enable the firm to concentrate on
achieving its objectives by identifying which areas are performing and which are not.
The use of management by exception reports enables control to be exercised where it is
most useful.
3. Organization
There is a direct relationship between the organizational structure and the management
accounting system. Management accounting system should therefore produce the right
information at the right cost, at the right time.
4. Communication
The existence of budgetary and management accounting system is an important part of
communication process. Plans are outlined to managers so that they are fully aware of
what is required of them and the management accountant tells them whether or not the
desired results are achieved.
5 Motivation
The use of budget and achievable targets motivates the employees to work hard so as to
achieve these targets.
Difference between Management and Financial Accounting
1. Legal requirements
It is a legal requirement for a public limited company to produce annual financial
accounts regardless of whether or not management regards this information as useful.
However it is optional for management accounting to prepare this statement.
2. Financial accounts
Financial accounts must be prepared to conform to legal requirements and generally
accepted accounting principles established by regulatory bodies. These requirements are
essential to ensure consistency and formality that is needed for external financial
statement. In contrast management accountings are not required to adhere to generally
accepted accounting principles when providing managerial information for internal
purposes.
3. Time dimensions
Financial accounting reports what has happened in the past in an organization where as
management accounting is concerned with both past and future information.
Management requires details of expected future cost and revenues.
4. Reporting frequency
Financial accounting is published annually while management accounting requires
information frequently so as to make decisions.
5. Focus on individual parts or segments of the business
Financial accounting report focuses on all parts of the business whereas management
accounting focuses on a small part of the business.
6. Type of information
Management accounting includes non monetary and monetary information while
financial accounting includes monetary information only. Management accounting
includes quantities of materials as well as monetary cost of material, number of

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employees as well as Labor cost etc. Financial accounting records this information in
monetary terms only.
Management Accounting System
Accounting system is the system of procedures, personnel and computers used to
accumulate and store financial data in the organization.
Managerial accounting constitutes one of several system used by managers in running an
organization. A system consists of a set of inputs, process and outputs. Those are known
as elements. The design of management accounting system should be guided by the
challenges facing managers. There are several factors which should be borne in mind
when a system is being set up.
1. What information is required?
i) What data is required to produce the information?
ii) What are the sources of this data?
iii) How should it be converted?
iv) How often should it be converted?
2 Who requires it?
3 How often is it required?
The following factors should also be considered
1. What data is required to produce the information?
2. What are the sources of this data?
3. How should it be converted?
4. How often should it be converted?
The organizational structure, cost and accuracy should be taken into account.
The following steps should be followed while setting management accounting system.
1. The organizational manual should be drafted which gives communication line
within the organization.
2. All the systems should be integrated.
3. Setting up of the cost centre, profit centre, investment centre etc
4. Introduction of budget and budgetary control.
5. Standards should be set up and standard costing should be put in place.
6. The system should be introduced gradually
 7. The staff should be recruited and trained on the system
8. There should effective internal control system
9. Monitoring and evaluation after implementation.
Attributes of a Good Management Accounting Information
i) Timely
ii) Relevant
iii) Accurate
iv) Inspires users confidence
v) Appropriately communicated
1.7 The Management Accounting Guidelines
Management accounting is still evolving and therefore the guidelines available are not
generally accepted as those of financial accounting. However, some of the guidelines
include:-
1. Cost benefit approach
As management accounting continually face resource allocation decisions, cost benefit
approach should be used. They should weigh the cost and the benefits expected from any
spending. The benefits should make the organization to attain its goals.
2. Give full recognition to behavioral as well as technical considerations
Management accounting system should have two simultaneous missions for providing
information namely:-
i. To help managers make wise economic decisions
ii. To motivate managers and other employees to aim and strive for goals of the
organization.
3. Responsibility accounting principles.
This seeks to assign each employee some authority and responsibility where by the said
employee is responsible for success or failure of his sections.
Responsibility accounting is a system that measures the plans and actions of each
responsibility centers.
There are four major types of responsibility centre are:-
i) Cost centre where manager is accountable for cost duly
ii) Revenue centre – where manager is accountable for revenue only.

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 iii) Profit centre where manager is accountable for profit only.
iv) Investment centre – where managers is accountable for investments, revenue and
costs.
4. Management by exceptional principle
This is a principle where management gives more attention to critical areas unusual or
exceptional out of line of the planned program.
Normal business activities are considered to be within the plan and so extra attention may
not be given.

Role of management accounting in management process

i) To allocate and accumulate data and provide reliable results for internal and
external profit reporting
ii) To provide relevant information to help managers make better decisions
iii) To provide information for planning,
iv) To provide information for control and
v) To provide information for performance measurement

Review Questions
What is the basic difference between financial and managerial accounting?
What are the key attributes of a good management accounting system?
Discuss the role of management accounting in the management process?
Explain the objectives of management accounting

Suggested References for Further Reading

i) Horngren et. al., 2009, Introduction to Management Accounting, 14th Ed, Dorling
Kindersley, New Delhi Pg 2- 43.
ii) Garisson R. H., and Noreen E. W., 1997 Managerial Accounting, 8th Ed,
MacGrraw-Hill, New York, Pg 2-39