INTRODUCTION TO MANAGEMENT ACCOUNTING – UNIT 1

DRURY CHAPTER 1

Overview

This unit is going to explain to you the purpose of studying Management Accounting and what
Management Accounting is about. This unit should be kept in mind when studying further topics under
Management Accounting.

Outcomes

Once you have completed this unit, you should be able to do the following:

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  Differentiate between management accounting, cost accounting and financial accounting
 Define the factors involved in the processes of decision-making, planning and control
 Describe the role of management accounting in the management process.

Tutorials

There will be no tutorials for this unit

What is accounting

It is the process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of information.

It is concerned with providing both financial and non-financial information that will help decision makers to
make good decisions.

Users of accounting information

Examples of users
- managers
- shareholders

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- potential investors
- employees
- creditors
- government

This can be broken down into two categories:

- Internal parties
- External parties

Management accounting is concerned with the provision of information to people within the organisation
to help them make better decisions and improve the efficiency and effectiveness of existing operations.

Financial accounting is concerned with provision of information to external parties.

Differences between management accounting and financial accounting

Management accounting Financial accounting

Legal requirements Optional information only Statutory requirements for

produced if benefit obtained is LTD companies to produce
more than cost of collecting it. AFS even if not useful
Focus on individual parts or Focuses on small parts of the Reports on the whole of the
segments organization business
Generally accepted Not required to adhere to AFS prepared in conformity
accounting practice (GAAP) GAAP. with of GAAP
Time dimension Concerned with future Reports what happened in the
information as well as past. past.
Report frequency Prepared as often as needed. Prepared annually

Functions of management accounting

Need to be able to meet the following requirements:

1. allocate costs between cost of goods sold and inventories for internal and external profit reporting.

In terms of financial accounting we need to match costs with revenues to calculate profit. Hence
unsold finished goods or partly completed stock (WIP) must not be included in the cost of sales figure
which is matched against sales during the period.

It is therefore necessary for valuation purposes to charge the costs incurred to individual products.
Costs are therefore traced to individual job or product so that the costs incurred during a period can
be allocated between unsold inventory and cost of sales.

2. Provide relevant information to help managers make better decisions

This involves both routine and non routine reporting. Routine information will include information
about the profitability of segments, resource information, product mixes etc. Non-routine information
is required for strategic decisions. For example information is needed to make decisions regarding
large capital investment, new products, new markets etc.

3. Provide information for planning, control and performance measurement

Planning – translates goals and objectives into specific activities and resources required to achieve
the goals.

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 Control – ensuring actual outcomes conform with planned outcomes. Set targets.
Performance – measured and compared to targets set.

Costs are assembled in different ways for different purposes. For information to have a value it needs to
be accurate as well as timeous.

The decision making process

1. Identify objectives

2. Search for alternative courses of action

Planning
Process
3. Gather data about alternatives

4. Select alternative courses of action

5. Implement the decisions

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6. Compare actual and planned outcome
Control
Process
7. Respond to divergences from plan

The first 5 stages represent the decision-making or planning process. The final 2 stages represent the
control process.

Identifying objectives

Need to specify the goals or objectives of the organisation.

Assumption adopted is that firms seek to maximise the value of future net cash inflows.

Search for alternative courses of action

Need to search for a range of possible courses of action.

Ie. Developing new sales for existing market
Developing new product for new market
Developing new markets for existing products.

The most difficult but also most important stage of the process

Gather data about alternatives

Gather information even if it is outside the decision makers control

Select alternative courses of action

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Choose between alternative courses of action and select the alternative that best satisfies the objectives of
the organisation.

Implementation of the decision

Alternative courses of action should be implemented as part of the budgeting process.

Comparing actual and planned outcomes and responding to divergences from plan

This consists of measurement, reporting and subsequent correction of performance in an attempt to

ensure that the firm’s objective and plans are achieved. Are the original intentions being fulfilled.

Corrective action must be taken so that actual outcomes conform to expected.

Changing competitive environment

Competition was previously very limited so no incentive to maximise profit. Doors have now been opened
and there is far more competition from the international market. Companies now have to compete not only
with domestic market but also with international market.

Changing product life cycle

Product life cycle is the period of time from initial expenditure on research and development to the time at
which support to customers is withdrawn. Global competition and technology has reduced the product life
cycle considerably. Entering the market later than competitors can have a dramatic effect on product
profitability.

Focus on customer satisfaction and new management approaches

Customer satisfaction is an overriding priority.

Customers generally buy the cheapest product. Keeping cost low and being cost efficient provides an
organization with a strong competitive advantage.

Customers are demanding high quality products and services. Most companies are focusing on total
quality management where all business functions are involved in a process of quality improvement.

Management are now focusing on cycle times in an effect to reduce non-value added activities.

Companies must develop a steady stream of innovative new products and services and have the capability
to adapt to changing customer requirements.

Companies are attempting to achieve customer satisfaction by adopting a philosophy of continuous

improvement. This is an ongoing process that involves a continuous search to reduce costs, eliminate
waste, and improve the quality and performance of activities that increase customer value or satisfaction.

Employees are now being empowered to make improvements to the output process as they are closest to
the operating process.

Increasing attention is now being given to the value-chain analysis as a means of increasing customer
satisfaction and managing costs more effectively. The value chain is the linked set of value creating
activities all the way from basic raw material sources for component suppliers through to the ultimate end-
use product or service delivered to the customer. If each link in the chain is designed to meet the needs of
its customers, then end-customer satisfaction should ensue.

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Customers are no longer satisfied if companies comply with the legal requirements of undertaking their
activities. They are expecting companies to be more proactive with regard to their social responsibilities,
safety and environmental issues.

The impact of the changing environment of management accounting systems

Due to the changing environment management accounting systems have begun to place greater emphasis
on collecting and reporting non-financial quantitative and qualitative information on those key variables that
are necessary to compete effectively and which also support the strategies of an organization.

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