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Management Accounting
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Management Accounting
Oxford Fajar Sdn. Bhd. (008974-T) 2011
CHAPTER
Introduction to
Management
Accounting
1
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Management Accounting
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After studying this chapter, you should be able to:
Define management accounting.
Understand how management accounting information
can assist managers in decision-making, planning,
directing and controlling.
Explain the differences between management
accounting and financial accounting, and how they are
related to cost accounting.

LEARNING OBJECTIVES
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Management Accounting
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Describe the characteristics of a good management
accounting information.
Understand responsibility accounting systems in
facilitating management accounting information in a
company.
Understand the importance of behavioural implication
of management accounting system.
Identify major changes in management accounting
practices in present-day business environment.

LEARNING OBJECTIVES (cont.)
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Management Accounting
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DEFINITION OF MANAGEMENT
ACCOUNTING
Chartered Institute of Management Accounting
(CIMA), UK:
Management accounting the process of
identification, measurement, accumulation,
analysis, preparation, interpretation and
communication of information used by
management to plan, evaluate and control
within an entity and to assure appropriate usage
and accountability for its resources.
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Management Accounting
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DEFINITION OF MANAGEMENT
ACCOUNTING (cont.)
Institute of Management Accountants (IMA),
USA:
Management accounting is a profession that
involves partnering in management decision-
making, devising planning and performance
management systems, and providing expertise in
financial reporting and control to assist
management in the formulation and
implementation of an organizations strategy.
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Management Accounting
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American Institute of Certified Public
Accountants (AICPA):
Management accounting as a practice extends
the following areas i.e. Strategic Management,
Performance Management and Risk
Management.
DEFINITION OF MANAGEMENT
ACCOUNTING (cont.)
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Management Accounting
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MANAGEMENT ACCOUNTING
Deals with the provision of financial information
as well as non-financial information that can
assist decision makers or management
accounting users to take informed decision.
Creates value to organizations in both private
and public companies.
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Management Accounting
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Assist in providing answers such as:
What are the resources needed to produce a
product?
What is the relevant price we should charge
for our product?
Should we produce internally or outsource?
MANAGEMENT ACCOUNTING
(cont.)
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Management Accounting
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ROLE OF MANAGEMENT
ACCOUNTING IN ORGANIZATION
Management accounting assists managers in
the following activities to ensure effective and
efficient use of company resources:
Decision-making
Planning
Directing
Controlling
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Management Accounting
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ROLE OF MANAGEMENT
ACCOUNTING IN ORGANIZATION
(cont.)
1. Decision making:
Act of choosing from amongst a competing set of
alternatives
Management accountants determine what kind of
data are needed, present data in a comprehensive
way and explain analysis for making decisions
Uses analytical tools in management accounting to
give relevant information for short-term decision-
making
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2. Planning
Involves selecting a course of action and
specifying how the action is implemented
Budgeting, the process of developing budgets; in
general, is described as part of the planning
process
3. Directing
Running organization on day to day basis to
ensure the plans are executed
Managers need to have the ability to motivate and
direct people
ROLE OF MANAGEMENT ACCOUNTING
IN ORGANIZATION (cont.)
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Controlling
Monitoring a plans implementation in ensuring
the plan is being adhered to
Providing feedback or reasons as to why the
targets have not been achieved is an important
key in effective control
Management accounting typically uses performance
report to compare the budgeted to actual results.
Differences between budgeted and actual results
are called variances.

ROLE OF MANAGEMENT ACCOUNTING
IN ORGANIZATION (cont.)
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MANAGEMENT ACCOUNTING VS.
FINANCIAL ACCOUNTING
Financial Accounting Management Accounting
Users
External parties: Shareholders,
investors, creditors and
government agencies
Internal parties: Managers and
employees
Emphasis
Focus on reporting past
activities
Focus on activities that influence
future decisions
Format of report
Must be detailed and accurate
and follow a certain format e.g.
Annual Report
Not necessarily accurate or
detailed. A format is entirely at
the managements discretion e.g.
reports of sales performance by
divisions, products or segments
Regulation
Generally Accepted Accounting
Principles (GAAP)
Not required to follow GAAP
Legislation
Required by law. Mandatory for
companies
Not mandatory.
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Financial Accounting Management Accounting
Segmentation of
reporting
The organization as a whole
Segmentation reporting: by
products, customers, etc.
Frequency
Infrequent interval: Once a year,
half yearly or quarterly
Frequent intervals: Daily, weekly,
etc.
MANAGEMENT ACCOUNTING VS.
FINANCIAL ACCOUNTING (cont.)
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Management Accounting
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COST ACCOUNTING
CIMA definition:
Gathering of cost information and its attachment
to cost objects, the establishment of budgets,
standard costs and actual costs of operations,
processes, activities or products; and the analysis
of variances, profitability or the social use of
funds.
Cost accounting involves the process of
gathering, determining and reporting costs of
products or activities.
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Management Accounting
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LINKAGES BETWEEN MANAGEMENT
ACCOUNTING, FINANCIAL ACCOUNTING
AND COST ACCOUNTING
Cost
Accounting
System
Accumulates cost
information
Management
Accounting
Collects
information for
decision-making,
planning,
directing and
controlling
Financial
Accounting
Publishes
financial
statements and
other financial
reports

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CHARACTERISTICS OF
MANAGEMENT ACCOUNTING
INFORMATION
Relevant
Information is able to influence the decision that
has to be made
Reliable
Information that can be trusted by users
Must be free from bias and significant errors
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Understandable
Information that can be easily understood by
users
Simple terms should be used and reports should
not be too complicated
Timely
Information must be provided to users in a timely
manner
CHARACTERISTICS OF MANAGEMENT
ACCOUNTING INFORMATION (cont.)
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CHARACTERISTICS OF
MANAGEMENT ACCOUNTING
INFORMATION (cont.)
Comparable
Information must be able to be compared
between alternatives
Cost benefits features (materiality)
Information collection provides benefits greater
than cost of acquiring them
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RESPONSIBILITY ACCOUNTING
SYSTEMS
A reporting system that identifies the person or a
department responsible for a particular financial
outcome
Traces costs, revenues or profits to the individual
managers who are primarily responsible for taking
decision about the cost, revenue or profits
A responsible center is an organizational unit on
which a manager has control or responsible for its
financial outcomes.
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TYPES OF RESPONSIBILITY
CENTERS
Types Responsible on
Cost center Cost only
Revenue center Revenue only
Profit center Cost and revenue
Investment center Cost, revenue and investment
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BEHAVIOURAL IMPLICATIONS OF
MANAGEMENT ACCOUNTING
Management accounting systems concerned
both instrumental and behavioural aspects.
Instrumental aspect helps managers to take
wise economic decision by providing them with
the desired information, in appropriate format
and preferred frequency.
Behavioural aspect deals with motivation and
encouragement of managers and subordinates,
encouraging them to take action in line with the
organizations desires.
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BEHAVIOURAL IMPLICATIONS OF
MANAGEMENT ACCOUNTING (cont.)
Behavioural aspect is importance because the
reaction of management and subordinates to the
usage of instrumental aspect of management
accounting will significantly affect the course of
events in an organization.
These behavioural tendencies of people must be
dealt with in a proper manner.
With a better understanding of the human
behaviour, management accountant will be able to
provide information in a better way.
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Management Accounting
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CURRENT BUSINESS
ENVIRONMENT
Changes in business environments:
Intense competition due to globalization and
technology advancement have changed the
nature of business activities.
Growing shift and businesses are moving away
from manufacturing to services and towards the
provision of services. Thus, increasing the
importance of advanced human skills in many
business.
Changes of focus from cost leadership to
customer focused in business strategy.
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CURRENT BUSINESS
ENVIRONMENT (cont.)
New techniques in the current business
environment
Total Quality Management (TQM): Managers
strive to create an environment that will enable
organizations to produce defect free products and
services.
Just in Time (JIT): Goods are manufactured or
purchased just in time for usage by applying
demand pull system.
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Advanced Manufacturing Technology (AMT):
Consist of technology advancements in automation
used in production process.
It ranges from automation to fully integrated
factories and comprises specific technologies such
as robotics, flexible manufacturing systems as well
as integration aspect of manufacturing into
computer integrated manufacturing.

CURRENT BUSINESS
ENVIRONMENT (cont.)
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CHANGES IN MANAGEMENT
ACCOUNTING PRACTICES
More accurate costing systems:
Activity Based Costing (ABC): More accurate
approach in allocating cost overhead
Target costing: Method of determining the cost of
a product or service based on the price (target
price) that customers are willing to pay
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Kaizen costing: Costing method which aims at
maintaining the present cost levels for
products being manufactured via systematic
efforts to achieve the desired cost level
Life cycle costing: Estimates and accumulates
costs over a products entire life cycle
CHANGES IN MANAGEMENT
ACCOUNTING PRACTICES (cont.)
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CHANGES IN MANAGEMENT
ACCOUNTING PRACTICES (cont.)
Increased role of management accounting in
strategy:
Strategic cost management (SCM) refers to the
process of managing costs to the companys
advantage
Strategic management accounting (SMA) refers
to the accounting aspect of strategic
management.
It is an integrated management approach which
draws together all individual elements involved in
planning, implementing and controlling business
strategy.
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Comprises a range of techniques such as
benchmarking, competitor cost analysis, attribute
costing and strategic performance measurements.
Increased importance of non-financial performance
measured using methods such as balanced score
card and benchmarking.
Change in the role of management accountants from
a bean counter to a strategic partner in the company.


CHANGES IN MANAGEMENT
ACCOUNTING PRACTICES (cont.)