TOPIC Introduction to

Management
1 Accounting

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 LEARNING OBJECTIVES

After discussing this chapter, you should be able to:

 Define management accounting.
 Understand how the nature and purpose of internal reporting.
 Explain the differences between management accounting and financial
accounting, and how they are related to cost accounting.
 Describe the characteristics of a good management accounting
information.
 Understand the importance of behavioural implication of management
accounting system.

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What is management accounting?

The processes and techniques that focus

on the effective and efficient use of
organisational resources to support
managers in their task of enhancing both
customer value and shareholder value
(IFAC,2002)

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 What is management accounting?
 Customer value
◦ The value that a customer places on particular
features of a product or service
 Shareholder value
◦ The value that shareholders or owners place on a
business
 Trade-offs between actions that increase
customer value and actions that increase
shareholder value

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 What is management accounting?
 Resources
◦ Financial and non-financial
◦ Organisational capabilities and competencies
 Effective use of resources
◦ The successful achievement of an objective
 Efficient use of resources
◦ The least possible consumption of resources to
achieve an objective

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 Management accounting systems
 Systems that produce information required by
managers to create value and manage resources
 Information provided on a regular basis
◦ Estimates of costs of producing goods and services
◦ Information for planning and controlling operations
◦ Information for measuring performance
 Ad-hoc information to satisfy managers’ short- and
long-term decision-making needs

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 CHARACTERISTICS OF MANAGEMENT
ACCOUNTING INFORMATION
 Relevant
◦ Means the information reduces uncertainty, improves
decision making by being able to make predictions
 Reliable / Accurate
◦ Means the information is free from error or bias and
accurately represents the activities of the organization.
 Timely
◦ Means the information is provided in time for decision
makers to make decision.
 Understandable
◦ Means the information is presented in a useful and logical
format.

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CHARACTERISTICS OF MANAGEMENT
ACCOUNTING INFORMATION
 Cost benefits features (materiality)
◦ Information collection provides benefits greater than
cost of acquiring them
 Comparable
◦ Information must be able to be compared between
alternatives

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Management accounting information
 Focuses on the needs of managers within the
organisation
 Flexibility in types of information provided
 Influenced by managers’ information needs
and differences in production and service
technologies
 Used by senior managers through to
operational managers

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Management accounting and financial accounting
information
 Financial accounting
◦ Preparing and reporting accounting information
for parties outside the organisation
◦ Constrained by rules and regulations
◦ Uses historical information
 Management accounting
◦ Content and design determined by managers’
needs

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Management accounting and financial
accounting information
 Costing systems
◦ Systems that estimate the cost of goods and
services as well as the cost of organisational
units, such as departments
◦ Used for both management and financial
accounting

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LINKAGES BETWEEN MANAGEMENT
ACCOUNTING, FINANCIAL ACCOUNTING
AND COST ACCOUNTING
Cost
Accounting
System
Accumulates cost
information

Management Financial
Accounting Accounting
Collects Publishes
information for financial
decision-making, statements and
planning, other financial
directing and reports
controlling

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Management accounting vs financial
accounting

Exhibit 1.1 page 10

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 Management accountants within
organisations
 Most large organisations have a ‘finance
function’
 Accounting staff may also be located in
operating divisions (e.g. an accountant located
in the factory)
 Often financial accounting function is distinct
from management accounting function

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 Management accounting processes
and techniques
 Support the organisation’s formulation and
implementation of strategy
 Contribute to improving competitive
advantage
 Provide information for managing resources
through planning and control systems
 Provide estimates of the costs of outputs

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 Management accounting
and strategy
 Vision
◦ The desired future state or aspiration of an
organisation
◦ Used by senior managers to focus attention and
energies of staff
 Mission statement
◦ Defines the overall purpose and boundaries of
the organisation

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 Management accounting
and strategy
 Objectives (or goals)
◦ Specific aims of the organisation
◦ Often quantified
◦ Relate to a specific period of time
 Strategies
◦ Long-term direction to achieve
organisation’s mission and objectives
◦ Focus on organisation’s resources to create value
for customers and shareholders

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 Major decisions in
formulating strategies

• In what business will we operate?

• How should we compete in that business?
• What systems and structures should we
have in place to support our strategies?

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Organizational Strategies
 Corporate strategy
 Business strategy
 Strategy implementation

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 Contributing to strategy
 Strategic planning
◦ Long-term planning
◦ Involves corporate strategy decisions
◦ Draws on management accounting information

 Implementing strategies
◦ Managers share responsibility for implementation
◦ Linking long-term plans to the budgeting system
◦ Compare actual outcomes to budgets and other targets

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 Contributing to strategy
• Maintaining competitive advantage
• Advantages of one business over another that are difficult
to imitate
◦ Cost leadership
 Economies of production
 Superior process technologies
 Tight cost control
◦ Product differentiation
 Superior quality
 Customer service
 Delivery performance
 Product features
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 Changing Role of Management
Accounting
Stage 1 : Cost Determination and Financial Control
Prior to 1950, the focus was on cost determination and financial control,
through the use of budgeting and cost accounting technologies
Stage 2 : Transition to Management Accounting
By 1965, the focus had shifted to the provision information for management
planning and control, through the use of such technologies as decision
analysis and responsibility accounting
Stage 3 : Japanese Influence and Transition to Strategic Management
Accounting
By 1985, attention was focused on the reduction of waste in resources used
in business processes, through the use of process analysis and cost
management technologies.
Stage 4 : Widespread Use of Strategic Management Accounting
(SMA) Practices
Beyond the mid-1980s, attention had shifted to the generation or creation of
value through the effective use of resources, through the use of
technologies, which examines the drivers of customer value, shareholder
value and organizational innovation (IFAC, 1998)

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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
organization’s desires.

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BEHAVIOURAL IMPLICATIONS OF
MANAGEMENT ACCOUNTING
 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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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

 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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 CURRENT BUSINESS ENVIRONMENT

– 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.

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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
– 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 product’s entire life cycle
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CHANGES IN MANAGEMENT
ACCOUNTING PRACTICES
 Increased role of management accounting in
strategy:
◦ Strategic cost management (SCM) refers to the
process of managing costs to the company’s
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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 CHANGES IN MANAGEMENT
ACCOUNTING PRACTICES
• 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 scorecard and
benchmarking.
 Change in the role of management accountants from a
bean counter to a strategic partner in the company.

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END OF TOPIC 1

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