Introduction to Managerial

Accounting

Managerial Accounting
Introduction to Managerial Accounting
A. DEFINITION, PURPOSE,
ACCOUNTING

CONCEPTS

AND

SCOPE

OF

MANAGERIAL

Definition
Managerial Accounting or Management Accounting is the systems and
processes used to gather data, process data, and provide useful quantitative
information to management. It also refers to reports designed to meet the needs of
internal users, particularly the managers.
According to the AAA Committee on Management Accounting, it is the
application of appropriate techniques and concepts in processing the historical and
projected economic data of an entity to assist management in establishing a plan
for reasonable economic objectives and in the making of rational decisions with a
view towards achieving these objectives.
Purpose
Management Accounting supplies the information needs of management.
This information should be more detailed, forward looking, and presented and
analyzed differently to suit the unique informational needs of management. To meet
these requirements, management accounting should have the following purposes:
1. Profit Measurement
Business performances should be measured. In the short-run, business
performance is normally expressed in terms of profitability.
2. Guide for planning
Managers plan to ensure that organizational resources and systems fit with
what is needed in the future to deliver profitability and sustained growth.
3. Standards for controlling
Actions are to be made in accordance with the plan. Errors should be
prevented from the very start. Deviations or planning gap that are
encountered while things are put into action should be immediately remedied
or corrected to execute plans as intended.
4. Basis for decision making
The primary tool of management in getting its job done is decision making. A
decision that is based on inadequate information may lead to inferior or even
damaging results. A rational decision based on quality information would
most likely lead to increased shareholders value.
Concepts
1. Accountability

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Management accounting presents information measuring the achievement of
the objectives of an organization and appraising the conduct of its internal
affairs in that process. In order that further action can be taken, based on this
information, it is necessary at all times to identify the responsibilities and key
result areas of the individuals within the organization.

2. Controllability
Management accounting identifies the elements of activities which
management can or cannot influence, and seeks to assess risk and sensitivity
factors. This facilitates the proper monitoring, analysis, comparison and
interpretation of information which can be used constructively in the control,
evaluation and corrective functions of management.

3. Reliability
Management accounting information must be of such quality that confidence
can be placed in it. Its reliability to the user is dependent on its source,
integrity and comprehensiveness.

4. Interdependency
Management accounting, in recognition of the increasing complexity of
business, must access both external and internal information sources from
interactive functions such as marketing, production, personnel, procurement,
finance, etc. This assists in ensuring that the information is adequately
balanced.

5. Relevancy

Refrain from using or appearing to use confidential information acquired in

the course of their work for unethical or illegal advantage either
personally or through third parties.

Integrity

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Practitioners of management accounting and financial management have a
responsibility to:
Avoid actual or apparent conflict interests and advise all appropriate
parties of any potential conflict.
Refrain from engaging in any activity that would prejudice their ability to
carry out their duties ethically.
Refuse any gift, favor, or hospitality that would influence or would appear
to influence their actions.
Refrain from actively or passively subverting the attainment of the
organizations legitimate and ethical objectives.
Recognize and communicate professional limitations or other constraints
that would prejudice responsible judgment or successful performance of
an activity.
Communicate unfavorable as well as favorable information and
professional judgment or opinion.
Refrain from engaging in or supporting any activity that would discredit
the profession.
Objectivity
Practitioners of management accounting and financial management have a
responsibility to:
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected
to influence an intended users understanding of the reports, comments
and recommendations presented.
Resolution of Ethical Conflict
In applying the standards of ethical conduct, practitioners of management
accounting and financial management may encounter problems in identifying
unethical behavior or in resolving an ethical conduct. When faced with significant
ethical issues, practitioners of management accounting and financial accounting
should follow the established policies of the organization bearing on the resolution
of such conflict. If these policies do not resolve the ethical conduct, such
practitioner should consider the following actions:
Discuss such problem with the immediate superior except when it appears that
the superior is involved, in which case the problem should be presented initially
to the next higher managerial level. If a satisfactory resolution cannot be
achieved when the problem is initially presented, submit the issues to the next
higher managerial level.
If the immediate superior is the Chief Executive Officer, or equivalent, the
acceptable reviewing authority may be a group, such as the audit committee,
executive committee, board of directors, or owners. Contact with levels above
the immediate superior should be initiated only with the superiors knowledge,
assuming the superior is not involved. Except when legally prescribed,
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communication of such problems to authorities or individuals not employed or

engaged by the organization is not considered appropriate.
Clarify relevant ethical issues by confidential discussion wi an objective advisor
(e.g., IMA Ethic Counseling Services) to obtain a better understanding of possible
courses of action.
Consult your own attorney as to legal obligations and rights concerning the
ethical conduct.
If ethical conflict still exists after extinguishing all levels of internal review, there
may be no other recourse on significant matters than to resign from the
organization and to submit an informative memorandum to an appropriate
representative of the organization. After resignation, depending on the nature of
the ethical conflict, it may also be appropriate to notify other parties.

B. Distinction between Financial Accounting and Management Accounting

Management Accounting is significantly different from Financial Accounting.
Their distinction relates to their orientation, emphasis, customer served, and body
of knowledge applied. Below are the basic differences between the two.
FINANCIAL ACCOUNTING
Historical in nature
Uses GAAP
Reports are wholistic
Reports are for general purpose
With unifying equation, A = L + C
Focuses on accounting and finance
Focuses on the process of preparing
the financial statements
Precision

MANAGEMENT ACCOUNTING
Deals about the future
Does not use GAAP
Reports are segmentized
Reports are for management use only
No unifying equation
Multi-disciplinar, also deals with other
areas of knowledgeand disciplines.
Concerns with the usefulness of
financial statements
Timeliness
C. Standards for internal accounting information
Internal decision makers employed by the enterprise, often referred to as
management, create and use internal accounting information not only for exclusive
use inside the organization but also to share with external decision makers. The
accounting information created and used by management is intended primarily for
planning and control decisions. The following identifies internal accounting
information standard

1. Importance of Timeliness
In order to plan for and control ongoing business processes, accounting
information needs to be timely. The competitive environment faced by many
enterprises demands immediate access to information.
2. Identity of Decision Maker

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Information that is produced to monitor and control processes needs to be
provided to those who have decision-making authority to correct problems.
3. Oriented toward the Future
Although some accounting information, like financial accounting information,
is historical in nature, the purpose in creating and generating it is to affect
the future. The objective is to motivate management to make future
decisions that are in the best interest of the enterprise, consistent with its
goals, objectives, and mission.
4. Measures of Efficiency and Effectiveness
Accounting information measures the efficiency and effectiveness of resource
usage. An assessment can be made on how effective management is in
achieving the organizations mission.

D. Applicability of the basic concepts of Financial Accounting to

Managerial Accounting
Financial management has its roots in accounting, although it may also be
regarded as a branch of applied economics. It is broadly defined as the
management of all the processes associated with the efficient acquisition and
deployment of both short- and long-term financial resources. Financial management
assists an organizations operations management to reach its financial objectives.
The management of an organization generally involves the three overlapping
and interlinking roles of strategic management, risk management and operations
management. Financial management supports these roles to enable management
to achieve the financial objectives of the shareholders. Financial management
assists in the reporting of financial results to the users of financial information, for
example shareholders, lenders and employees.
Some of the important functions in which financial accounting may be
involved in management accounting include:
Forecasting revenues and costs
Planning activities
Managing costs
Identifying alternative sources and costs of funding
Measurement and control of performance
Costing compliance with social, environmental and sustainability
requirements.
E. Management uses of accounting in organizing, planning, directing and
controlling
Managers make decision in all phases of their managerial functions. The
functions are illustrated as follows:
Planning
Decision
Making

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Organizing and
directing

Controlling

The diagram below depicts the relationship of planning and controlling and its
relevance to management:
Goals
Objectives

Plans

Budgets

Actions

Revisions

Results

Feedback

Standards

F. Controllership
Controllership may be defined as the function of business management which
combines the responsibility for accounting, reporting, measurement, auditing,
taxes, operating controls and other related areas. The seven basic functions of a
controller are (i.e., PREGPET)

Planning and controlling

This means to establish, coordinate, and administer, as an integral part of
management, an adequate plan for the control of operations.
Reporting and interpreting
The task is to compare performance with operating plans and standards and
to report and interpret the results of operations to all levels of management
and to owners of the business.

Evaluating and consulting

This includes consulting with al segments of management responsible for
policy or action concerning any phase of the operation of the business.
Government Relations
This includes supervising or coordinating the preparation of report of
government agencies.
Protection of assets
This is assuring protection for the assets of business through internal control,
internal auditing and assuring proper insurance coverage.
Economic appraisal
This includes continuously appraising economic and social forces and
government influences, and interpreting their effect upon the business.
Tax administration
This includes establishing and administering tax policies and procedures.
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G. Responsibility Accounting
Responsibility Accounting identifies the investment, revenues and
expenses assigned and controlled by a manager in a segment to monitor and asses
the performance of each part of an organization. If a manager is to be held
answerable or accountable on the performance of the segment, then he should be
given the right information to make decisions accordingly. The content of the
information should be correlated with the level of details and frequency of report to
be provided within the overriding principle of cost-benefit analysis.

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