Define management accounting

Explain the importance of cost control and planning within organizations

Describe how information can be used to identify performance within an organization

Explain the differences between financial information requirements for companies, public bodies
and society

Explain the role of the management accountant and activities undertaken

Explain the relationship between the management accountant and the managers being
served

Explain the difference between placing management accounting within the finance
function and a business partnering role within an organization

Explain the background to the formation of ICMAB

Explain the role of the ICMAB in developing the practice of management accounting.
1 The CIMA definition of management accounting

2 The IFAC definition of the domain of the professional accountant in business

3 Characteristics of financial information for operational, management and strategic

4 Levels within organizations

5 Cost object, concepts of target setting and responsibility accounting

6 Performance measurement and performance management using actual versus budget

7 Comparisons, profitability and return on capital

Financial information requirements for companies, public bodies and society including concepts
8
of shareholder value, meeting societys needs and environmental costing

9 The CIMA definition of the role of the management accountant

10 The IFAC definition of the role of the professional accountant in business

11 The nature of relationships between advisers and managers

12 The positioning of management accounting within the organization

13 The need for a professional body in management accounting ICMAB

ICMABs role in relation to its members, students, the profession of management accounting
14
and society.
 CIMA

Role of
Information
Management
Characteristics
Accountant

Purpose of
Management
Accounting
 ICMAB
International Federation of CIMA
Accountants ICAB
ACCA
Management Accounting is concerned with providing
information to managers-that is, people inside an
organization who direct and control its operations.
Management Accounting provides the essential data with which
organizations are actually run. Because it is manager
oriented, any study of management accounting must be
preceded by some understanding of what managers do, the
information managers need, and the general business
environment. As the organizations and the business
environment changes then the role of management accounting
changes.

Therefore, management accounting is internally focused. Its

aim is to allow management to make the best decisions in the
interest of the organization.
 CIMA Defines of
as
The application of the principles of accounting and financial
management to create, protect and increase value for the
shareholders of for profit and non-profit enterprises in the public and
private sectors
Management accounting is an integral part of management. It
requires the identification, generation, presentation,
interpretation and use of relevant information to

Inform strategic decisions and formulate strategy

Plan long, medium and short run operations
Determine capital structure and fund that structure
Design reward strategies for executives and shareholders
Inform operational decisions
Control operations and ensure efficient use of resources
Measure and Report financial and non-financial performance to
management and other stakeholders
Safeguard tangible and intangible assets
Implement corporate governance procedures, risk
management and internal controls
Financial accounting is used to present the
financial health of an organization to its external
stakeholders, Board of directors, stockholders,
financial institutions and other investors are the
audience for financial accounting reports.

Financial accounting presents a specific period of

time in the past and enables the audience to see
how the company has performed.

Financial accounting reports must be filed on an

annual basis, and for publically traded companies, the
annual report must be made part of the public
record.
The differences between management accounting and financial
accounting include:

Management accounting provides information to people within an

organization while financial accounting is mainly for those outside it,
such as shareholders

Financial accounting is required by law while management accounting

is not. Specific standards and formats may be required for statutory
accounts such as in the IAS and IFRS.

Financial accounting covers the entire organization while management

accounting may be concerned with particular products or cost
centers.

Managerial accounting is used primarily by those within a company or

organization. Reports can be generated for any period of time such as
daily, weekly or monthly. Reports are considered to be "future
looking" and have forecasting value to those within the company.

Financial accounting is used primarily by those outside of a company or

organization. Financial reports are usually created for a set period of time,
such as a financial year or period.
Financial reports are historically factual and have predictive
value to those who wish to make financial decisions or
investments in a company.

Management Accounting is the branch of Accounting that deals

primarily with confidential financial reports for the exclusive
use of top management within an organization. These reports are
prepared utilizing scientific and statistical methods to arrive
at certain monetary values which are then used for decision
making. Such reports may include:

Sales Forecasting reports

Budget analysis and comparative analysis
Feasibility studies
Merger and consolidation reports

Financial Accounting, on the other hand, concentrates on the

production of financial reports, including the basic reporting
requirements of profitability, liquidity, solvency and stability.
Reports of this nature can be accessed by internal and external
users such as the shareholders, the banks and the creditors.
Management Accounting
relates to the provision of appropriate information,
including cost information for decision-making, planning,
control, and performance evaluation.

Management accounting is one of the core functions of businesses

to help plan, evaluate and control businesses. It relates to
the provision of appropriate information for decision-
making.

It is critical that management accounting information is prepared,

provided, and used on a timely basis. Late information is no
information.

It is important for management accounting information to be

relevant, and such relevant information needs to be obtained
efficiently and effectively.

Cost-benefit evaluation is a key concept in management

accounting.
Cost accounting

defines costs and valuates inventories to help

managers to run businesses

Cost accounting defines costs and valuates

inventories to help managers to run
businesses.
Planning

Control

Decision
Making
 Identify
alternatives.

Select alternative that does

the best job of furthering
organizations objectives.

Develop budgets to guide

progress toward the
selected alternative.
Planning involves establishing the objectives of an organization and
formulating relevant strategies that can be used to achieve those
objectives.

In order to make plans (budgets), it helps to know what has happened

in the past so that decision about what is achievable in the future
can be made. For example, if a manager is planning future sales volume,
they need to know what sales volume have been in the past.

Planning can be done at different levels in an organization:

Strategic-long term planning carried out by the highest level of the

organization.
Management-Short-to medium-term planning, carried out by middle level
management
Operational-Short term planning for day to day operations.
 The control function ensures
that plans are being followed.

Feedback in the form of performance reports

that compare actual results with the budget
are an essential part of the control function.
Once planning has been carried out, target can be set. This
allows for evaluation for performance.

Information relating to the actual results of an organization

must be gathered and compared to the targets. The
differences(variances) can be reported to management.
This type of information facilitates manages to control their
operations.

Many measures can be used to measure performance within an

organizations, it is largely dependent on the type of organization.
Some common performance measurements are:

Variances-Comparison of actual results against budgeted results.

Profitability measures-absolute measures such as gross profit or

net profit, or relative measures such as gross margin %.

Return measures-Financial ratio measures such as return on

capital.
 Formulating long-and Begin
short-term plans
(Planning)

Comparing actual
Implementing
to planned Decision
plans (Directing
performance Making
and Motivating)
(Controlling)

Measuring
performance
(Controlling)
Decision making involves considering information that has
been provided and making an informed decision.

In most situations, decision making involves making a

choice between two or more alternatives.

Managers need reliable information to compare the

different courses of action available and understand what
consequences might be of choosing each of them.
The operations of organizations generate a huge
quantity of data. Data consist of raw facts and
statistics before they have been processed. Once
data have been processed into a useful from, they
are called information.

Managers need ACCURATE information in order to

make good decisions.
Accurate

Complete

Cost Beneficial

Understandable

Relevant

Authoritative

Timely

Easy to use
Strategic Managerial Operational
Management need to know about developments in their markets and in
the economic situation.

They also need to know about any new technology that emerges, and
about the activities of competitors. Decision made at this level are:

Will have a large impact on the whole

1 organization

2 Will be long term

3 Tend to be unstructured
Management at this level might want to know about issues such as product
or service quality, speed of handling customer complaints,
customer satisfaction levels, employee skills levels and employee
morale. Decision made at this level:

Will have a medium impact on the whole

1 organization

2 Will be medium term

Will act as a bridge between the strategic

3 and operational levels
At this level, management want to know about the number of rejects per
machine, the lead time for delivering materials and the number of
labor and machine hours available. Decision made at this level:

Will have a small impact on the whole

1 organization; they will normally only affect
one business unit or department

2 Will be short term

3 Tend to be highly structured

The traditional management accountant
was largely involved in reporting business
results to management , but this is no longer
the case.

Management accountants today are seen as

value-adding business partners and are
expected to not only forecast the future of
the business, but to assist in delivering this
future by identifying opportunities for
enhancing organizational performance.
Management accountants now work alongside
business managers as mentors, advisors and
drivers of performance.

Management accountants are an integral

part of any business, providing a variety of
information to management for the purpose
of planning, control and decision making.
Management Accountants help organizations establish viable strategies and
convert them into profit (in a commercial context) or into a value for money (in
a not-for-profit context). To achieve this they work as an integral part of multi-
skilled management teams in carrying out the:

1 Formulation of policy and setting of corporate objectives

Formulation of strategic plans derived from corporate

2 objectives

3 Formulation of short-term operation plans

4 Acquisition and use of finance

Design of systems, recording of events and transactions

5 and management of information systems

Generation, communication and interpretation of financial

6 and operating information for management and other
stakeholders
 Provision of specific information and analysis on which
7 decisions are based

Monitoring of outcomes against plans and other

8 benchmarks and the initiation of responsive action for
performance improvement

Derivation of performance measures and benchmarks,

9 financial and non-financial, quantitative and
qualitative, for monitoring and control

Improvement of business systems and processes

10 through risk management and internal audit review
The IFAC state that the roles that
professional accountants in business perform
include:

Implementing and maintaining

operational and fiduciary controls

Providing analytical support for

strategic planning and decision making

Ensuring that effective risk

management processes are in place

Assisting management in setting the

tone for ethical practices
Accountants can be part of an internal finance
function within an organization, or may be a part of
a business partnering role.

When deciding on their structure, companies need to

decide where to position the management
accounting function.

Dedicated Business Partners

Shared Service Centre (SSC)

Business Process Outsourcing Centers

(BPO)
With this approach, the management
accountant is an integral part of the
business area that they support. This
brings many benefits to both the
accountants and the management of the
area.

The relationship between the management

accountant and the managers of the
business area is an important business
relationship. To work in the best interests of
the company, they must work as business
partners and the relationship must be
based on trust, honesty and respect.
From the accountants point of view,
they must:

Act professionally at all times: as

representatives of the accounting
profession, they are expected to show
professional care and attention in the way
they conduct themselves.
Demonstrate technical awareness: can
be demonstrated by being a qualified
member of ICMAB.
Demonstrate business awareness: they
must be aware of the nature of the
business and the needs of the managers.
Act with integrity: the work of
management accountant should be done in
the best interests of the company and
society.
From the managers point of view,
they must:

Trust the accountant and the

information being provided
Respect the accountant's knowledge,
experience and profession
Be able to discuss all aspects of work
Confidentially with the accountant
Be able to State clearly what their
requirements are

It is important to remember that both

the management accountant and the
managers of the business want the
business to succeed and they have to
work together to achieve this.
An alternative approach is to set up a shared service
center (SSC). This is where the whole finance
function is brought together as one center and this
center provides all the accounting needs of the whole
organization.

The advantage of this approach are:

Reduced headcount, premises and associated

costs

The central team can become very

experienced and adopt best practice

Consistency of Management Information

throughout the Organization
BPO is contracting with a third party (external supplier) to
provide all or part of a business process or function.
Typically the functions which are outsourced are procurement,
ordering and reporting functions, although decision support and
other corporate functions may also be outsourced.

The advantages of this approach are:

This comes from headcount reduction and

reduction in property and associated
costs

This can bring new expertise into the

organization

If only the more routine functions are

outsourced, the retained finance function
can concentrate on their role of providing
the best information for management
decision making.
The disadvantages of this approach are:

The work of being carried out remotely so

management are unable to supervise the
function on a day-to-day basis

Often the systems containing the information

are not accessible to the organization,
meaning that they are only able to get the
information the outsources provide. It can
also become very difficult to bring the
function back in house

Important information could end up getting

into the wrong hands

Quality requirements must be specified when

the contract is set up and quality control
must be put in place to monitor the work of
the outsourced function
ICAMB has a code of ethics which all members and students are required to comply
with. The code of ethics is made up of five fundamental principles:

Being straightforward, honest and truthful in all

professional and business relationships

Not allowing bias, conflict of interest or the influence

of other people to override your professional judgment

An ongoing commitment to your level of professional

knowledge and skill

You should not disclose professional information

unless you have specific permission, or a legal or
professional duty, to do so

Compliance with relevant laws and regulations. You

must also avoid any action that could negatively affect
the regulation of the profession