Management-Accounting-Notes | 2022 LATEST UPDATE

LESSON 1: INTRODUCTION TO MANAGEMENT ACCOUNTING Learning objectives After studying this chapter you should be able to · Explain terms such as management accounting, cost accounting, and financial accounting · Explain the main features of management accounting · Differentiate between management accounting and financial accounting Introduction Managers use management accounting information to choose strategy to communicate it and to determine how best to implement it. They use management accounting information to coordinate their decisions about designing, producing and marketing a product or service What is Management Accounting? Management accounting is very closely linked to cost accounting; so closely, in fact, that it is difficult to say where cost accounting ends and where management accounting begins. Cost accounting simply aims to measure the performance of departments, goods and services. However, management accounting is much, much more and involves: 1 The provision or information for management: Indeed, the role of the management accountant could well be described as that of an ‘information manager’. The information generated should be designed to assist management, to control business operations and to help management with decision-making. In fulfilling this role the management accounting department/section must consult with the users of the information, i.e. management, to assess its needs in terms of precisely what information is required and when, etc. The aim is, to provide management with a flow of relevant information, e.g. reports, statements, spreadsheets, etc. as and when required. A frequent flow of information (weekly or monthly) should enable management to respond to emerging problems/situations as soon as possible. The early detection of problems means earlier solutions & early action. 2. Advising management: A key part of management accounting is to advise management about the economic consequences and implications of its (proposed) decisions and alternative course of action. In particular, this advice should answer a frequently overlooked question: What happens if things go wrong? (If interest rates go up? Or if the sales target is not achieved?) 3. Forecasting, planning and control: A lot of management account-ing is concerned with the future and predetermined systems such as budgetary control and standard costing. Such systems investi-gate the differences (i.e. variances) which arise as a result of actual performance being different from planned performance in terms of budgets or standards. In addition, the management accountant should also be involved in strategic planning, e.g. the setting of objectives and the formulation of policy. The forecasting process will involve accounting for uncertainty (risk) via statistical techniques, such as probability, etc. 4. Communications: If the management accounting system is to be really effective it is essential that it goes hand in hand with a good, sound, reliable and efficient communication system. Such a system should communicate clearly by providing information in a form, which the user, i.e. managers and their subordinates, can easily understand (reports, statements, tabulations, graphs and charts). However, great care should be taken to ensure that managers do not suffer from ‘information overload’, i.e. having too much information much of which they could well do without. 5. Systems: The management accounting department/section will also be actively involved with the design of cost control systems and financial reporting systems. 6. Flexibility: Management accounting should be flexible enough to respond quickly to changes in the environment in which the company/organization operates. Where necessary information/ systems should be amended/modified. Thus, there is a need for the management accounting section/ department to be involved with the monitoring of the environment on a continuing basis. 7. An appreciation of other business functions: Those who provide management accounting information need to understand the role played by the other business functions. In addition to communi-cating effectively with other business functions, they also need to secure their cooperation and coordination, e.g. the budget preparation process relies on the existence of good communica-tions, cooperation and coordination.