Management_Accounting

It has been found that management accounts are invaluable when it comes to a company making important and timely management decisions about their business. It is clear that different businesses will have different management accounting needs and this will depend on the areas that the business finds are most important to them. A few examples of the areas that may be as follows; - The sales process: this includes distribution, debtors and pricing. - The purchasing process – this area includes records of stock levels and creditors. - Records regarding employees. - A fixed asset register Companies are under no legal obligation to draw up management accounts; however, many find that it makes running a business so much simpler if they do prepare the accounts. In fact, many companies produce them as regularly as monthly or quarterly. Management accounts are usually for analysing the recent past performances of the business and also usually study elements that look at the future of the company as well. This can include looking at profit forecasts, cashflow and sales. The figures found from this analysis are compared against figures that have been gathered from past forecasts and budgets. The information gathered for the management accounting is usually broken down so that the performance of different parts of the company can all be measured separately to ensure that they are all working to the best of their abilities. An example of this is that a specific product could be monitored in order to see how well it has done across different outlets. Businesses who are selling a variety of products are advised to produce a financial breakdown for each of them. This will allow you to make sure that very profitable products are not subsidising those that are failing to sell as well. By organising the financial side of your company in this way, you will be able to monitor trends in the business, therefore highlighting any variations in your income and spending that may require your attention. This will save companies from resorting to taking out large loans in order to subsidise their business and will therefore have a positive effect on the financial side of the company in the long run. It is clear that different businesses will have different management accounting needs and this will depend on the areas that the business finds are most important to them. The information that has been gathered for the management accounting tends to be broken down so that the productivity of separate parts of the business can be monitored. By organising your business in this way, you can see where changes are needed and save yourself from having to take out any large loans . Read more at http://www.articlealley.com/article_694221_19.html'kcplink=1 Managerial accounting is concerned with providing information to managers-that is, people inside an organization who direct and control its operation. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which the organizations are actually run. Managerial accounting is also termed as management accounting or cost accounting. Financial accounting provides the scorecard by which a company's overall past performance is judged by outsiders. Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed-comparing actual results to plans and to benchmarks. Some reports provide timely, frequent updates on key indicators such as orders received, order backlog, capacity utilization, and sales. Other analytical reports are prepared as needed to investigate specific problems such as a decline in the profitability of a product line. And yet other reports analyze a developing business situation or opportunity. In contrast, financial accounting is oriented toward producing a limited set of specific prescribed annual and quarterly financial statements in accordance with Generally Accepted Accounting Principles (GAAP). (Ray H. Garrison, Eric W. Noreen 1999).   ► | Financial accounting vs. Managerial accounting:Managerial accounting differs from financial accounting in a number of ways that are briefly discussed below | Financial Accounting Vs Managerial Accounting - Difference between financial and Managerial Accounting: Financial accounting reports are prepared for the use of external parties such as shareholders and creditors, whereas managerial accounting reports are prepared for managers inside the organization. This contrast in basic orientation results in a number of major differences between financial and managerial accounting, even though both financial and managerial accounting often rely on the same underlying financial data. In addition to the to the differences in who the reports are prepared for, financial and managerial accounting also differ in their emphasis between the past and the future, in the type of data provided to users, and in several other ways. These differences are discussed in the following paragraphs. Emphasis on the Future: Since planning is such an important part of the manager's job, managerial accounting has a strong future orientation. In contrast, financial accounting primarily provides summaries of past financial transactions. These summaries may be useful in planning, but only to a point. The future is not simply a reflection of what has happened in the past. Changes are constantly taking place in economic conditions, and so on. All of these changes demand that the manager's planning be based in large part on estimates of what will happen rather than on summaries of what has already happened. Relevance of  Data: Financial accounting data are expected to be objective and verifiable. However, for internal use the manager wants information that is relevant even if it is not completely objective or verifiable. By relevant, we mean appropriate for the problem at hand. For example, it is difficult to verify estimated sales volumes for a proposed new store at good Vibrations, Inc., but this is exactly the type of information that is most useful to managers in their decision making. The managerial accounting information system should be flexible enough to provide whatever data are relevant for a particular decision. Less Emphasis on Precision: Timeliness is often more important than precision to managers. If a decision must be made, a manager would rather have a good estimate now than wait a week for a more precise  answer. A decision involving tens of millions of dollars does not have to be based on estimates that are precise down to the penny, or even to the dollar. In fact, one authoritative source recommends that, "as a general rule, no one needs more than three significant digits., this means, for example, that if a company's sales are in the hundreds of millions of dollars, than nothing on an income statement needs to be more accurate than the nearest million dollars. Estimates that accurate to the nearest million dollars may be precise enough to make a good decision. Since precision is costly in terms of both time and resources, managerial accounting places less emphasis on precision than does financial accounting. In addition, managerial accounting places considerable weight on non monitory data, for example, information about customer satisfaction is tremendous importance even though it would be difficult to express such data in monitory form. Segments of an Organization: Financial accounting is primarily concerned with reporting for the company as a whole. By contrast, managerial accounting forces much more on the parts, or segments, of a company. These segments may be product lines, sales territories divisions, departments, or any other categorizations of the company's activities that management finds useful. Financial accounting does require breakdowns of revenues and cost by major segments in external reports, but this is secondary emphasis. In managerial accounting segment reporting is the primary emphasis. Generally Accepted Accounting Principles (GAAP): Financial accounting statements prepared for external users must be prepared in accordance with generally accepted accounting principles (GAAP). External users must have some assurance that the reports have been prepared in accordance with some common set of ground rules. These common ground rules enhance comparability and help reduce fraud and misrepresentations, but they do not necessarily lead to the type of reports that would be most useful in internal decision making. For example, GAAP requires that land be stated at its historical cost on financial reports. However if, management is considering moving a store to a new location and then selling the land the store currently sits on, management would like to know the current market value of the land, a vital piece of information that is ignored under generally accepted accounting principles (GAAP). Managerial AccountingNot Mandatory: Financial accounting is mandatory; that is, it must be done. Various out side parties such as Securities and exchange commission (SEC) and the tax authorities require periodic financial statements. Managerial accounting, on the other hand, is not mandatory. A company is completely free to do as much or as little as it wishes . No regularity bodies or other outside agencies specify what is to be done, for that matter, weather anything is to be done at all. Since managerial accounting is completely optional, the important question is always, "Is the information useful'" rather than, "Is the information required' Managerial accounting is managers oriented therefore its study must be preceded by some understanding of what managers do, the information managers need, and the general business environment. Accordingly we shall briefly examine these subjects. |   |   | Need for Managerial Accounting Information: Every organization-large and small-has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations. Every where mangers carry out three major activities-planning, directing and motivating, and controlling. Planning: Planning involves selecting a course of action and specifying how the action will be implemented. The first step in planning is to identify the alternatives and then to select from among the alternatives the one that does the best job of furthering the organization's objectives. While making choices management must balance the opportunity against the demands made on the companies resources. The plans of management are often expressed formally in budgets, and the term budgeting is applied to generally describe the planning process. Budgets are usually prepared under the direction of controller, who is the manager in charge of the accounting department. Typically, budgets are prepared annually and represent management's plans in specific, quantitative terms. Directing and Motivating: In addition to planning for the future, managers must oversee day-to-day activities and keep the organization functioning smoothly. This requires the ability to motivate and affectively direct people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and make many small decisions that affect customers and employees. In effect, directing is that part of the manager's work that deals with the routine and the here and now. Managerial accounting data, such as daily sales reports are often used in this type of day-to-day decision making. Controlling: In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals operations are on track, is the key to effective control. In sophisticated organizations, this feedback is provided by detailed reports of various types. One of these reports, which compares budgeted to actual results, is called a performance report. Performance report suggest where operations are not proceeding as planned and where some parts of the organization may require additional attention. The Planning and Control Cycle: The work of management can be summarized in a model. The model, which depicts the planning and control cycle, illustrates the smooth flow of management activities from planning through directing and motivating, controlling, and then back to planning again. all of these activities involve decision making. So it is depicted as the hub around which the activities revolve. History of Managerial Accounting: Managerial accounting has its roots in the industrial revolution of the 19th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets. Since there were no external shareholders and little unsecured debt, there was little need for elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and provided the essential information needed to manage the early large scale production of textile, steel, and other products. After the turn of the century, financial accounting requirements burgeoned because of new pressures placed on companies by capital markets, creditors, regulatory bodies, and federal taxation of income. Johnson and Kaplan state that "many firms needed to raise funds from increasingly widespread and detached suppliers of capital. To tap these vast reservoirs of outside capital, firms' managers had to supply audited financial reports. And because outside suppliers of capital relied on audited financial statements, independent accountants had a keen interest in establishing well defined procedures for corporate financial reporting. The inventory costing procedure adopted by public accountants after the turn of the century had a profound effect on management accounting. As a consequence, for many decades, management accountants increasingly focused their efforts on ensuring that financial accounting requirements were met and financial reports were released on time. The practice of management accounting stagnated. In the early part of the century, as product line expanded operations became more complex, forward looking companies saw a renewed need for management-oriented reports that was separate from financial reports. But in most companies, management accounting practices up through the mid-1980s were largely indistinguishable from practices that were common prior to world war I. In recent years, however, new economic forces have led to many important innovations in management accounting. Code of Conduct for Management Accountants: Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the Institute of management Accountants has promulgated the following standards of ethical conduct for practitioners of management accounting and financial management. Adherence to these standards internationally is integral to achieving objective of management accounting. Competence: Practitioners of management accounting and financial management have a responsibility to: * Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. * Perform their professional duties in accordance with relevant laws, regulations and technical standards. * Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information Confidentiality: Practitioners of management accounting and financial management have a responsibility to: * Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. * Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality * 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: Practitioners of management accounting and financial management have a responsibility to: * Avoid actual or apparent conflicts of interest 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 either activity or passively subverting the attainment of the organization's legitimate and ethical objectives. * Recognize and and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. * Communicate unfavorable as well as favorable information and professional judgment or opinion. * Refrain from engaging 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 user's understanding of the reports, comments, and recommendations presented. Resolution of Ethical Conflicts: 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 conflict. When faced with significant ethical issues practitioners of management accounting and financial management should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such practitioner should consider the following course of action. * Discuss such problems with immediate superior except when it appears that superior is involved, in which case the problem should be presented to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issue 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, board of trustees, or owners. Contact with a level above the immediate superior should be initiated only with the superior's knowledge. assuming the superior is not involved. Except where legally prescribed, 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 with an objective adviser to obtain a better understanding of possible course of action * Consult your own attorney as to legal obligations and rights concerning the ethical conflict. * If the ethical conflict still exists after exhausting 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. * The Role of Management Accounting in the Organization The purpose of management accounting in the organization is to support competitive decision making by collecting, processing, and communicating information that helps management plan, control, and evaluate business processes and company strategy. The interesting thing about management accounting is that it is rare to find an individual within a company with the title of “management accountant.” Often many individuals function as accountants within the organization, but these individuals typically operate as financial accountants, costs accountants, tax accountants, or internal auditors. However, the ability to develop and use good management accounting (which covers a lot more ground than the product costing done by cost accountants) is actually an important ability for many individuals, including finance professionals, operational and marketing managers, top-level executives, and information technologists. Generally, in a very large company, each division has a top accountant called the controller, and much of the management accounting that is done in these divisions comes under the leadership of the controller. On the other hand, the controller usually reports to the vice president of finance for the division who, in turn, reports to the division’s president and/or overall chief financial officer (CFO). All of these individuals are responsible for the flow of good accounting information that supports the planning, control, and evaluation work that takes place within the organization. NETWORK Don’t make the mistake of believing that the career path of an accountant is limited to auditing and tax work. Spend some time at the AICPA Accounting career web site at http://www.aicpa.org/nolimits/index.htm. What are the basic career paths that an accountant can follow' Be sure to review some of the work that an accounting professional might pursue within each of these career paths. You may also want to spend time at http://www.accounting.com/ to see what actual jobs are currently available to accountants. As should be clear by now, the process of management accounting is the process of creating and using cost, quality, and time-based information to make effective decisions within the organization. Many people in the organization play a role in this process. The internal audit department has the responsibility of ensuring that controls are followed and operations are efficient. Financial accounting, while providing information to outsiders (such as creditors, investors, and government agencies), must also provide relevant financial reports to decision makers within the organization. Systems professionals have the responsibility to process information so that it is available to management in formats useful for decision making. Tax department experts make sure that the organization complies with the tax laws and pays no more than its legally obligated tax liability, but these people also participate in good planning, control, and evaluation of processes and decisions that will affect future tax expense exposure. Finally, cost accounting obviously plays a key role in tracking and reporting relevant product and service costs. Overall, the controller works to bring together all this information as an integral part of the planning, controlling, evaluating, and decision-making activities that take place throughout the organization. FYI Individuals interested in developing and demonstrating a professional competency in management accounting can obtain a professional certificate that is much like the CPA certification. The Certificate in Management Accounting (CMA) is sponsored by the Institute of Management Accountants (IMA), a national organization of professional management accountants. Five areas of study are emphasized on the CMA exam: (1) economics and finance, (2) organizational behavior, (3) public reporting, (4) periodic reporting for internal and external purposes, and (5) decision analysis, including modeling and information systems. Technology and the Management Accountant As you have read this introductory chapter to management accounting, you have likely noticed that the goals of management accounting information provided to the management and executive teams inside the organization are quite different from the financial accounting information provided to groups outside the organization, such as investors, creditors, and regulators. You may even ask how information and performance measures regarding quality and time can be provided by a typical general ledger system that is limited to debits and credits of dollar amounts. This is a good question! For most of the twentieth century, management accountants have been able to successfully produce management accounting information using the general ledger system of financial accounting. This marriage of management accounting and financial accounting information systems worked as long as the goal of management accounting was strictly to track cost information. Now, however, the emergence of JIT, coupled with increased competition in a worldwide market, has forced most organizations to compete on issues of quality and timeliness, as well as cost. The problem is that it is very difficult to use a debit/credit system to track organizational performance regarding quality and time. Thankfully, computerized information systems, specifically database systems, have progressed to a point where it is economically feasible for organizations to track just about any kind of information. Now the real challenge for current and future management accountants is to organize the immense amount of data that can be provided to support decision making without creating information overload in managers and executives. In this process, management accountants should understand how to use the most current technology. Typically, developing knowledge and skills in computer technologies will require additional courses of study for the future business professional. The goal of the remainder of this book is to provide you with a framework for developing cost, quality, and time-based information that supports the management process. This framework must then be used with top-notch technology in order to provide information that truly adds competitive value to organizations! Looking Forward in the Management Accounting Profession Business professionals involved in management accounting have come a long way since the early days of management accounting in the 1800s. Today, management accounting professionals play a key role in many organizations. The nature of their work continues to expand as new industries develop and computer technology grows in importance in the gathering and use of information by decision makers. For example, you’ve spent the bulk of this chapter being introduced to management accounting in the context of DuPont, a manufacturing business. However, businesses focused on service rather than manufacturing (e.g., law firms, banks, hospitals, transportation, hotels) are far and away the dominant industries in the U.S. economy. Further, merchandising companies (retailers and wholesalers) combine to be as strong an economic force as the manufacturing industry. And as you’re certainly aware, the explosion of the Internet has established a new aspect in our economy—e-commerce. At this point, e-commerce is generally a growing delivery platform for many service and merchandising companies, rather than a separate industry. You need to be aware of these trends as you work through this textbook. We will spend a lot of time applying concepts and tools of management accounting to nonmanufacturing settings. As we close this chapter, we want to leave you with two lingering, but important, questions. First, can a service or merchandising company effectively perform C-V-P analysis, product costing, and segment analysis' Or are these techniques useful only for manufacturing companies' Second, does the arrival of e-commerce in service, merchandising, or manufacturing organizations change your response to the first question' That is, as companies shift more and more of their operations (such as sales of software, financial services, and groceries) into the “virtual environment” of the Internet, does e-commerce affect the use of any management accounting techniques that you are studying in this textbook' Think about these questions. We plan to spend a lot of time in the next several chapters exploring some possible answers with you. FYI By 2004, e-commerce activities across the world will be enormous, amounting to $6.8 trillion, or 8.6% of the global sales of all goods and services. Interestingly, while the United States accounted for 75% of worldwide e-commerce sales in 2000, that share is expected to drop to a little less than 50% by 2004. Source: “Global eCommerce Approaches Hypergrowth,” Forrester Research, Inc., April 18, 2000 TO SUMMARIZE Management accounting plays a key role in organizations today. The top accountant in most organizations is the controller. All accounting functions report to this individual, including the cost accountants, the financial and tax accountants, the internal auditors, and systems support personnel. Though much management accounting originates within these positions, all decision makers in the organization must understand how to create and use good management accounting information. Management accounting is also being significantly affected by dramatic improvements in computer technology. Today’s technology allows management to track performance information that goes beyond the cost-based information of historic general ledger systems. Good management accounting involves a responsibility to manage a wide variety of critical information. Hence, those involved need to anticipate and be prepared to deal with various ethical dilemmas. And finally, though we’ve used DuPont as the example company in this chapter, you need to understand that management accounting is not just for manufacturing companies. Service and merchandising industries represent a much larger portion of the U.S. economy than does the manufacturing industry. Further, the advent of the Internet and e-commerce is bringing dramatic changes to many companies and industries. This textbook will explore management accounting in all types of business. As you work through the remainder of this textbook, you should consider how each new concept you learn could be applied in multiple types of business settings. Private sector    Definition Part of national economy made up of, and resources owned by, private enterprises. It includes the personal sector (households) and corporate sector (firms), and is responsible for allocating most of the resources within an economy. In economics, the private sector is that part of the economy which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state. By contrast, enterprises that are part of the state are part of the public sector; private, non-profit organizations are regarded as part of the voluntary sector. Public sector Definition The part of the economy concerned with providing basic government services. The composition of the public sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service(such as public education), and services that encourage equal opportunity. Private sector Definition The part of a nation's economy which is not controlled by the government. ------------------------------------------------- Role within a corporation Consistent with other roles in today's corporation, management accountants have a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization. The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability may be more meaningful to the business management team vs. the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management scorecarding, and client profitability analysis. Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. One widely held view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. Consistent with the notion of value creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavor. In corporations that derive much of their profits from the information economy, such as banks, publishing houses, telecommunications companies and defence contractors, IT costs are a significant source of uncontrollable spending, which in size is often the greatest corporate cost after total compensation costs and property related costs. A function of management accounting in such organizations is to work closely with the IT department to provide IT Cost Transparency.[1] [edit]An alternative view A very rarely expressed alternative view of management accounting is that it is neither a neutral or benign influence in organizations, rather a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory. Stated differently, Management Accounting information is the mechanism which can be used by managers as a vehicle for the overview of the whole internal structure of the organization to facilitate their control functions within an organization.