Management Accounting refers to the interpretation, analysis, identification, and
presentation of accounting information which has been obtained with the help of
financial accounting and cost accounting. Management accounting helps the
business managers in the formulation of policies, decision-making process and in the
day-to-day operations of the enterprise (Kalpan& Atkinson, 2015)
Management Accounting is the process of creating organization goals by identifying,
measuring, analyzing, interpreting and communicating information to managers
Management accounting focuses on all accounting aimed at informing management
about operational business metrics. It uses information relating to costs of products
or services purchased by the company. Budgets are often used to quantify the
decisions made in operational planning. Management accountants use performance
reports to note variances between actual results from budgets.
DIFFERENCE OF MANAGEMENT AND FINANCIAL ACCOUNTING
Management accounting used by managers to make decisions regarding the daily
operations of a company. The distinguishing feature of managerial accounting is that
it is not based on past performance, but on current and future trends. For example,
determining how much your business should charge for a new product and analyzing
how much revenue a future product line is capable of generating are both examples
of business problems within the field of managerial accounting. So, too, is deciding
when to replace the computers in your offices. Since business leaders constantly
need to make operational decisions in a short amount of time, management
accounting must rely on predicting markets and future trends. This is prepared for
INTERNAL COMMUNITY.
Financial Accounting is used to present the financial health of a company to external
stakeholders. This allows the board of directors, stockholders, potential investors,
creditors and financial institutions to see how the company has performed during a
specific period of time in the past. These reports are filed on an annual basis. If a
business is considered a publicly-traded company on the stock market, the reports
must be made part of the public record. This is prepared for the EXTERNAL
COMMUNITY.
The main difference between management accounting and financial accounting is
financial accounting is the collection of accounting data to create financial
statements, while management accounting is the internal processing used to account
for business transactions.
FUNCTIONS OF MANAGEMENT ACCOUNTING
1. Helping Forecast the Future - Forecasting helps decision to made and answers
questions like: Should a company invest more in equipment? Should it diversify
into different markets and regions? Should it buy another company?
Management accounting helps answer important questions that can forecast
future trends in business.
2. Helping in Make-or-buy Decisions - Management accounting insights on cost and
production availability are deciding factors in purchasing choices. Data from
managerial accounting empower decision-making at both an operational and
strategic level.
3. Forecasting Cash Flows - Estimating cash flows and the impact of cash flows on
the business is essential. Considering where the costs companies will incur in the
future and where its revenue will come from can help a business make its next
moves. Management accounting involves creating budgets and trend chars that
manager use to decide how to allocate money and resources to generate the
projected revenue growth.
4. Helping Understand Performance Variances - Performance discrepancies in
business are variances between what was predicted and what was achieved. Using
analytical techniques, management accounting help management build on positive
variances and manager the negative ones.
5. Analyzing the Rate of Return - Knowing the rate of return (ROR) is essential to
know before embarking on a project that requires a lot of investments. Vital
questions that can be answered through management accounting include. If
presented with two investment opportunities, how does a business choose the most
profitable one? In how many years will a company break even on a project? What are
the cash flows estimated to be?
ROLES AND PRINCIPLES OF MANAGEMENT ACCOUNTING
1. Influence - Communication is the main source which provides insight that is
influential. Management accounting is concerned with effective communication
as it improves decision-making with the availability of all the required
information at various stages of decision-making. This ensures integrated
thinking and efficient decisions (Hugh, et. al., 2016)
2. Relevance - Information must be relevant. Management accounting takes into
consideration the best available relevant information available with the enterprise
that can enhance the quality of decision-making for the users and improve their
decision style or process being used
3. Value Generation - Analysis of impact on value. Management accounting
considers analyzing information along with the value generation path while
exploiting opportunities and focuses on costs, risks and Value generation
opportunities
4. Trust - Trust build up by stewardship. The professionals involved in management
accounting processes are expected to be skilful, ethical, and accountable while
ensuring governance and social requirements. This makes the decision-making the
process more objective and accountable (Hugh, et.al. 2016)
MANAGEMENT ACCOUNTING SYSTEMS
Management accounting systems are used to provide critical information to
management to be used in operational business decision-making. EX: A
manufacturing company might use these systems to help in the costing and
managing of their process. A hospital might use management accounting systems to
assist them in insurance billing and other in-house requirements. These systems vary
within the industries they are used within and allow for functionalities and reports
specific to that industry.
TYPES OF MANAGEMENT ACCOUNTING SYSTEMS
1. TRADITIONAL COST ACCOUNTING - track costs using job order or process costing
methods. Each of these methods and others determine how a company allocates
costs relating to direct materials, direct labor, and manufacturing overhead. Job order
costing is used for large projects where all costs are easily traceable to individual
projects. Process costing allocates costs based on the number of processes used to
produce homogeneous goods. These goods run through a continuous process and
are difficult to cost individually.
EX: a company that manufactures gadgets might list the cost of the materials used to
make each gadget, the labor required to assemble it, and the overhead costs
associated with running the factory.
2. LEAN ACCOUNTING - a more revolutionary technique in terms of management
accounting systems. Rather than focusing solely on costs, lean accounting is a
method that presents a strategy for reducing costs by eliminating waste. Accountants
in this system will provide almost immediate financial information for making
decisions, assessing value streams, and measuring profitability. Any excess costs may
be waste and cut from the system based on this information.
EX: The Toyota Motor Company is one of the greatest examples of lean
manufacturing and continuous improvement fully embraced in a company culture.
Their methods for continuous improvement are so well developed and precise they
have their own name, the Toyota Production System (TPS). TPS reduces waste,
increasing efficiency and reducing costs. The high-quality and cost-competitive
products Toyota produces are directly linked to Toyota's ability to reduce waste
throughout the production process
3. THROUGHPUT ACCOUNTING – Throughput (measure of how many units of
information a system can process in a given amount of time). Typically, not seen as a
costing process under traditional management accounting systems. Accountants
focus on identifying the constraints within the company's production system.
Constraints include insufficient levels of materials, labor, or production capacity from
the company's facilities. Reducing these constraints allow for more throughputs to
increase production volume, thereby lowering the cost for each individual unit
produced. In most cases, this method can work with traditional job order or process
costing systems.
EX: An automobile manufacturer wants to calculate its throughput. It can produce
100 cars over a 5 day period, therefore it's throughput is 20 cars per day
4. TRANSFER PRICING - another common management accounting system. Under
this method, companies will cost goods as they move through different departments.
Each item goes through transfers to different departments or process, with each one
adding a small portion of costs to the product.
ROLE OF MANAGEMENT ACCOUNTANTS
Planning. The management accountant gains an understanding of the impact on the
organization of planned transactions (i.e., analyzing strengths and weaknesses) and
economic events, both strategic and tactical, and sets obtainable goals for the
organization. The development of budgets is an
example of planning.
Controlling. The management accountant ensures the integrity of financial
information, monitors performance against budgets and goals, and provides
information internally for decision making. Comparing actual performance against
budgeted performance and taking corrective action where necessary is an example
of controlling. Internal auditing is another example.
Evaluating Performance. The management accountant judges and analyzes the
implication of various past and expected events, and then chooses the optimum
course of action. The management accountant also translates data and
communicates the conclusions. Graphical analysis (such as trend, bar charts, or
regression) and reports comparing actual costs with budgeted costs are examples of
evaluating performance.
Ensuring Accountability of Resources. The management accountant implements a
reporting system closely aligned to organizational goals that contribute to the
measurement of the effective use of resources and safeguarding of assets. Internal
reporting such as comparison of actual to
budget is an example of accountability.
External Reporting. The management accountant prepares reports in accordance
with generally accepted accounting principles and then disseminates this information
to shareholders, creditors, and regulatory tax agencies. An annual report or a credit
application are examples of external
reporting.
CHAPTER 2. MANAGEMENT ACCOUNTING AND THE BUSINESS ENVIRONMENT
The business environment in recent years has been characterized by increasing
competition and relentless drive for continuous improvement. These changes
include:
1.An increase in global competition
2.Advances in manufacturing technologies
3.Advances in information technologies, the internet, and e-commerce
4.A greater focus on the customer
5.New forms of management organization; and
6.Changes in social, political, and cultural environment of business
While many of the major programs or approaches also referred to as contemporary
management techniques:
1. Just-in-Time (JIT)
The philosophy that activities are undertaken only as needed or demanded.
A production system also known as pull-it-through approach
Materials are purchased and units are produced only as needed to meet actual
customer demand.
In JIT system, inventories are reduced to the minimum and in some cases, zero.
4 Characteristics of JIT
1.Elimination of all activities that do not add value to the product or service
2.Commitment to a high level of quality
3.Commitment to continuous improvement in the efficiency of an activity
4.Emphasis on simplification and increase visibility to identify activities that do not
add value.
Main Benefits of JIT
1.Working capital position is improved by recovery of funds that were tied up in
inventories
2.Throughput time is reduced, resulting in greater potential production and quicker
response to customers
3.Areas previously used to store inventories are released and are made available for
other more productive uses.
4.Lesser waste and more customer satisfaction are achieved because of reduction in
defect rates.
2. Total Quality Management (TQM)
 Instituted by many companies to ensure that their products are of the highest quality and that
production processes are efficient.
 A technique in which management develops policies and practices to ensure that the firm’s
products and services exceed customers’ expectations.
 Currently, there is no generally agreed upon “perfect” way to institute TQM program.
o listening to the needs of customers
o making products right the first time
o reducing defective products that must be reworked
o encouraging workers to continuously improve their production process.
 Some TQM programs are referred as Continuous Quality Improvement Programs.
 It affects product costing by reducing the need to track the cost of scrap and rework related to each
job.
 It is a formal effort to improve quality throughput an organization’s value chain.
2 Major Characteristics of TQM
oFocus on serving customers
oSystematic problem-solving using teams made up of front-line workers
3. Process Reengineering
 Reengineering is a process for creating competitive advantage in which a firm recognized its operating and
management functions, often with the result that jobs are modified, combined, or eliminated.
o Defined as the “fundamental rethinking and radical redesign of business processes to achieve dramatic
improvements in critical, contemporary measures of performance, such as cost, quality service and
speed.”
 Process Reengineering, a more radical approach to improvement than TQM.
o An approach where a business process is diagrammed in detail, questioned and then completely
redesigned in order to eliminate unnecessary steps, to reduce opportunities for errors and to reduce
costs.
o Employee Resistance is one basic recurrent problem
 Business Process is any series steps that are followed in order to carry out some task in a business.
 Main Objective: simplification and elimination of wasted effort and the central idea is that all activities that
do not ass value to product or service should be eliminated.
 Steps Used in Process Reengineering
oA business process is diagrammed in detail
oEvery step in the business process must be analyzed and justified
oThe process is redesigned to include only those steps that the product or service
more valuable
 This process can yield the following anticipated results:
oProcess is simplified
oProcess is completed in less time
oCosts are reduce
oOpportunities for errors are reduced
4. Benchmarking
 A process by which a firm:
oDetermines its critical success factors
oStudies the best practices of other firms for achieving these critical success
factors
Then implements improvements in the firm’s processes to match or beat the
performance of those competitors
5. Mass Customization
 Is a management technique in which marketing and production processes are
designed to handle the increased variety that results from delivering customized
products and services to customers.
 Growth of mass customization is in effect another indication of the increase
attention given to satisfying the customer.
6. Balance Scorecard
 An accounting report that includes the firm’s critical success factors in 4 areas:
oFinancial performance
oCustomer satisfaction
oInternal business process
oInnovation and learning
7. Activity-based Costing and Management
 Activity Analysis is used to develop a detailed description of the specific activities
performed in the operation of the firm.
oProvides the basis for activity-based costing and activity-based management.
 Activity-based Costing (ABC) is used to improve the accuracy of cost analysis by
improving the tracing of costs to products or to individual customers.
 Activity-based Management (ABM) uses activity analysis to improve operational
control and management control.
 ABC and ABM are key strategic tools for many firms, especially those with complex
operations, or great diversity of products.
8. Theory of Constraints (TOC)
 A sequential process of identifying and removing constraints in a system.
 Emphasizes the importance of managing the organization’s constraints or barriers that hinder or
impede progress toward an objective.
 Basis Sequential Steps in Applying TOC
a.Analyze all the factors of production required in the production chain.
b.Identify the weakest link, which is the constraint
c.Focus improvement efforts on strengthening the weakest link
d.If improvement efforts are successful, eventually the weakest link will improve to the point where
it is no longer the weakest link.
e.At this point, a new weakest link must be identified and improvement efforts must be shifted
over that link.
 It is a perfect complement to TQM and Process reengineering
 It focuses improvements efforts where they are likely to be most effective.
9. Life Cycle Costing
 a management technique to identify and monitor the costs of a product throughout its lifecycle.
 Consists of all steps from product design and purchase of raw material to delivery of and service of
the finished product.
 Steps
1. Research and development
2. Product design, including prototyping, target costing and testing
3. Manufacturing, inspecting, packaging and warehousing
4. Marketing, promotion and distribution
5. Sales and service
Management accountants now strategically manage the product’s full life cycle of costs, including
upstream and downstream costs as well as manufacturing costs.
10. Target Costing
 Involves the determination of the designed cost for a product or the basis of a
given competitive price so that the product will earn a desired profit.
 The basic relationship that is observed in this approach is
Target Cost = Market determined Price - desired profit
 Entity using this must often adopt strict cost-reduction measures to meet the
market price and remain profitable.
 Common strategic approach used by intensely competitive industries where even
small price differences attract consumers to the lower-priced product.
11. Computer-Aided Design and Manufacturing
 Many companies used this to respond to changing consumer tastes more quickly.
 These innovations allow companies to significantly reduce the time necessary to
bring their products from the design process to the distribution stage.
 CAD is the use of computers in product development, analysis, and design
modification to improve the quality and performance of the product.
 CAM is the use of computers to plan, implement, and control production.
12. Automation
 Involves and requires a relatively large investment in computers, computer
programming, machines and equipment.
 2 Integrated Approaches
1.Flexible Manufacturing System (FMS)
i.A computerized network of automated equipment that produces one or more
groups of parts or variations of a product in a flexible manner.
ii.It uses robots and computer-controlled materials-handling system to link
several stand-alone, computer-controlled machines in switching from one
production run to another.
2. Computer Integrated Manufacturing (CIM)
i. Is a manufacturing system that totally integrates all office and factory
functions within a company via a computer-based information network to
allow hour-by-hour manufacturing management.
 Major Characteristics of Modern manufacturing companies adopting FMS and
CIM
oProduction of high-quality products and services
oLow inventories
oHigh degrees of automation
oQuick cycle time
oIncreased flexibility and
oAdvanced information technology
13. E-Commerce - A number of internet-based companies have emerged and been
been proven successful in last decade. This is adopted by Amazon.com and eBay has
also attracted many investors to pursue the use of internet in conducting business.
14. The Value Chain
 An analysis tool that firms use to identify the specific steps required to provide a product or service to the
customer.
 Key Idea: firm studies each step in its operation to determine how each activity contributes to the firm’s
competitiveness and profits.
 Analyzing the firm’s value chain helps management discover:
o Which steps or activities are not competitive
o Where costs can be reduced
o Which activity should be outsourced
o How to increase value for the customer as one or more of the steps of the value chain
 If properly implemented, it can:
o Enhance quality
o Reduce cost
o Increase output
4 THEMES COMMON TO MANY COMPANIES
1.Customer focus theme
2.Value-chain and supply chain analysis
3.Key success factors
4.Continuous improvement and benchmarking
1. FOCUS ON THE CUSTOMER
 It means that the management accounting system should produce information about both
realization and sacrifice.
o It should able to measure various attributes of customer value
 To succeed in this era, customer value is key focus that businesses of all types must be concerned
with.
 Cost Information plays an important part in the process called Strategic cost Management.
 2 General Strategies
a.Cost leadership
b.Superior product through differentiation
 Successful pursuit of cost leadership and/or differentiation strategies requires an understanding of a
firm’s value chain (internal) and supply chain (External.)
2. VALUE CHAIN AND SUPPLY CHAIN ANALYSIS
 Value Chain refers to the sequence of business functions in which usefulness is added to the
products or services of a company.
 Value refers to the increase in the usefulness of the product or service and as a results its value to
the customer.
 Internal Value Chain is the set of activities required to design, develop, produce, market and deliver
products or services to customers.
 To determine product profitability for internal decision-making purposes, some companies deduct
only manufacturing costs from product revenues.
 Selling, General, and Administrative (upstream and downstream costs)
o Can represent half or more of the total costs of an organization.
o If this is omitted in profitability analysis, then the product is UNDERCOSTED and management
may unwittingly develop and maintain products that in the long rum result in losses rather than
profits for the company.
 Industrial Value Chain is the linked set of value-creating activities from basic raw
materials to the disposal of the final product by end-use customers.
 Fundamental to a value-chain framework is the recognition of existing complex
linkages and interrelationships among activities both within and external to the
firm.
 2 types of linkages
a.Internal Linkages – are relationships among activities that are performed within a
firm’s portion of the industrial value chain (the internal value chain).
b.External Linkages – are activity relationships between the firm and firm’s suppliers
and customers.
3. KEY SUCCESS FACTORS
 Cross Functional Teams
o Crucial in managing the time to market.
Bring together production and operations managers, marketing managers, purchasing and material-handling
specialists, design engineers, quality management personnel, and managerial accountants to focus their
varied expertise and experience on virtually all management VALUE CHAIN AND SUPPLY CHAIN ANALYSIS
 Value Chain refers to the sequence of business functions in which usefulness is added to the products or
services of a company.
 Value refers to the increase in the usefulness of the product or service and as a results its value to the
customer.
 Internal Value Chain is the set of activities required to design, develop, produce, market and deliver
products or services to customers.
 To determine product profitability for internal decision-making purposes, some companies deduct only
manufacturing costs from product revenues.
 Selling, General, and Administrative (upstream and downstream costs)
oCan represent half or more of the total costs of an organization.
oIf this is omitted in profitability analysis, then the product is UNDERCOSTED and
management may unwittingly develop and maintain products that in the long
rum result in losses rather than profits for the company.
 Industrial Value Chain is the linked set of value-creating activities from basic raw
materials to the disposal of the final product by end-use customers.
 Fundamental to a value-chain framework is the recognition of existing complex
linkages and interrelationships among activities both within and external to the
firm.
 2 types of linkages
a.Internal Linkages – are relationships among activities that are performed within a
firm’s portion of the industrial value chain (the internal value chain).
b.External Linkages – are activity relationships between the firm and firm’s suppliers
and customers.
oissues.
oManaging the value chain means that a management accountant must
understand many functions of the business, from manufacturing to marketing to
distribution to customer service.
 Computer Integrated Manufacturing
oThis process is fully automated, with computers controlling the entire production
process.
oIn CIM systems, the types of costs incurred by the manufacturer are quite
different from those in traditional manufacturing environments.
 Product Life Cycles and Diversity
 Time-Based Competition
oIn a global competitive environment, TIME has become very significant element
in strategies for success.
oTime to Market becomes a critical objective for many companies.
oResponse time, Lead time, on time and Downtime are among the many timebased phrases that crop up in conversations of today’s managers.
 Global Competition
o Caused by:
a. Reductions in tariffs, quotas and other barriers to free trade
b. Improvements in global transportation systems and information technology
c. Increasing sophistication in international markets.
 Information and Communication Technology Management
 Cost Management System
o Cost Management is widely used today, no uniform definition however exists.
 It often carried out as an important part of general management strategies and their
implementation.
4. Continuous Improvement and Competitive Strategy
oContinuous Improvements is the constant effort to eliminate waste, reduce
response time, simplify the design of both products and processes, and improve
quality and customer service.
Managerial accountants contribute to this program.
oCompetitive Strategy involves determination and implementation of a set of
policies, procedures and approaches to business that produces long-term
success.
CONCLUSION:
Definition: Management accounting is a field of accounting that provides
information to managers within an organization to help them make informed
decisions about planning, budgeting, and controlling operations.
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Objectives: The objectives of management accounting are to:
Provide information that is useful for planning and decision-making
Help managers to control costs and operations
Assist managers in evaluating performance
Identify and report on trends
o
o
o
o
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Users: The primary users of management accounting information are internal users, such as
managers, executives, and financial analysts.
Methods: Management accountants use a variety of methods to collect, analyze, and report
information, including:
Cost accounting
Budgeting
Performance measurement
Decision making
Difference between financial accounting and management accounting: Management accounting
and financial accounting are two closely related fields of accounting, but they have different
purposes and audiences. Financial accounting is concerned with providing information to external
users, such as investors and creditors, while management accounting is concerned with providing
information to internal users, such as managers.
o
o
o
o
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