CHAPTER M1
Management
Accounting: Its
Environment and
Future
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Learning Objective 1:
Describe management accounting and contrast it with financial accounting.
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Management Accounting
 The process of
 identification,
 measurement,
 accumulation,
 analysis,
 preparation,
 interpretation, and
 communication of financial information used by management to plan, evaluate, and control an organization.
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Cost Accounting
 Cost accounting is a subset of management accounting, although the two terms are often used interchangeably.
 Cost accounting deals with the theories and procedures related to determining the cost of a particular product, service, or activity.
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Management or
Financial Accounting?
 There are several major differences between the worlds of management accounting and financial accounting.
 Although these differences exist, it is important to keep in mind that they both play important roles in the total accounting picture.
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Focus on Users
 Financial accounting is particularly intended to provide information to external users, such as shareholders, bankers, other creditors, suppliers, and the like.
 Management accounting is particularly intended to provide information to internal users, such as managers, directors, administrators, and the like.
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Accounting Rules
 The financial accountant is governed by
GAAP (generally accepted accounting principles).
 The management accountant need follow no such rules. The management accountant has much greater flexibility in deciding what information to report, when and how to report it, and to whom.
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Level of Detail
 Financial accounting statements are known as general purpose statements comprised of highly aggregated information. Many different external users rely on the same statements.
 Management accounting reports are typically much more detailed, possibly dealing only with the information related to one particular decision.
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Timeliness
 Timeliness is an important characteristic of useful information. Management releases financial accounting information to external users on a quarterly and annual basis.
 Managers, on the other hand, need daily, hourly, weekly, or monthly internal accounting reports.
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Future Orientation
 Financial accounting provides information about past results. Predictive value is desired, but not required.
 Management accounting information is used primarily for decision making, and these decisions affect the future of the firm.
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Management Positions in Accounting
 For most firms, the controller is the chief accountant, the person ultimately in charge of the accounting system.
 The treasurer is typically responsible for managing the company’s cash, credit, and investments.
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Learning Objective 2:
Explain major historical developments that have affected management accounting.
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The Growth of
Management Accounting
 Four major factors have had an impact:
 Emergence of permanent employees
 The industrial revolution
 Scientific management
 Diversification
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Emergence of
Permanent Employees
 When firms primarily hired independent contractors, no formal communication system was needed. It was also relatively easy to determine the cost of producing a product.
 Permanent employees and the development of the “factory” concept contributed to greater control over production.
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Industrial Revolution
 As organizations grew in size and complexity, the ability of the owners to supervise all aspects of the business started to shrink.
 The creation of various levels of management resulted in a need for a formal communication system for the managers.
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Scientific Management
 One of the major features of the scientific management philosophy was that workers need to be evaluated in comparison to a standard for performance.
 The philosophy created a need for an entire army of data collectors and cost analysts.
Time and motion studies and engineering reports became commonplace.
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Learning Objective 3:
Describe how changes in management accounting affect today’s businesses.
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Diversification
 Early in the 20th century, companies began to diversify. More managers with skills in different areas were needed. There was also an increase in the delegation of authority.
 More information was needed from the various business operations to allow top managers and owners to plan, control, and evaluate performance.
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The Emergence of
Management Accounting
 Institute of Management Accountants (IMA) founded in 1919
 Leaner management practices led to:
 Just-in-time inventory (JIT)
 Activity-based management (ABM)
 Activity-based costing (ABC)
 Design for manufacturing (DFM)
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Learning Objective 4:
Explain how businesspeople use management accounting information and skills.
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Consumers of
Management Accounting
 Management accounting information is always forward-looking .
 The future contains uncertainty .
 Management accounting allows the user to formulate models to reduce uncertainty by planning, using reliable information.
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The End of Chapter M1
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