Chapter 1
Introduction to
Management Accounting
Accounting
The accounting profession has had to develop
and broaden its scope to provide relevant, timely,
accurate and understandable financial
information required in the modern economy
Management information systems that can assist
in both day to day business decision situations
and in long term strategy issues are required.
What is accounting
‘The process of identifying, measuring and
communicating economic information about an
organisation or other entity, to permit informed
judgements and decisions by the users of the
information’
American Accounting Association
‘…the collection, measurement, recording,
classification and communication of economic data
relating to an enterprise for the purposes of
reporting, decision making and control’
American Institute of Certified and Public Accountants
Nature and Purpose of Accounting
Financial and Management
Accounting
Classifying
And Recording
Transactions
Preparing
and Publishing
Financial
Statements
Financial Accounting
Planning,
Forecasting and
Control
Information
For Management
Decision
Making
Management Accounting
Management accounting in
business
Management accounting involves providing
information for planning, controlling, decision
making and the formulation of business policy
and strategy. Across all business sectors,
management accounting helps provide answers
to the following questions:
What are future costs likely to be?
How do actual costs compare with budget?
Is the organisation achieving the objectives set by
management?
Management accounting in
Hospitality, Tourism and Retail
Relevant questions include:
Is the hotel operating at an optimum level – is occupancy level acceptable?
How many customers does the restaurant require to break-even?
What strategy will maximise profits?
Is the organisation meeting customer expectations in terms of quality, reliability
and price?
What is the optimum price to charge per room or per seat?
Should a particular tourism attraction shut-down in an off-season period?
What is the effect of special offers and packaged deals?
Is the mark-up on purchases sufficient to cover all costs and achieve a
satisfactory profit?
What is the cost of providing additional services for customers?
Is each retail department performing adequately and contributing to the
organisation?
What product ranges are particularly successful?
What is the effect of reducing the price of products during a sale?
How does the organisations performance compare to other similar
organisations?
What market share has the organisation achieved?
Key differences in Management
Accounting
Financial
Accounting
Management
Accounting
External (shareholders )
Internal (management)
Summarised balance sheet,
profit and loss, and cash
flow
A range of very detailed and
specifically focused reports
Frequency
Once / twice a year
As required by management
Usually weekly / monthly
Time focus
Historic
Both historic and future
focused
Company’s Acts and
standards issued by the
accounting profession
Not governed by legislation
or standards
Source
Primary users
Type of information
Format of accounting
governed by
Role of Management
‘To manage is to forecast and plan, to organise, to command, to
coordinate and to control.’
H. Fayol (1916)
‘Managing is an operational process initially best dissected by
analysing the managerial functions…The five essential
managerial functions are: planning, organising, staffing,
directing and leading, and controlling.’
Fayol, Koontz and O’Donnell (1984)
‘Management is a process that enables organisations to set
and achieve their objectives by planning, organising, and
controlling their resources, including gaining the commitment
of their employees (motivation)’
Cole (2004)
Control Process
Long Term
Planning Process
Framework for Planning, Decisionmaking and Control
 Set business objectives
Decision
 Identify potential strategies
 Evaluate and select strategies
 Implement strategies
 Compare actual results with plan
 Investigate variances and take corrective action
Decision
Characteristics of Good
Information
Is the information communicated early enough to be effective?
Is the information up-to-date?
Is the information produced at appropriate intervals?
Is the information presented relevant for the purpose it is
intended?
Is the information addressed to the correct person?
Is the information accurate?
Is the information complete?
Is the information clear and unambiguous so the user can
understand it?
Is the information detailed enough?
Is the information concise enough?