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?