Topic1- Scope of MA

8/4/2019 Topic1- Scope of MA

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Topic: Scope of Management Accounting

Learning Objective:

Define and explain the distinguishing features of management accounting.

Explain the concept of cost accounting and cost object

Differentiate between data and information

List the type of information needed * last page

Identify and explain the elements of useful information

Explain the concept of financial (and non-financial) information and its limitations

Differentiate between management accounting and financial accounting.

List the broad functions of management and why they need cost information.

Outline the level of planning and their information needs

Understand how management accountant fits into an organizations structure

Describe three ways management accountants support managers

Abstract:

Management accounting is concerned with providing information to managers - the internal users.

Managers develop strategies for achieving goals, evaluate the performance of workers and of other

managers, and make decision. Manager decides what price to charge for their products, whether to

continue to sell a particular product, and whether to construct a new factory building. Many activities

performed by managers have to do with acquiring and utilizing economic resources and managers need

information to aid them in making these decisions. Management accountants generate much of theinformation managers use to plan operations and make decisions.

Management accounting provides information tailored to the need for each decision making. This means

that only useful information is provided. To do this, management accounting must be manager centered. Itmust understand what a manager does, the type of information needed and the general business

environment.

The role of management accountant is to provide information. Thus there is a need at the initial stage todifferentiate the term between data and information. Then the focus is to provide useful information, not

merely information. How do we do that? Firstly, the information provided is restricted to cost information.This means that the information centered on quantitative information - both monetary (e.g. USD, RM etc.

and non-monetary (tones, pound, foot units etc.). The scope of management accounting does not include

providing qualitative information. Secondly, to provide useful information, understanding of what a

manager does is essential. The functions of planning, organizing, coordinating, motivating, and

controlling must be clearly understood. However three functions will be given attention i.e. planning,

monitoring and control and decision making. The different level of management must also be identified -

strategic level, tactical level and operational level; so that management accountant would know at whatlevel does management accounting information is can be provided. Thirdly, any information, whether it isquantitative or qualitative, must satisfy the basic criteria of good information. By this it means that the

information must posses the qualities of: relevant, complete, clear, confidence, communicated, not inexcessive volume, timely, used the right channel, and provided at a costs which is less than the value of the

benefits it provides.

Given this scope of information to be provided, it is also essential at the beginning of this course to

highlight the point that financial accounting is more concerned with external stakeholders - shareholders,

creditors, government agencies, public at large; while management accounting is concerned with internal


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users. Thus there is a need to go into the detail concerning the differences between financial accounting

and management accounting.

Key Content:

Define and explain the distinguishing features of management accounting.

Management Accounting Definition and Scope

A generally accepted definition of management accounting provided by the Chartered Institute ofManagement Accountants in the CIMA Official Terminology (1996 Edition) is:

The process of identification, measurement, accumulation, analysis, preparation, interpretation and

communication of information used by management to plan, evaluate and control within an entity

and to assure appropriate use of and accountability for its resources. Management accounting also

comprises the preparation of financial report for non-management groups such as shareholders,

creditors, regulatory agencies and tax authorities.

Thus the core activities of management accounting include:

Participation in planning process at both the strategic and operational levels. This

involves the establishment of policies and the formulation of plans and budgets which will

subsequently be expressed in financial terms. The initiation of and the provision ofguidance for management decisions. This involves

the generation, analysis, presentation and interpretation of appropriate relevant information.

Contributing to the monitoring and control performance through the provision of reports

on organizational (and organizational segments) performance, including comparisons of actualwith planned (or budgeted performance), and their analysis and interpretation

Management accounting is therefore concerned with the collection of data (internal and external

source), its analysis and processing into information, and interpretation and communication of that


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Explain the concept of cost accounting and cost object

Cost Accounting: Cost accounting is part of management accounting. It is a

management information system that analyses past, present and future

data to provide the basis of managerial action. It involves the

collection, measuring and analysis of financial and non-financial

information of acquiring and utilizing resources in an organization.

Cost accounting provides the data for management accountant to use.

Cost accounting can be classified into four activities:

Cost determination

Cost recording

Cost analyzing

Cost reporting

Costs accounting aim to provide the answers to the following type of questions:

What has been the cost of goods produced or services rendered?

What has been the cost of a department or work section?

What have revenues been?

What are the future costs of goods and services likely to be?

How do actual costs compare to budget costs?

What cost information does management need in order to make

sensible decisions about profits and costs?

The cost accounting database is the foundation for most internal accounting reports and for much data

that is reported in external accounting reports.

-

Management

Accounting

Financial

Accounting

Cost Accounting


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Cost Object: The first step in cost estimation is to decide what item (or the thing) of the

organization are costs to be assigned. The item to be costed is called cost

object. The primary cost objects is the products and services provided by

the organization, but costs object may also include sub units, customers,

suppliers and time periods. Each of these cost objects is related to differentplanning decisions.

Two examples for business are the cost of a 45-horsepower outboard motor and the marketing of

the motor. Two personal examples are the cost of learning to become a sky

diver and the cost of remote speaker for an existing stereo system.


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Differentiate between data and information

Management accounting involves in collection of data and processing these data into

information. Thus there is a need to explain the distinction between data andinformation.

Data and Information: a. Data are raw material for processing. Data relates to fact, events and transactions and so forth.

b. Information is data that has been processed in such a

way as to be meaningful to the person who receives it.

The quality of source data affects the value of information. If the source of data is

flawed, information processed from the data is worthless.

Identify and explain the elements of useful information

Criteria of Good Information

Good decision is made when the information itself is good. The qualities of good

information are:

It should be relevant for its purpose; It should be complete for its purpose;

It should be sufficiently accurate for its purpose;

It should be clear to the user;

It should be communicated to the right person;

It should not be too excessive- its volume must be manageable;

It should be timely - communicated at the most appropriate time

It should be communicated by an appropriate channel ofcommunication;

It should be provided at a cost which is less than the value of the

benefits it provides;

The user should have confidence in it.


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1. Financial and Non Financial Information

Explain the concept of financial (and non-financial) information and its

limitations

Financial Information:

The main type of information used/produced by cost and management accountant is

restricted to financial information. The financial information can be broken down into

monetary and non-monetary information. Material costs represent the price (monetary

information) of so many kilograms (non-monetary) of physical substance used in

production. Sometime the non-monetary component is more meaningful to managers.

Financial information however has its limitation:

The production of the information may involve making assumptions, guesswork

and subjectivity. This may not be clear to the user of the information.

The information may be less accurate than it appears due to poor measurement

and/or classification of cost techniques.

A quantitative, statistical or accounting technique used to produce the information

may not be fully understood and hence the underlying assumptions may not have

been taken into account.

The information may be inappropriately presented. For example it may be too

numerical, too technical or perhaps totally inappropriate for the intended recipient.

Because of the terminology used, the information may not be capable of beingcorrectly interpreted.

Non-Financial Information:

Non-financial information is information that cannot be expressed in numbers. It

sometimes refers to as qualitative information. Examples of qualitative informationinclude employee morale, motivation, loyalty and attitude towards teamwork.

Information does not need to be in quantitative to be of interest to management.

Closing down a branch which will result in high unemployment in a particular location

is a significant factor to be taken into account when a decision is made about the future

of the branch.

However, for this course, decision is made purely on the basis of financial monetary


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Differentiate between management accounting, cost accounting and financial accounting.

4. Management Accounting vs. Financial accounting.

Accounting

Recording

Estimating

Organizing

Financial Accounting

Reports to those outside the

organization:

Owners

Lenders

Tax authorities

Regulators

Emphasis is on summaries of

financial consequences of past

activities.

Objectivity and verifiability of

data are emphasized.

Precision of information isrequired

Only summarized data for the

entire organization are prepared

Must follow GAAP

Managerial Accounting

Reports to those inside the

organization for:

Planning

Directing andmotivating

Controlling

Performance

evaluation

Emphasis is on decisions

affecting the future

Relevance and flexibility of

data are emphasized

Timeliness of information is

required

Detail segment reports about

departments, products,

customers, and employees

are prepared


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(Managerial Accounting, Garrison/Noreen, 9th Edition McGraw-Hill)

(Management Accounting: A Strategic Approach, Morse,Davis and Hartgraves, Sout-Western

Publishing)

Financial Accounting

Reporting system

Information for internal and external

users

General purpose financial statements

Statements highly aggregated

Relatively long reporting period

Report on past decisions

Often required by law or generally

accepted accounting principles

Must conform to external standards

Management Accounting

Decision-making tool

Information for internal user only

Special-purpose information

Information maybe aggregated or detailed,

depending on need

Reporting may be long or short, depending

on need

Oriented towards future decisions

Not required by law or generally accepted

accounting principles

No external standards

Allow subjective data, if relevant


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o List the broad functions of management and why they need cost information.

The Role of Management Accountant in the Management Process

The Management Process

Planning

In the planning process the management accountant helps to formulate future plans by providing

information to assist in deciding what products to sell, in what markets and at what prices, and

evaluating proposals for capital expenditure. In the budgeting process (budget is define as

quantitative plan) the management accountant plays a major role in the short-term planning process.

He or she is responsible for providing data on past performance that may be particularly useful as

guidance for future performance. In addition, the management accountant establishes budgetprocedures, and timetables and coordinates the short-term plans from all section of the business and

ensures that these plans are in harmony with each other. He or she then assembles that various plans

into one overall plan (that is, the master budget) for the business as a whole and presents this plan

for top management approval.

Control

Management accounting aids the control process by producing performance reports that compare the

actual outcome with the planned outcomes for each responsibility center. A responsibility center

may be defined as a segment (such as a department) of and organization where an individual

manager holds delegated authority and is responsible for the segments performance.

The management accountant provides an important contribution to the control process by

drawing a managers attention to those specific activities that do not conform to plan. In other

words, the management accountant assists the control function by providing prompt measurements

of actions and identifying trouble spots. This management-by-exception approach frees managersfrom an unnecessary concern with those operations that are adhering to the plans. In addition, top

management is made aware of those specific locations where the plans are not being achieved.

OrganizationalMission and Goals

Plannin

Control Organizing

Motivating


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Organizing

The interaction of the management accounting and the organizing process is suitably described by

Belkaoui (1980, p. 30). He states:

The identification of the elements of an organizational structure most prevalent and essential to proper

functioning of a management accounting system allows the tailoring of the internal reporting system to

that structure or the suggestion of a more appropriate organization structure.

Belkaoui concludes that, while organizational structure is concerned with authority, responsibility andspecialization so as to assure effective performance, management accounting though responsibility

accounting represents the design and implementation of the accounting system for better definition

and consolidation of these relations.

Communications

Management accounting aids the communication function by installing and maintaining an effective

communication and reporting system. For example, the budget communicates plans to those managers

who are responsible for carrying them out so that they are clearly aware of what is expected of themduring the forthcoming budget period. In addition, the information contained in the budget can be

helpful in ensuring coordination between managers of different organizational sub-units, so that each isaware of the requirements and constrains faced by the others with whom he or she interacts. The

performance reports produced by the accountant communicate important information to a manager by

indicating how well the latter is doing in managing his or her activities and highlighting those items that

need detailed investigation through the process of management-by-exception.

Motivation

Budgets and performance reports that are produced by the accountant also have an important influence

on the motivation of the personnel of the organization. Budget represents targets that are intended to

motivate managers to strive to achieve the organizations objectives. Such targets are more likely to

motivate than a situation of vagueness and uncertainty. The performance reports are intended to

motivate desirable individual performance by communicating performance information in relation to

targets set. In addition, the accountant assists in motivating personnel by providing valuable assistance

in identifying potential managerial problem areas and highlighting those items for detailed

investigation. He or she provides as supportive system to enable mangers to control their activities moreeffectively. It is important to note, however, that budgets and performance reports can cause serious

behavioral problems and can be harmful to motivation if the are used and interpreted without sufficientknowledge ofpotential organizational behavioral problems.

(Excerpt from Management and Cost Accounting, Colin Drury, Thomson Business Press)


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Outline the level of planning and their information needs

Information and Planning Process

The Organization Planning Process

The planning process includes developing mission, setting goals and devising plans. Manager began the

planning process by creating, modifying or reaffirming the mission, which is the topmost goal in the

organization and which describes the organizations purpose. Next, managers use the mission to guide the

development of organizational goals. Then they outline and implement the plans necessary to achieve those

goals.

Once the organization has determined the basic purpose of the organization i.e. the mission, the next steps is

the to establish organization goal and prepare the plans. Goals and plan are needed at three specific levels inthe organization: strategic, tactical and operational.

Strategic goal and plans: Strategic goals are formal statement of the organizations major intended

achievement; whilst strategic plan generally cover resource allocations and define a broad scope of long-term

organizational actions designed to attain strategic goals. Both strategic goal and strategic plan are develop bytop management.

Tactical goals and plans: Tactical goals are targets for future results to achieve by specific divisions or

functional units of the organization. These goals are also known as business-level goals when they pertain to

individual business divisions. Tactical plans outline the means for achieving the organizations tactical

goals. Typically, top and middle managers work together to create tactical plans which covers shorter

periods than strategic plans. Tactical plan consists of specific actions to be taken by business divisions orindividuals groups and are narrower in scope.

Operational Goals and plans: Operational goals are set by middle managers and first-line managers as

specific targets for results to be achieved by departments and individuals within the functional units or the

business divisions. These goals, also called functional-level goals when applied to functional units,

generally cover short-term results needed to support the organizations tactical and strategic goals.

Operational plan describes the means for achieving the organizations operational goal. Such plan supports

the implementation of tactical plans, and they specifically define necessary decisions and actions to be taken

by divisions and functional departments. Operational plans cover briefer periods than tactical plan, and they

include the day-to-day operations of the organization.

Mission Goals Plans Performance


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Just as planning process can be analyzed in three levels, so is the information necessary to make

decision within the planning process can be analyzed the same way.

At the Strategic Level, since the decision made effect the long-term organization actions, the

information is therefore:

a. Derived from both internal and external sources;

b. Summarized at a high level;c. Relevant to the long term;

d. Deals with the whole organization;e. Often prepared on an ad hoc basis;

f. Both quantitative and qualitative;

g. Incapable of providing complete certainty, given that the future cannot be

predicted.

At the Tactical Level, the information is used by middle management to decide how resources of

business should be employed, and to monitor how they are and have been employed. Tacticalinformation therefore:

a. Is derived from more restricted range of external source, so it is thus primarilygenerated internally;

b. Is summarized at a lower level

c. Is relevant to the short and medium term;

d. Describe or analyses activities or departments

e. Is prepared routinely and regularly;

f. Is based on quantitative measures.

At the Operational Level, the information is used by front-line managers operational information

may therefore include details concerning output and spoilage level from a particular production line

or sales level achieved by sale representative. Operational information therefore:

a. Is derived entirely from internal sources;b. Is highly detailed. Being the processing of raw data;

c. Relates to the immediate term;d. Is task specific;

e. Is prepared constantly; or very frequently;

f. Is largely quantitative.


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Understand how management accountant fits into an organizations structure

Organization Structure and the Management Accountant

Line and Staff Position

Most organizations distinguish between line management and staff management. Examples of

line management are manufacturing, marketing and distribution managers. A manager in the line

position makes decisions and supervises activities that directly affect the organization ability to

achieve its goals. Managers in line position hold line authority, formal authority based on their

hierarchical positions in the chain of command.

Management accountants, human resource managers and information technology specialist are

examples of staff management. They support the managers in line positions by providing

information and guidance and by performing specialized or technical tasks that line manager lacks

the skill (or time) to perform. Manager in staff position holds staff authority, the authority to

provide advice and to direct activities within their functional area of expertise.

However, staff authority is not the same as line authority, and the difference sometimes led to

conflicts between line and staff. Staff managers can make recommendations to line managersabout key issues and activities that influence the organization performance, but because line

managers make the final decision (accepting or rejecting staffs recommendation), staff may

disagree with decisions that run contrary to their advice. However, staff managers can request

reports from the line managers to spot problems and to formulate new ideas that can beimplemented in the many organization departments.

Line and Staff Positions in a Centralized Organization

Chief Executive Officer

Vice President

West Malaysia

Operations

Vice President

Middle East

Operations

Vice President

Middle East

Operations

Centralized Staffs:

Legal, HRM, Accounts, Finance


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Describe three ways management accountants support managers

Key Management Accounting Guidelines

Three important functions provide the most value when management accountant interacts

with managers. They are:

1. Cost-Benefits Approach

The cost-benefit approach is commonly used in making decisions such as resource

allocation. Resources should be spend if they are expected to better attain company

goals in relation to the expected costs of those resources. The expected benefits from

spending should exceed the expected costs. The expected benefits and costs may not

be easy to quantify. Nevertheless, the cost-benefit approach is useful for making

resource-allocation decisions.

2. Behavioral and Technical Considerations.

A management accounting system should have two simultaneous missions for

providing information: (a) to help managers make wise economic decisions and (b)

to motivate managers and other employees to aim and strive for goals of theorganization. Accountants and managers should always remember that a

management system is not always confine to technical matters. Management is

primarily a human activity that should focus on how to help individuals do their job

better.

3. Different Costs for Different Purposes.

There are multiple external parties and multiple internal parties from whom financial

reports are prepared. Any specific accounting method is unlikely to be preferred

method for all external and internal parties. Even an individual manager may prefer

one method for one decision over another method prefer by another manager for

another or similar decision. A cost concept used for external reporting purposes mayalso not be an appropriate concept for internal, routine reporting for managers. Cost

concept for one decision making may also be not appropriate for another type of

decision making.


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o List the type of information needed

The management needs for information relate to the following:

a. costs

b. revenues

c. profits

d. asset valuese. cash flows

Case Study 1

Kentan and Maliki just started a retail pizza shop. They make pizza each night and sell them throughout the

next day. They employ two people to help them make and sell the pizza. Unsold pizza from one day is sold

at a substantial discount the next day.

They think the business is doing well so far but they have not maintained very detailed record and had not

attempted to compute income for the first quarter of 2003. They do not have a accounting background and

now that the business is organized and operating, they come to you to ask for advice. In particular, theywould like to know what kind of information they might need to manage their business effectively.


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Case Study 2

A private college in Subang Jaya is owned and operated by a non-profit organization. The costs of providing

quality education and services have been arising steadily over the past year. With utility costs, academic

salaries, supplies, and rental costs rising faster than the cost of living, the college posted a loss of RM1,

500,000 for the year 2003. As the college administrators, you are concerned about the situation and suggestsome immediate step to reduce the problem. You propose an immediate freeze to recruiting non-academic

staffs, reduced staffing for non-critically service department, a freeze for replacement and acquisition of new

teaching equipment but across the board increase in tuition fee of 15%.

You propose these at the monthly executive management meeting which include key academic personnel.

Many professors and board members are outraged at your suggestions. One board member comments, We

are charitable institution. Costs make little difference to us. We want to educate people. If you raise fee,

some will be unable to afford our services. The deputy president of academic is even more upset. I cantquality service with marginal staffing. I think you are forgetting your role in this hospital. We academician

train people, you are supposed to push around the accounting numbers and keep these financial problems out

of our head. If you cant do the job, we can get someone else to do it.

Respond to the board member and academician and defend your position.

CYU

1. List the differences in orientation between management accounting and financial accounting.

2. What is the difference between data and information?

3. List the qualities of good information.

4. What is the limitation of financial information?

5. What are the three guidelines management accountants perform?

6. What is a cost objective? Give two examples from business and two from your personal life.

7. What are the role management accountants perform?

Documents

Topic1- Scope of MA