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Introduction to Managerial
Accounting
Managerial Accounting
Introduction to Managerial Accounting
A. DEFINITION,
PURPOSE, CONCEPTS
AND
SCOPE
OF
MANAGERIAL
ACCOUNTING
Definition
Managerial
Accounting
or
Management
Accounting
is
the
systems and processes
used to gather data,
Management Advisory Services
process
data,
and
provide
useful
quantitative information
to management. It also
refers
to
reports
designed to meet the
needs of internal users,
particularly
the
managers.
According to the AAA
Committee
on
Management Accounting,
it is the application of
appropriate
techniques
and
concepts
in
processing the historical
and projected economic
data of an entity to assist
management
in
establishing a plan for
reasonable
economic
objectives and in the
making
of
rational
decisions with a view
towards achieving these

objectives.
Purpose
Management
Accounting supplies the
information
needs
of
management.
This
information should be
more detailed, forward
looking, and presented
and analyzed differently
to
suit
the
unique
informational needs of
management. To meet
these
requirements,
management accounting
should have the following
purposes:
1. Profit
Measurement
Business performances
should be measured. In
the short-run, business
performance
is
normally expressed in
terms of profitability.
2. Guide for planning
Managers
plan
to
ensure
that
organizational
resources and systems
fit with what is needed
in the future to deliver
profitability
and
sustained growth.
3. Standards
for
controlling
Actions are to be made
in accordance with the
plan. Errors should be
prevented from the
very start. Deviations
or planning gap that
are encountered while
things are put into
action
should
be
immediately remedied
or corrected to execute
plans as intended.
4. Basis for decision
making
The primary tool of
management in getting
its job done is decision
making. A decision that
is based on inadequate
information may lead
to inferior or even
damaging results. A
rational decision based

on quality information
would most likely lead
to
increased
shareholders value.
Concepts
1. Accountability
Management
accounting
presents
information measuring
the achievement of the
objectives
of
an
10
organization
and
appraising the conduct
of its internal affairs in
that process. In order
that further action can
be taken, based on this
information,
it
is
necessary at all times
to
identify
the
responsibilities and key
result areas of the
individuals within the
organization.
11
2. Controllability
Management
accounting
identifies
the
elements
of
activities
which
management can or
cannot influence, and
seeks to assess risk
and sensitivity factors.
This
facilitates
the
proper
monitoring,
analysis,
comparison
12
and interpretation of
information which can
be used constructively
in
the
control,
evaluation
and
corrective functions of
management.
3. Reliability
Management
accounting information
must be of such quality
13
that confidence can be

placed
in
it.
Its
reliability to the user is
dependent
on
its
source, integrity and
comprehensiveness.
4. Interdependency
Management
accounting,
in
recognition
of
the
increasing complexity
14
of
business,
must
access both external
and
internal
information
sources
from
interactive
functions
such
as
marketing, production,
personnel,
procurement, finance,
etc. This assists in
ensuring
that
the
information
is
adequately balanced.
15
5. Relevancy
Management
accounting
must
ensure that flexibility is
maintained
in
assembling
and
interpreting
information.
This
facilitates
the
exploration
and
presentation, in a clear,
understandable
and
16
timely manner, of as
many alternatives as
are
necessary
for
impartial and confident
decisions to be taken.
The
process
is
essentially
forward
looking and dynamic.
Therefore,
the
information
must
satisfy the criteria of
being applicable and
appropriate.
17
Scope
Management
accounting is concerned
with
presentation
of
accounting information in
the most useful way for
the management.
Its
scope is, therefore, quite
vast and includes within
its fold almost all aspects
of business operations
such as:
18
1. Financial
Accounting
Management
accounting is mainly
concerned
with the
rearrangement of the
information
provided
by financial accounting.
Hence,
management
cannot
obtain
full
control
and
coordination
of
19
operations
properly
financial
system.
without a
designed
accounting
2. Cost Accounting
Standard
costing,
marginal
costing,
opportunity
cost
analysis,
differential
costing and other cost
techniques
play
a
useful role in operation
20
and control of the

business undertaking.
3. Revaluation
Accounting
This is concerned with
ensuring that capital is
maintained intact in
real terms and profit is
calculated with this fact
in mind.
4. Budgetary Control
21
This includes framing

of budgets, comparison
of actual performance
with
the
budgeted
performance,
computation
of
variances, finding of
their causes, etc.
5. Inventory Control
It includes control over
inventory from the time
22
it is acquired till its final

disposal.
But
Management
Accounting
covers
a
much broader scope and
it
goes
beyond
the
boundaries
of
accounting. It may also
extend its scope and
draw
upon
Finance,
Economics, Operations
Research,
Statistics,
23
Mathematics or other
discipline as necessary.
B. Recent
Developments
in
Management
Accounting
Today rapidly changing
business
environment
stipulates the need of
companies shareholders
and managers making
decisions as fast as
24
possible following the

local/global changes of
science,
business,
technologies, politics and
society as well as internal
companys
situation.
Studies
disclosed
the
significance
of
Management Accounting
as
a
stimulus
for
organizational
change,
progress
and
substantiated the benefit
25
of
performance
measurement
process
not only for financial
results
(improving
financial
indicators,
increasing market value)
but also for ongoing
performance
improvement,
communication
and
control processes.
26
The main factors which

probably
had
the
strongest influence on
the
development
of
were:
Different dominating
theories
of
management
Different
views
to
management
accounting
27
Changing situation in
the global economy
such as globalization,
financial crisis, etc.
Expectations
of
shareholders,
managers,
society,
scientists, etc.
Such factors brought
development
in
as follows:
28
Different
sets
of
Management
Accounting tools are
used in different types
of organizations
There
were
some
changes
of
Management
Accounting depending
on the financial results
and
expectations/objective
29
s of shareholders and
management
External factors such
as situation in the
global
economy,
competition, changes
of science, business,
technologies, politics,
society and financial
results
of
organizations became
closely
related
to
30
Management
Accounting.
C. Ethical Conducts of
Management
Accountants
Following
is
the
Standards
for
Ethical
Conduct for Practitioners
of
Management
Accounting and Financial
Management published in
1997 by the Institute of
31
Management
Accountants, previously
National Association of
Accountants.
Competence
Practitioners
of
management
accounting and financial
management have a
responsibility to:
32
Maintain
an
appropriate level of
professional
competence
by
ongoing development
of their knowledge
and skills.
Perform
their
professional duties in
accordance
with
relevant
laws,
regulations
and
technical standards.
33
Prepare complete and

clear
reports
and
recommendations
after
appropriate
analysis of relevant
and
reliable
information.
Confidentiality
Practitioners
of
and
financial
management
have
a
responsibility to:
34
Refrain from disclosing

confidential
information acquired
in the course of their
work, except when
authorized, and legally
obligated to do so.
Inform
subordinates
as
appropriate
regarding
the
confidentiality
of
35
work and monitor their

activities to assure the
maintenance of that
confidentiality.
Refrain from using or
appearing
to
use
confidential
work for unethical or
illegal
advantage
either personally or
through third parties.
36
Integrity
Practitioners
of
and
financial
management
have
a
responsibility to:
Avoid
actual
or
apparent
conflict
interests and advise
all appropriate parties
of
any
potential
conflict.
37
Refrain from engaging

in any activity that
would prejudice their
ability to carry out
their duties ethically.
Refuse any gift, favor,
or
hospitality
that
would influence or
would
appear
to
influence their actions.
Refrain from actively
or
passively
subverting
the
38
attainment
of
the
organizations
legitimate and ethical
objectives.
Recognize
and
communicate
professional
limitations or other
constraints that would
prejudice responsible
judgment
or
successful
39
performance of an
activity.
Communicate
unfavorable as well as
favorable information
and
professional
judgment or opinion.
Refrain from engaging
in or supporting any
activity that would
discredit
the
profession.
40
Objectivity
Practitioners
of
and
financial
management
have
a
responsibility to:
Communicate
information fairly and
objectively.
Disclose
fully
all
relevant
information
that could reasonably
be
expected
to
41
influence an intended
users understanding
of
the
reports,
comments
and
recommendations
presented.
Resolution of Ethical
Conflict
In
applying
the
standards
of
ethical
conduct, practitioners of
42
and
financial
management
may
encounter problems in
identifying
unethical
behavior or in resolving
an ethical conduct. When
faced with significant
ethical
issues,
practitioners
of
and financial accounting
should
follow
the
established policies of
43
the organization bearing

on the resolution of such
conflict. If these policies
do not resolve the ethical
conduct,
such
practitioner
should
consider the following
actions:
Discuss such problem
with
the
immediate
superior except when it
appears
that
the
superior is involved, in
44
which case the problem

should be presented
initially to the next
higher managerial level.
If
a
satisfactory
resolution cannot be
achieved
when
the
problem
is
initially
presented, submit the
issues to the next higher
managerial level.
If
the
immediate
superior is the Chief
45
Executive Officer, or
equivalent,
the
acceptable
reviewing
authority may be a
group, such as the audit
committee,
executive
committee, board of
directors, or owners.
Contact
with
levels
above the immediate
superior
should
be
initiated only with the
superiors
knowledge,
46
assuming the superior is

not involved. Except
when legally prescribed,
communication of such
problems to authorities
or
individuals
not
employed or engaged
by the organization is
not
considered
appropriate.
Clarify relevant ethical
issues by confidential
discussion
wi
an
47
objective advisor (e.g.,

IMA Ethic Counseling
Services) to obtain a
better understanding of
possible
courses
of
action.
Consult
your
own
attorney as to legal
obligations and rights
concerning the ethical
conduct.
If ethical conflict still
exists
after
48
extinguishing all levels

of internal review, there
may
be
no
other
recourse on significant
matters than to resign
from the organization
and
to
submit
an
informative
memorandum
to
an
appropriate
representative of the
organization.
After
resignation, depending
49
on the nature of the

ethical conflict, it may
also be appropriate to
notify other parties.
D. Distinction
between
Financial
Accounting
and
Management
Accounting
Management
Accounting
is
significantly
different
50
from
Financial
Accounting.
Their
distinction relates to their
orientation,
emphasis,
customer served, and
body
of
knowledge
applied. Below are the
basic
differences
between the two.
FINANCIAL MANAGEME
ACCOUNTIN NT
G
ACCOUNTIN
51
G
Historical Deals
in nature
about the
Uses GAAP future
Reports are Does
not
wholistic
use GAAP
Reports are Reports are
for general segmentize
purpose
d
With
Reports are
unifying
for
equation, A manageme
=L+C
nt use only
52
Focuses on No unifying
accounting equation
Multiand
disciplinar,
finance
Focuses on also deals
the process with other
of
areas
of
preparing
knowledge
the
and
financial
disciplines.
statements Concerns
Precision
with
the
usefulness
53
of financial
statements
Timeliness
E. Standards
for
internal
accounting
information
Internal
decision
makers employed by the
enterprise, often referred
to
as
management,
create and use internal
accounting
information
not only for exclusive use
54
inside the organization

but also to share with
external decision makers.
The
accounting
information created and
used by management is
intended primarily for
planning
and
control
decisions. The following
identifies
internal
accounting
information
standard
55
1. Importance
of
Timeliness
In order to plan for and
control
ongoing
business
processes,
accounting information
needs to be timely. The
competitive
environment faced by
many
enterprises
demands
immediate
access to information.
56
2. Identity
of
Decision Maker
Information
that
is
produced to monitor
and control processes
needs to be provided to
those
who
have
decision-making
authority to correct
problems.
3. Oriented
the Future
toward
57
Although
some
accounting information,
like
financial
accounting information,
is historical in nature,
the purpose in creating
and generating it is to
affect the future. The
objective is to motivate
management to make
future decisions that
are in the best interest
of
the
enterprise,
58
consistent
with
its
goals, objectives, and
mission.
4. Measures
of
Efficiency
and
Effectiveness
Accounting information
measures the efficiency
and effectiveness of
resource
usage.
An
assessment
can
be
made on how effective
59
management
is
in
achieving
the
organizations mission.
F.Applicability of the
basic
concepts
of
Financial Accounting
to
Managerial
Accounting
Financial management
has
its
roots
in
accounting, although it
may also be regarded as
60
a branch of applied
economics. It is broadly
defined
as
the
management of all the
processes
associated
with
the
efficient
acquisition
and
deployment
of
both
shortand
long-term
financial
resources.
Financial
management
assists an organizations
operations management
61
to reach its financial

objectives.
The management of an
organization
generally
involves
the
three
overlapping
and
interlinking
roles
of
strategic
management,
risk management and
operations management.
Financial
management
supports these roles to
enable management to
62
achieve
the
financial
objectives
of
the
shareholders.
Financial
management assists in
the reporting of financial
results to the users of
financial information, for
example
shareholders,
lenders and employees.
Some of the important
functions
in
which
financial accounting may
be
involved
in
63
include:
Forecasting
revenues
and costs
Planning activities
Managing costs
Identifying alternative
sources and costs of
funding
Measurement
and
control of performance
Costing
compliance
with
social,
64
environmental
sustainability
requirements.
and
G. Management uses
of
accounting
in
organizing, planning,
directing
and
controlling
Managers
make
decision in all phases of
their
managerial
65
functions. The functions

are illustrated as follows:
Planning
Decision
Making
Controlling
Organizing and
directing
The
diagram
below
depicts the relationship
of
planning
and
controlling
and
its
relevance
to
management:
66
Goals
Objectives
Plans
Budgets
Actions
Revisions
Results
Feedback
Standards
H. Controllership
Controllership may be
defined as the function of
67
business
management
which
combines
the
responsibility
for
accounting,
reporting,
measurement, auditing,
taxes, operating controls
and other related areas.
The seven basic functions
of a controller are (i.e.,
PREGPET)
Planning
controlling
and
68
This
means
to
establish,
coordinate,
and administer, as an
integral
part
of
management,
an
adequate plan for the
control of operations.
Reporting
and
interpreting
The task is to compare
performance
with
operating plans and
standards and to report
69
and
interpret
the
results of operations to
all
levels
of
management and to
owners of the business.
Evaluating
and
consulting
This includes consulting
with al segments of
management
responsible for policy
70
or action concerning
any
phase
of
the
operation
of
the
business.
Government
Relations
This
includes
supervising
or
coordinating
the
preparation of report of
government agencies.
Protection
of
assets
71
This
is
assuring
protection
for
the
assets
of
business
through
internal
control,
internal
auditing and assuring
proper
insurance
coverage.
Economic appraisal
This
includes
continuously appraising
economic and social
forces and government
72
influences,
and
interpreting their effect
upon the business.
Tax administration
This
includes
establishing
and
administering
tax
policies
and
procedures.
I. Responsibility
Accounting
Responsibility
Accounting
identifies
73
the investment, revenues

and expenses assigned
and controlled by a
manager in a segment to
monitor and asses the
performance of each part
of an organization. If a
manager is to be held
answerable
or
accountable
on
the
performance
of
the
segment, then he should
be
given
the
right
74
information
to
make
decisions
accordingly.
The
content
of
the
information should be
correlated with the level
of details and frequency
of report to be provided
within
the
overriding
principle of cost-benefit
analysis.
75

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Introduction to Managerial

towards achieving these

Management Advisory Services

rational decision based

that confidence can be

and control of the

This includes framing

Management Advisory Services

it is acquired till its final

possible following the

Management Advisory Services

The main factors which

Management Advisory Services

Prepare complete and

Refrain from disclosing

work and monitor their

Refrain from engaging

the organization bearing

which case the problem

assuming the superior is

objective advisor (e.g.,

extinguishing all levels

on the nature of the

inside the organization

Management Advisory Services

Management Advisory Services

to reach its financial

Management Advisory Services

functions. The functions

Management Advisory Services

the investment, revenues

Management Advisory Services

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