Introduction to Management Accounting

Management Accounting Definition of Accounting ? Definition of Financial Accounting ? Definition of Management Accounting ? © Edited by Ahmad Zahiruddin Yahya 2012

Definition of accounting ….the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. © Edited by Ahmad Zahiruddin Yahya 2012

Management versus Financial Accounting Accounting System (accumulates financial and managerial accounting data) Managerial Accounting Information for decision making, and control of an organization’s operations. Financial Accounting Published financial statements and other financial reports. Internal Users External Users © Edited by Ahmad Zahiruddin Yahya 2012

Comparison of Financial and Managerial Accounting #1 Financial Accounting Management Accounting Users External persons who make financial decisions Managers who plan for and control an organisation © Edited by Ahmad Zahiruddin Yahya 2012

Comparison of Financial and Managerial Accounting #2 Financial Accounting Management Accounting Time focus Historical perspective Future emphasis © Edited by Ahmad Zahiruddin Yahya 2012

Comparison of Financial and Managerial Accounting #3 Financial Accounting Management Accounting Verifiability vs. Relevance Emphasis on verifiability Emphasis on relevance for planning & control © Edited by Ahmad Zahiruddin Yahya 2012

Comparison of Financial and Managerial Accounting #4 Financial Accounting Management Accounting Precision vs. Timeliness Emphasis on precision Emphasis on timeliness © Edited by Ahmad Zahiruddin Yahya 2012

Comparison of Financial and Managerial Accounting #5 Financial Accounting Management Accounting Subject Primary focus is in the whole organisation Focuses on segments of an organisation © Edited by Ahmad Zahiruddin Yahya 2012

Comparison of Financial and Managerial Accounting #6 Financial Accounting Management Accounting GAAP Must follow GAAP and prescribed formats Need not follow GAAP or any prescribed format © Edited by Ahmad Zahiruddin Yahya 2012

Comparison of Financial and Managerial Accounting #7 Financial Accounting Management Accounting Requirement Mandatory for external reports Not mandatory © Edited by Ahmad Zahiruddin Yahya 2012

Do you know when accounting for managerial decision making began? © Edited by Ahmad Zahiruddin Yahya 2012

MANAGERIAL ACCOUNTING HISTORY Beginnings between 1880 and 1925 Pre-1915, management accounting focused on product costing, that is, what products provided best profit 1925 to 1950, emphasis on inventory costing systems Improvements to inventory costing in 1950s and 1960s 1980s recognized need for improvements in management accounting © Edited by Ahmad Zahiruddin Yahya 2012

Do you know what the current focus for managerial accounting is? © Edited by Ahmad Zahiruddin Yahya 2012

CURRENT FOCUS: The changing business environment Organizations have faced dramatic changes in their business environment. Move from protected markets to highly competitive global markets Deregulation Declining product life-cycles © Edited by Ahmad Zahiruddin Yahya 2012

CURRENT FOCUS: The changing business environment To compete successfully in today’s environment companies are: Making customer satisfaction an overriding priority. Adopting new management approaches. Changing their manufacturing systems. Investing in AMT ’s. Above changes are having a significant impact on the MAS. © Edited by Ahmad Zahiruddin Yahya 2012

Focus on Customer Satisfaction © Edited by Ahmad Zahiruddin Yahya 2012

© Edited by Ahmad Zahiruddin Yahya 2012 Key success factors Cost efficiency –increased emphasis on accurate product costs and cost management. Quality –TQM, quality measures. Time – reduced cycle time, reduced focus on non-value-added activities. Innovation – responsiveness in meeting customer requirements. Product comparisons. Feedback on customer satisfaction. © Edited by Ahmad Zahiruddin Yahya 2012

Continuous improvement Static historical standards no longer appropriate. Benchmarking © Edited by Ahmad Zahiruddin Yahya 2012

© Edited by Ahmad Zahiruddin Yahya 2012 Employee empowerment Delegate more responsibility to people closest to operating processes and customers. © Edited by Ahmad Zahiruddin Yahya 2012

© Edited by Ahmad Zahiruddin Yahya 2012 Value chain analysis The term “value chain” refers to the sequence of business functions in which usefulness is added to the products or services of an organization. © Edited by Ahmad Zahiruddin Yahya 2012

Value chain R & D Design Production Management Accounting Marketing Distribution Service © Edited by Ahmad Zahiruddin Yahya 2012

What are management accounting roles? © Edited by Ahmad Zahiruddin Yahya 2012

Management Accounting Roles Problem Solver Scorekeeper Attention Director © Edited by Ahmad Zahiruddin Yahya 2012

Problem Solving This involves comparative analysis for decision making. This role asks: Of the several alternatives available, which is the best? © Edited by Ahmad Zahiruddin Yahya 2012

Scorekeeping This involves accumulating data and reporting reliable results to all levels of management. This role asks: How is the business doing? © Edited by Ahmad Zahiruddin Yahya 2012

Attention Directing This involves helping managers properly focus their attention. This role asks: Which opportunities and problems should be emphasized first. Attention directing should focus on all opportunities to add value to an organization, not just cost-reduction opportunities. © Edited by Ahmad Zahiruddin Yahya 2012

MANAGEMENT ACCOUNTING: Designed for Profit Maximization “The objective of profit maximization should be constrained by the requirement that profits be achieved through legal and ethical means.”1 1Hansen & Mowen, 2007, p. 17 © Edited by Ahmad Zahiruddin Yahya 2012

Code of Conduct for Management Accountants The Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management have two major parts offering guidelines for:  Ethical behavior.  Resolution for an ethical conflict. © Edited by Ahmad Zahiruddin Yahya 2012

IMA Guidelines for Ethical Behavior Follow applicable laws, regulations and standards. Maintain professional competence. Competence Prepare complete and clear reports after appropriate analysis. © Edited by Ahmad Zahiruddin Yahya 2012

IMA Guidelines for Ethical Behavior Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage. Confidentiality Ensure that subordinates do not disclose confidential information. © Edited by Ahmad Zahiruddin Yahya 2012

IMA Guidelines for Ethical Behavior Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organization’s legitimate objectives. Integrity Recognize and communicate personal and professional limitations. © Edited by Ahmad Zahiruddin Yahya 2012

IMA Guidelines for Ethical Behavior Avoid activities that could affect your ability to perform duties. Communicate unfavorable as well as favorable information. Refrain from activities that could discredit the profession. Refuse gifts or favors that might influence behavior. Integrity © Edited by Ahmad Zahiruddin Yahya 2012

IMA Guidelines for Ethical Behavior Communicate information fairly and objectively. Objectivity Disclose all information that might be useful to management. © Edited by Ahmad Zahiruddin Yahya 2012

© Edited by Ahmad Zahiruddin Yahya 2012 THE END ADVISE & REMINDER: Now, your reading time….it’s your responsibility to read Chapter 1 in the main text and related chapters in the additional recommended references ! © Edited by Ahmad Zahiruddin Yahya 2012