Chapter 1 Nature of Management Accounting NATURE OF

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Chapter 1 Nature of Management Accounting

Chapter 1 Nature of Management Accounting

NATURE OF MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT ACCOUNTING

NATURE OF MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT ACCOUNTING

Accounting is the process of identifying, measuring and communicating economic information to permit informed

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information. Business Accounting System Financial Accounting Cost Accounting Management Accounting

Management Accounting Information Management accounting information is the accounting information specifically prepared to aid

Management Accounting Information Management accounting information is the accounting information specifically prepared to aid managers.

Management accounting information is used in three managerial functions 1. Planning is the process

Management accounting information is used in three managerial functions 1. Planning is the process of deciding what action should be taken in the future. 2. Implementation involves specific actions planned in advance to fulfill the budgets. 3. Control comprises managerial action to correct conditions that cause deviation between the actual and planned performance.

Functions of Controller is the highest level management accountant. Management Accountants are responsible for

Functions of Controller is the highest level management accountant. Management Accountants are responsible for the design and operation of the management accounting system.

Distinction between Controller and Treasurer Controllership 1. Planning for control 2. Reporting and interpreting

Distinction between Controller and Treasurer Controllership 1. Planning for control 2. Reporting and interpreting 3. Evaluating and consulting 4. Tax administration 5. Government reporting 6. Protection of assets 7. Economic appraisal Treasureship 1. Provision of capital 2. Investor relations 3. Short-term financing 4. Banking and custody 5. Credits and collections 6. Investments 7. Risk management

Management Accounting vs. Financial Accounting Dimension Management Accounting Financial Accounting Information precision Varies according

Management Accounting vs. Financial Accounting Dimension Management Accounting Financial Accounting Information precision Varies according to use of the information Unified structure Sources of principles Whatever is useful to Management Generally accepted accounting principles Information precision Timeorientation Optional Historical and estimates of the future Statutory Obligation Historical

Management Accounting vs. Financial Accounting Dimension Management Accounting Financial Accounting Report entity Responsibility centres

Management Accounting vs. Financial Accounting Dimension Management Accounting Financial Accounting Report entity Responsibility centres Overall organisation Purpose A means to the end of assisting management External reporting/statements for outside users Users Relatively small group: know identity Relatively large Timeorientation Historical and estimates of the future Historical

Management Accounting vs. Financial Accounting Dimension Information precision Management Accounting Varies according to use

Management Accounting vs. Financial Accounting Dimension Information precision Management Accounting Varies according to use of the information Financial Accounting Unified structure Sources of principles Whatever is useful to Management Generally accepted accounting principles Information precision Optional Statutory Obligation Timeorientation Historical and estimates of the future Historical

Important Similarities between Financial and Management Accounting Most elements of financial accounting are also

Important Similarities between Financial and Management Accounting Most elements of financial accounting are also found in management accounting. Basic data collected for both are in accordance with the generally accepted financial accounting principles to avoid duplication. Both are used in decision making.

Relationship between Cost Accounting and Management Accounting Cost Accounting provides Data for Appraisal Information.

Relationship between Cost Accounting and Management Accounting Cost Accounting provides Data for Appraisal Information. Cost Accounting helps in Profit Planning. Cost Accounting is useful for the purpose of control.

Cost Accounting Provides Data for Performance Appraisal Profit Planning Management Accounting Purpose of Control

Cost Accounting Provides Data for Performance Appraisal Profit Planning Management Accounting Purpose of Control

Management Accounting Information and Their Uses Management Accounting information is used for three distinct

Management Accounting Information and Their Uses Management Accounting information is used for three distinct purposes. Purposes Uses Historical Data Future estimates 1. Measurement Basis for external reporting. Analysing economic performance Cost-plus contract payments. Normal pricing decisions 2. Control Analysing managerial performance Strategic planning Budgeting 3. Alternative choices None Capital budgeting Short-run decisions

Measurement Purposes For the measurement purpose the management accounting system focuses on the measurement

Measurement Purposes For the measurement purpose the management accounting system focuses on the measurement of full costs. Full Cost Accounting measures the resources used in performing some activity. It is the sum of direct and indirect costs. Full costs are used in (i) Financial reporting, (ii) Analysing economic performance and (iii)Cost-plus contracts.

Control Purposes For control purposes, management accounting measures costs by responsibility centres. Responsibility Centres

Control Purposes For control purposes, management accounting measures costs by responsibility centres. Responsibility Centres is an organisation unit headed by a manager who is responsible for its operations and performances.

Alternative Choice Decisions The alternative decisions use differential costs. Differential costs are costs which

Alternative Choice Decisions The alternative decisions use differential costs. Differential costs are costs which differ according to the alternatives. For short-run decisions only direct costs are relevant. For long-range decisions full costs are relevant.