UNIT 5 MANAGEMENT ACCOUNTING Unit Code H5080489 1

UNIT 5: MANAGEMENT ACCOUNTING Unit Code: H/508/0489 1

UNIT 5: MANAGEMENT ACCOUNTING › LO 1: Demonstrate an understanding of management accounting systems. 2

UNIT 5: MANAGEMENT ACCOUNTING P 1 Explain Management Accounting and give the essential requirements of different types of Management Accounting systems 3

What is Management Accounting? Management accounting may be simply defined as a body of accounting knowledge primarily consisting of concepts and techniques (tools) useful to management in making better decisions and evaluating performance. Management accounting is a key element of management. 4

What is Management Accounting? Management accounting in particular involves the identification, generation, presentation, interpretation and use of relevant information to help managers run their organisations. As such it involves the application of accounting and financial management to create, protect, preserve and increase value for the stakeholders of the organisation concerned. 5

What is a Management Accounting system? Management accounting systems focus on tracking the costs associated with the production of goods and services in a company. A few of the most common systems include traditional cost accounting, lean accounting, throughput accounting, and transfer pricing. 6

What is a Management Accounting system? Management Accounting systems provides companies with a different method for tracking costs in order to produce goods and services at the lowest cost possible. Failing to follow any system can result in overpriced goods and lower gross margins. 7

What is a Management Accounting system? Traditional management accounting systems track costs using job order or process costing methods. Each of these methods and others determine how a company allocates costs relating to direct materials, direct labour, and manufacturing overhead. 8

What is a Management Accounting system? Job order costing is used for large projects where all costs are easily traceable to individual projects. Process costing allocates costs based on the number of processes used to produce homogeneous goods. These goods run through a continuous process and are difficult to cost individually. 9

Why is it important to integrate these within an organisation? Managerial accounting provides companies with quantitative and qualitative information on operational and financial performance. While financial accounting focuses on the external use of this information by creditors and others to assess performance and make decisions. 10

Why is it important to integrate these within an organisation? Managerial accounting is used internally by owners, managers and employees. A company’s managerial accounting system encompasses the processes companies install to control and plan operations and support effective decision-making. 11

Explore the origin, role and principles of Management Accounting Managerial accounting has its roots in the industrial revolution of the 19 th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets. Since there were no external shareholders and little unsecured debt, there was little need for elaborate financial reports. 12

Explore the origin, role and principles of Management Accounting Today, organizations have different goals and may even have a combination of objectives, therefore, it is impossible to develop comprehensive and uniform rules for all organizations. Objectives that are frequently emphasized on by organizations, include: - The primary function of management accounting is to help management through the process of profit maximization (scientific management). 13

Explore the origin, role and principles of Management Accounting - Management accounting system seeks to assign a device and this assignment is performed with permission of management and selection of operational goals and distribution of them throughout the organization. The performance responsibilities are assigned to people, and this process is usually referred to as planning (Management principles). 14

Explore the origin, role and principles of Management Accounting system is a controlled system that can identify and correct poor performance with permission of the management (scientific management). Ensuring sufficient wisdom and knowledge within the organization, allowing accurate comparison of the responsibilities for determining the performance domain and obtaining the final benefits and action costs (principles of management). 15

Explore the origin, role and principles of Management Accounting system is an unbiased system of performance evaluation, in which personal desires are removed due to objectivity of the system (management principles). 16

Explore the origin, role and principles of Management Accounting Management is known as an Information System whose major goals include: 1) Presentation of decidable information to different management levels to be used in their decision making, planning, control and facilitation functions. 17

Explore the origin, role and principles of Management Accounting 2) Serve as a means of effective communication within themselves Effective use of budgeting and other control techniques in accounting which requires an understanding of the interaction between these techniques, motivations and levels of the organization which need to be controlled. 18

Explore the origin, role and principles of Management Accounting Effective management accounting practices can improve decision-making in organizations through, among other things, future-focused insight and analysis. But, according to the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA), management accounting has lacked the same level of guidance as financial accounting to ensure that these practices are consistently used worldwide. 19

Explore the origin, role and principles of Management Accounting The four global management accounting principles are as follows: Influence: Communication provides insight that is influential. Management accounting begins and ends with conversations. It improves decision-making by communicating insightful information at all stages of decision-making. Good communication of critical information allows management accounting to cut across silos and facilitates integrated thinking. 20

Explore the origin, role and principles of Management Accounting The consequences of actions in one area of the business on another area can be better understood, accepted, or repaired. By discussing the needs of decision-makers, the most relevant information can be sourced analyzed. This means recommendations will be useful to the decisionmaker and achieve influence. 21

Explore the origin, role and principles of Management Accounting Relevance: Information is relevant. Management accounting scans the best available resources for information that is relevant to the decision that needs to be taken, the persons making the decision, and the decision style or process being used. By understanding the needs of stakeholders, the most relevant information for decision-making is identified, collected, and prepared for analysis. 22

Explore the origin, role and principles of Management Accounting Value: Impact on value is analyzed. Management accounting connects the organization’s strategy to its business model and requires a thorough understanding of the wider macroeconomic environment. It involves analyzing information along the valuegeneration path, evaluating opportunities, and focusing on the risks, costs, and value-generation potential of opportunities. 23

Explore the origin, role and principles of Management Accounting Scenario analysis brings rigor to the evaluation of organizational decisions. By running scenario models to evaluate the impact of particular opportunities and risks, organizations make better decisions about exploiting or mitigating them. The models also enable organizations to quantify the likelihood of an opportunity succeeding or a risk occurring and the value that is to be generated or eroded. 24

Explore the origin, role and principles of Management Accounting Trust: Stewardship builds trust. Accountability and scrutiny make the decision-making process more objective. Balancing short-term commercial interests against longrun value for stakeholders enhances credibility and trust. Management accounting professionals are trusted to be ethical, accountable, and mindful of the organization’s values, governance requirements, and social responsibilities. 25

Explore the origin, role and principles of Management Accounting Being mindful of conflicting interests improves stakeholder management and is an important consideration when prioritizing stakeholder groups. Proactively seeking feedback and being responsive to questions or complaints facilitates scrutiny by those with an interest in the organization’s performance. This enhances the trust, credibility, and legitimacy of the organization and has a positive impact on improving processes and reputation. 26

The distinction between management and financial accounting. 27

REFERENCES Kfknowledgebank. kaplan. co. uk. (2019). [online] Available at: http: //kfknowledgebank. kaplan. co. uk/KFKB/Wiki%20 Pages/Management%20 Accounting. aspx Microbuspub. com. (2019). [online] Available at: http: //www. microbuspub. com/pdfs/chapter 1. pdf wise. GEEK. (2019). What are the Different Types of Management Accounting Systems? . [online] Available at: https: //www. wisegeek. com/what-are-the-different-types-of-management-accountingsystems. html Smallbusiness. chron. com. (2019). How Do Managerial Accounting Systems Contribute Toward a Company's Continual Improvement? . [online] Available at: https: //smallbusiness. chron. com/managerial-accounting-systems-contribute-toward-companyscontinual-improvement-71678. html Accountingdetails. com. (2019). History of Managerial Accounting. [online] Available at: https: //www. accountingdetails. com/history_of_managerial_accounting. html 28

REFERENCES Ghanbari, M. and Vaseli, S. (2015). The Role of Management Accounting in the Organization. International Research Journal of Applied and Basic Sciences, 9(11), pp. 1913 -1915. Media, B. (2009). ACCA Paper F 2 - Management Accounting Study Text, 2009. London: BPP Learning Media. Accounting. WEB. (2019). The 4 Global Management Accounting Principles Your Company Can Adopt. [online] Available at: https: //www. accountingweb. com/aa/standards/the-4 -global-management-accounting -principles-your-company-can-adopt Kfknowledgebank. kaplan. co. uk. (2019). [online] Available at: http: //kfknowledgebank. kaplan. co. uk/KFKB/Wiki%20 Pages/Management%20 Accounti ng. aspx 29