Management Accounting | Managerial Accounting

In today’s economy, it is more important than ever to utilize the expertise of Management Accountants (also called cost, managerial, industrial, corporate, or private accountants) for the survival of both small and large companies. Management decisions must be cost effective, for the “bottom line” is the ultimate goal for survival.

What is Management Accounting?

Management Accounting is a system using financial accounting records as basic data to enable better business planning decisions. It is designed to aid decision making, planning, and setting performance standards for specific periods of time. The accounting procedures record the inputs and outputs in an analysis system to find the best cost-effective plans to ensure the company’s future.

In order to properly maintain and grow a profitable business, companies strongly rely on Management Accountants who work closely with the company’s management. Managerial Accounting focuses primarily on internal financial reports of past performance which become the basis for short- and long-term decision making. The accounting procedures are more flexible than those regulated for financial accounting. Preparation of the data and reports is the focus of managerial accounting, which consists mainly of four broad functions: budgeting, performance evaluation, cost management, and asset management.

With operating costs, taxes, and cost of living continually to increase, management may find itself in a situation where cuts may need to be made to maintain quality while earning a reasonable profit. It is the responsibility of the Management Accounting department to find which business activities were least profitable and then make a recommendation whether or not to continue with the business activities, or estimate future revenues in order to aid present day decision-making.

Professional Standards for Management Accountants

Management Accountants are expected to uphold the highest standards of ethical conduct including competence, confidentiality, integrity, objectivity, and resolution of ethical conflicts.

The Institute of Management Accountants confers the Certified Management Accountant (CMA) designation upon applicants who complete a bachelor’s degree or who attain a minimum score or higher on specified graduate school entrance exams. Applicants must have worked at least 2 years in management accounting, pass a four-part examination, agree to meet continuing education requirements, and comply with standards of professional conduct. The exam covers areas such as financial statement analysis, working-capital policy, capital structure, valuation issues, and risk management.

Confidentiality and Type of Information

Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Such reports may include:

1. Sales Forecasting reports
2. Budget analysis and comparative analysis
3. Feasibility studies
4. Merger and consolidation reports

Management accountants based their reports on historical values, while employing statistical methods to arrive at future values. The process of identifying, measuring, analyzing, interpreting, and communicating information for the pursuit of an organization’s goals. This is also known as “cost accounting.”

Management Accounting is used primarily by those WITHIN a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be “future looking” and have forecasting value to those within the company.

• Information on the costs of an organization’s products and services.
  For Example, managers can use product costs to guide the setting of selling prices. In addition, these product costs are used for inventory valuation and income determination (Horngren and Foster, pp. 2).
• Budgets.
  A budget is a quantitative expression of a plan.
• Performance reports:
  These reports often consist of comparisons of budgets with actual results. The deviations of actual results from budget are called variances (Horngren and Foster, pp. 3)
• Other information which assist managers in their planning and control activities.
  Examples are information on revenues of an organization’s products and services, sales back logs, unit quantities and demands on capacity resources (Kaplan and Atkinson, pp. 1).

Accounting concepts that managers need to understand in order to make successful, informed decisions. Managerial Accounting focuses attention on decision making through incremental analysis and performance measurement.

Ability to accumulate, classify, measure, analyze, interpret and report cost and other financial information useful to internal and external decision makers reviewing the execution of an organization’s program or project resources to ensure they are effectively being used to meet objectives.

Financial accounting is used primarily by those OUTSIDE of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company.

Managerial (Management) Accounting

Process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information that is used by management to plan, evaluate, and control within an organization. It is the accounting used for the planning, control, and decision-making activities of an organization. Managerial accounting is concerned with providing information to internal managers who are charged with directing, planning, and controlling operations and making a variety of management decisions. Managerial accounting can be contrasted with Financial Accounting which is concerned with providing information,via financial statements, to stockholders, creditors, and others outside the organization. More specifically, the differences between financial and managerial accounting are summarized here:

	Financial Accounting		Managerial Accounting
(1)	Provides data for external users	(1)	Provides data for internal use.
(2)	Is required by FASB.	(2)	Is not mandated by FASB.
(3)	Is subject to GAAP.	(3)	Is not subject to GAAP.
(4)	Must generate accurate and timely data.	(4)	Emphasizes relevance and flexibility of data.
(5)	Emphasizes the past.	(5)	Has more emphasis on the future.
(6)	Looks at the business as a whole	(6)	Focuses on parts as well.
(7)	Primarily stands by itself.	(7)	Draws heavily from other disciplines such as finance, economics, and operations research.
(8)	Is an end in itself.	(8)	Is a means to an end.

Management accounting is managers oriented therefore its study must be preceded by some understanding of what managers do, the information managers need, and the general business environment. Accordingly we shall briefly examine these subjects.

Need for Managerial Accounting Information: Every organization-large and small-has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations. Every where mangers carry out three major activities-planning, directing and motivating, and controlling. Continue Reading.

History of Managerial Accounting: Managerial accounting has its roots in the industrial revolution of the 19th 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. Continue Reading.

Competence:

Practitioners of management accounting and financial management have a responsibility to:

• 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.
• Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information

Confidentiality:

Practitioners of management accounting and financial management have a responsibility to:

• Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so.
• Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality
• Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

Integrity:

Practitioners of management accounting and financial management have a responsibility to:

• Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.
• 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 either activity or passively subverting the attainment of the organization’s legitimate and ethical objectives.
• Recognize and and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.
• Communicate unfavorable as well as favorable information and professional judgment or opinion.
• Refrain from engaging or supporting any activity that would discredit the profession.

Objectivity:

Practitioners of management accounting and financial management have a responsibility to:

• Communicate information fairly and objectively
• Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.

Resolution of Ethical Conflicts:

In applying the standards of ethical conduct, practitioners of management accounting and financial management may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues practitioners of management accounting and financial management should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such practitioner should consider the following course of action.

• Discuss such problems with immediate superior except when it appears that superior is involved, in which case the problem should be presented to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issue to the next higher managerial level.
• If the immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with a level above the immediate superior should be initiated only with the superior’s knowledge. assuming the superior is not involved. Except where 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 with an objective adviser to obtain a better understanding of possible course of action
• Consult your own attorney as to legal obligations and rights concerning the ethical conflict.
• If the ethical conflict still exists after exhausting 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 on the nature of the ethical conflict, it may also be appropriate to notify other parties.