01 - Management Accounting

Question 1

What are the learning outcomes of the Management Accounting chapter?

Answer 1

• Explain the purpose of management accounting.
• Explain the role of the management accountant.
• Explain the role of CIMA as a professional body for management accountants.
• Explain the information needs of different levels of the organisation.
• Explain the characteristics of good information.

Question 2

What must you know from the Managment Accounting chapter?

Answer 2

• The definition of management accounting.
• The importance of cost control and planning within organisations.
• The ways in which information can be used to identify performance within an organisation.
• The differences between financial information requirements for companies, public bodies and society.
• The role of the management accountant and the activities undertaken by management accountants.
• The relationship between the management accountant and the managers being served.
• The difference between placing management accounting within the finance function and a business partnering role within an organisation.
• The background to the formation of CIMA.
• The role of the CIMA in developing the practice of management accounting.

Question 3

What is management accounting?

Answer 3

Management accounting is the application of the principles of accounting and financial management to

create, protect, preserve and increase value

for the stakeholders of for-profit and not-for-profit enterprises in the public and private sectors.

Question 4

What can managment accounting be used for?

Answer 4

Management accounting is an integral part of management. It requires the identification, generation, presentation, interpretation and use of relevant information to:

• Inform strategic decisions and formulate business strategy
• Plan long, medium and short-run operations
• Determine capital structure and fund that structure
• Design reward strategies for executives and shareholders
• Inform operational decisions
• Control operations and ensure the efficient use of resources
• Measure and report financial and non-financial performance to management and other stakeholders
• Safeguard tangible and intangible assets
• Implement corporate governance procedures, risk management and internal controls

Question 5

What are the main purposes of managment accounting?

Answer 5

• Planning
• Control
• Decision Making

Managers require information for each of these purposes and it is the role of the management accountant to provide this information.

Question 6

What is the purpose of Planning in managment accounting?

Answer 6

Planning involves:

• establishing the objectives of an organisation
• and formulating relevant strategies (plans) to achieve these objectives.

Planning can be carried out at differernt levels in an organisation:

Strategic

• Long-term planning carried out at the highest level of the organisation

Managerial

• Short- to medium term planning carried out with middle managment.

Operational

• Short-term planning for day to day operations.

Question 7

What is the purpose of Control in managment accounting?

Answer 7

Planning allows targets to be set and this allows for actual performance to be evaluated and controlled.

When actual performance is compared to planned (budgeted) performance, managers are able to identify the areas in which they succeeded or failed and this helps to determine future actions.

Question 8

What is the purpose of Decision-Making in management accounting?

Answer 8

Decision-making involves:

• considering all of the information that is available
• and making informed decisions.

Providing good information to managment to assist in decision making is a key role of a management accountant.

Question 9

What is flow of data to information?

Answer 9

The operations of organisations generate a huge quantity of data.

Data consist of raw facts and statistics before they have been processed.

Once data have been processed into a useful form, this becomes information.

The better the information provided to management – the better the planning, control and decision making.

Question 10

What are the characteristics of good data?

Answer 10

ACCURATE

• Accurate
  
  • The degree of accuracy required depends on the reason the information is needed.
• Complete
  
  • Managers should be given all the information they require with no ommissions, but information should not be excessive.
• Cost Beneficial
  
  • The value of information should not exceed the cost of producing it.
• Understandable
  
  • Use of technical language and jargon should be limited to ensure that the users of the information will understand it.
• Relevant
  
  • The information containted in a report should be relevant to its purpose. Redundant parts should be removed
• Authoritative
  
  • Information should be trusted and provided from reliable sources so the user can have confidence using it.
• Timely
  
  • Information should be provided within a reasonable timescale so that the information is not out of date and can still be sued for its purpose
• Easy to Use
  
  • Always consider the user’s needs when providing information to ensure what is provided is what they need.

Question 11

What are the different levels of management for which information is required?

Answer 11

Strategic

• This is the top-level managmenet of the organisaiton.
• Decisions made at this level tend to be long-term.
• They affect the whole organisation and tend to be unstructured.

Managerial

• Decisions made at the managerial level will have a medium impact on the organisation.
• They will be medium term and will be semi-structured.

Operational

• Decisions made at this level will normally only affect one department and these decisions will be short term, day-to-day decisions.
• Decisions at this level tend to be highly structured.

Question 12

What are the characteris of information required at the Strategic Level and Operational Level?

Answer 12

Strategic vs. Operational

Source

• S - Historical and future estimates
• O - Historical

Time

• S - Required less frequently
• O - Required daily

Accuracy

• S - Contains subjective estimates
• O - Information must be accurate

Detail

• S - Highly summarised
• O - Detailed

Breadth

• S - Wide variety of information required
• O - Focused information

Question 13

Explain how different users will use information differently.

Answer 13

Financial information is required by a variety of different users. Each user has different needs and this will reflect the type of information required.

Commercial

• The main objective of commercial organisations is usually to maximise the wealth of their shareholders. Therefore, they would require information on costs of running departments, producing products and calculating profit.

Not-for-profit

• The main objective of public bodies is to provide services to the public. They should be operating within the public interest and in line with government requirements. These are not-for-profit organisations, so they will require information on the efficiency and effectiveness of their services rather than on profit calculations.

Society

• Society at large is also a user of financial information. The public is interested in how organisations are being run and are performing.

Note on enivronmental reporting

In recent years, environmental reporting has become more important as the public are taking a keener interest in the impact organisations have on the environment.

Question 14

What are the differences between Managment Accounting and Financial Accounting?

Answer 14

Managment Accounting

• Concerned with the provision of information to management to aid decision making
• Internally focused
• Can use any format
• No rules or regulations

Financial Accounting

• Concerned with the production of statutory accounts for an organisation
• Externally focused
• Governed by many rules and regulation
• Statutory requirement

Question 15

What is the role of the management accountant?

Answer 15

No specific role

Management accountants do not necessarily have a single, clearly defined role. The definition of management accounting that we looked at earlier in the module leaves considerable scope for interpretation.

Stakeholders

The management accountant has to deal with staff at all levels of the entity and in all departments, not just in the finance function.

Forward vs. Backward Looking

• Management accounting is largely future oriented. The purpose of a management accounting exercise is frequently to set out plans and forecasts for the future. These may be used to coordinate and direct activities.
• Management accountants also have to be prepared to look back and to reflect on whether actual results indicate that things are running to plan. If not the management accountant’s job is then to decide where changes have to be made in order to remedy any problems.

In other words, management accounting is both forward looking as well as backward looking.

Question 16

What is the reationahip betweeen the managment accountant and management?

Answer 16

Good at communicating with people

• They must be able to resolve conflicts in a diplomatic and effective manner.
• They must also be able to resolve disputes between colleagues whose interests are in conflict.

An ambiguous role in the organisation

• They may be involved in making decisions at all levels from developing corporate strategy down to identifying cases of overspending at the departmental level.
• Their role may be restricted to ensuring that the decision-makers have all of the information that they require.
• The management accountant may not be the person who decides on the questions to which he or she has an input.

Question 17

What are the different positions a managment accountant can play within an organisation?

Answer 17

Dedicated business partner

• Integral part of the business area they support
• Advantage
  
  • Strong relationships whic are built up between the accountant and the business ->
  • Thus increased knowledge of the business area which will allow the accountant to better meet the needs of the business.

Shared services centre

• Whole of finance brought together as one centre and provides all the accounting needs of the whole organisation.
• Advantage
  
  • Cost reduction through economies of scale and lack of duplication.
  • Consistency of managment information.
  • Increased quality of services through establishment of best practive.

Business process outsourcing

• Finance function outsourced to an external third party
• Advantage
  
  • Cost savings
  • Gaining of expertise from specialist providers
  • Outsourcing more routine activities should also allow the retained finance function to concentrate on more value-adding activities to benefit the business

Question 18

What is CIMA?

Answer 18

CIMA is a professional body.

CIMA is the world’s largest and leading professional body of management accountants. It has 183,000 members and students in 168 countries.

One implication of these inter-related responsibilities is that CIMA requires its members to pass exams and obtain professional experience. That means that anybody who holds the CIMA qualification should have the necessary technical competence to discharge his or her responsibilities.

CIMA’s Royal Charter and the designation of its members as “Chartered Management Accountants” puts it at the very top of the hierarchy in terms of professional bodies.

Question 19

What is the purpose of a professional body?

Answer 19

Professional bodies exist to support their members by

• representing their interests to government, regulators and other interested and influential parties.
• They are also responsible for ensuring that their members’ credibility is maintained and enhanced.
• Finally, they exist to protect the public interest from dishonesty and incompetence on the part of their members.

Question 20

What is CIMA’s role in developing management accounting?

Answer 20

R&D

• CIMA does not claim any specific responsibility for the development of newer and better management accounting techniques. That is a matter for its members.
• CIMA does, however, fund academic research into the techniques used in management accounting.

Professional and ethical standards

COPIP

Also, it sets out professional and ethical standards for its members. CIMA’s five fundamental principles are:

Confidentiality

• Information obtained in the line of duty should not be disclosed to a third party unless specific permission has been obtained, or where there is a legal or professional duty to do so.

Objectivity

• No bias or conflict of interest should be allowed to override professional judgement.

Professional competence and due care

• Accountants must give an ongoing commitment to their level of professional knowledge and skill.

Integrity

• Being straightforward, honest and truthful in all professional and business relationships.

Professional behaviour

• Accountants must always avoid any action that could negatively affect the reputation of the profession.

Question 21

What are responsiibilites of CIMA members towards CIMA?

Answer 21

CIMA members are required to maintain their professional skills by engaging in continuing professional development (CPD) and CIMA provides courses that can be purchased and followed in a range of areas to maintain and enhance competence.

Question 22

Unit Synopsis

What is Management Accounting?

Answer 22

Management accounting is the

• application of the principles of accounting and financial management
• to create, protect, preserve and increase value
• for the stakeholders of for-profit and not-for-profit enterprises in the public and private sectors.

Management accounting is an integral part of management. It requires the

• identification,
• generation,
• presentation,
• interpretation

and use of relevant information to:

• inform strategic decisions and formulate business strategy;
• plan long, medium and short-run operations;
• determine capital structure and fund that structure;
• design reward strategies for executives and shareholders;
• inform operational decisions;
• control operations and ensure the efficient use of resources;
• measure and report financial and non-financial performance to management and other stakeholders;
• safeguard tangible and intangible assets;
• implement corporate governance procedures, risk management and internal controls.

Question 23

Unit Synopsis

How has the role of management accounting evolved over time?

Answer 23

Management accounting started off as costing, with the emphasis being placed on the determination of costs.

The discipline has grown enormously in importance and prominence since then.

Management accountants are involved in the management of the business at all levels from relatively minor practices through to strategic planning.

They ensure that plans and strategies are carried out by looking backwards at past performance.

Question 24

Unit Synopsis

What is the role of management accountants?

Answer 24

Management accountants require considerable skill, both in terms of:

• technical excellence in management accounting techniques
• and also in terms of personal skills.

There is a danger that the managers and staff with whom the accountant must interact will indulge in dysfunctional behaviour if they do not receive the necessary motivation and encouragement.

Badly designed monitoring and appraisal systems can be dangerously counter-productive.

Question 25

Unit Synopsis

Which types of organisations are able to use management accountants?

Answer 25

Management accounting is relevant to all types of entity, including not-for-profit entities such as charities and public sector entities.

The accountant may have to determine different approaches, as per the type of entity, to the development of benchmarks against which to measure performance.

Question 26

Unit Synopsis

What is the role of the management accountant with respect to the relationship with management?

Answer 26

Arguably, the management accountant’s role should be alongside “general” managers rather than as an outsider interfering in the manager’s operations.

The management accountant should focus on the creation of value, pulling together and coordinating the activities of the functional specialists within the organisation.

Question 27

Unit Synopsis

What is CIMA and what is its purpose?

Answer 27

CIMA exists to further the discipline of management accounting and to pursue the interests of its members.

As part of that, CIMA also exists to protect the interests of those who rely on the integrity and competence of management accountants by ensuring that its members are competent and well disciplined.