1.) An Introduction to Management Accounting Flashcards
Define: Accounting. (American Accounting Association, 1966 definition)
“The process of identifying, measuring and communicating economic information to permit judgements and decisions by users of the information”
- Financial decisions/judgement
- Measured quantitatively (even non-financial tings)
Who are the users of accounting information?
“It’s a language”
- Management
- Investors
- Lendors
- Employees (employment security?)
- Creditors
- Government (taxation)
- Public
- Analysts
> > > Internal vs. external users
What is Management Accounting?
What is Financial Accounting?
Management:
- Provides information for managers of an organisation who direct and control its operations
- Information to help planning & control, decision making
- Mostly internal users
Financial:
- Provides information to shareholders, creditors and others who are outside the organisation
- Mostly external users
Describe ‘The Management Cycle’
Decision Making at centre with arrows going to all:
1) Formulating Long-and Short-Term Plans (Planning)
2) Implementing the Plans (Directing and Motivating)
3) Measuring Performance (Controlling)
4) Comparing Actual to Planned Performance (Controlling)
What are some examples of how The Management Cycle is implemented?
1) Need information to formulate plans e.g. for budget targets (Planning)
2) Encouraging employees to work in the interest of the company (Directing and Motivating)
3) , 4) Is the organisation meeting budget targets? (Controlling)
Define: Management Accounting (CIMA Official Terminology)
The process of:
- identification,
- measurement,
- accumulation,
- analysis,
- preparation,
- interpretation and
- communication of:
information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources.
What is the Role of Management Accounting?
1) Developing plans and analysing alternatives
2) Communicating plans to key personnel
3) Evaluating performance
4) Reporting the results of activities
5) Accumulating, maintaining, and processing an organisation’s financial and non-financial information
- Also; risk-management
What are the Characteristics of Useful Information?
- Relevance (key; fit for purpose, comparable)
- Understandability (to be interpreted)
- Timeliness (detecting problems early to stay on track to achieve plan)
- Comparability
- Reliability (but doesn’t have to be as precise as financial accounting)
- Completeness
What is the purpose of information re. Management Accounting? What are the caveats?
Information provision should ultimately be aimed at achieving organisation objectives, but:
- objective(s) may be poorly defined (and may change based on new information)
- there may be several objectives in conflict (top-down approach of organisation, filtering down to specific objectives at base level)
- objectives could change over time
What is the Cost/Benefit Criterion for obtaining information?
- Cost of obtaining information should not outweigh the benefit of possessing it
- More info = more cost
- Benefit reaches a plateau, whilst cost keeps increasing
- Thus information often based on estimates as a result
“Just precise enough”
What are the similarities of Management and Financial Accounting?
Similarities:
- Both predominantly quantitative
- Share certain data sources
- Both are key elements of the MIS; Management Information System
List the key differences between Management and Financial Accounting.
1) Users
2) Time focus
3) Emphasis
4) Frequency
5) Focus
6) Format
How do Management and Financial Accounting differ re. Users?
Financial:
- External persons who make financial decisions
Management:
- Managers who plan for and control an organisation
How do Management and Financial Accounting differ re. Time focus?
Financial:
- Historical perspective
Management:
- Future emphasis on planning/company growth etc.
How do Management and Financial Accounting differ re. Emphasis?
Financial:
- Emphasis on verifiability and precision (trust)
Management:
- Emphasis on relevance for planning and control
How do Management and Financial Accounting differ re. Focus (general)?
Financial:
- Primary focus is on the whole organisation
Management:
- Focuses on segments of an organisation e.g. profitability of individual products etc
How do Management and Financial Accounting differ re. Frequency?
Financial:
- Prepared on a regular basis; annually
Management:
- Prepared on an ad hoc basis; produced PRN
How do Management and Financial Accounting differ re. Format?
Financial:
- Must follow GAAP and prescribed formats
Management:
- Flexible, based on users’ needs, not mandatory (apart from product costing for financial statements)
Describe the expanding role of Management Accounting.
- Increasing complexity and size of organisations (w/globalisation; becomes de-centralised)
- Increased emphasis on quality; customers more discerning e.g. mobile phone market
- Rapid development and implementation of technology
- World-wide competition
- Regulatory environment (e.g. low-cost airlines)
> > > All factors that increased the need for management accounting information.
Describe how the business environment has changed in the last 20 years.
More competitive environment emphasising:
- Higher quality products
- Lower prices and costs
- Global competition
- Meeting and anticipating customer needs (customer satisfaction)
What current issues surround Management Accounting?
- Changing organisational forms; flatter, network structures
- Increased importance of service industries and changing approaches to public sector management e.g. NHS targets (private sector management strategies in public sector)
Why are ethical accounting practices important?
- Build trust
- Promote loyal, productive relationships w/users of accounting information
Which professional organisation outlines a good code of ethics for Management Accounting?
- CIMA; Chartered Institute of Management Accountants
- Many companies and professional organisations also have
»> Accounting scandals = ethics gone wrong e.g. Tesco
Describe the Code of Ethics for Management Accountants.
Integrity:
- Avoid activities that could affect your ability to perform duties
- Refuse gifts/favours that might influence behaviour
- Communicate unfavourable as well as favourable information
- Refrain from activities that could discredit the profession
