3. Managerial role of accounting

Question 1

What is accounting? What does it do?

Answer 1

• process of identifying, measuring and communicating economic information
• to permit judgements and decisions by users of the information

Question 2

Why is accounting called the language of business?

Answer 2

• communicates financial information to various stakeholders

Question 3

Managers’ use of accounting information:

Answer 3

• require accounting information that will assist them in their decision-making and control activities

Question 4

Shareholders’ use of accounting information:

Answer 4

• require information on the value of their investment and the income that is derived from their shareholding

Question 5

Employees’ use of accounting information:

Answer 5

• require information on the ability of the firm to meet wage demands and avoid redundancies

Question 6

Creditors’ use of accounting information:

Answer 6

• creditors and providers of loan capital require information on a firm’s ability to meet its financial obligations

Question 7

Government agencies’ use of accounting information:

Answer 7

• require information such as sales activity, profits, investments, stocks, dividends, paid etc
• government taxation authorities require information on the amount of profits subject to taxation
• all this information is essential for determining policies to manage the economy

Question 8

How can users of accounting information can be divided into two categories:

Answer 8

• Internal users within organisations
• external users such as shareholders, creditors and regulatory agencies outside the organisation

Question 9

What are the differences between financial and management accounting?

Answer 9

• financial focuses on providing information to external users, management focuses on providing information to internal users
• financial accounting follows generally accepted accounting principles (GAAP) whereas management does not follow specific rules or standards
• financial accounting produces financial statements such as income statements, statement of financial position, and statement of cash flows whereas management accounting produces customised reports such as budgets, variance, and profitability analysis

Question 10

what is management accounting also known as?

Answer 10

Managerial accounting, cost accounting, or internal accounting

Question 11

What aspects of an organisation’s activities does management accounting cover?

Answer 11

Planning:
- helps managers set objectives, formulate strategies, and prepare budgets and forecasts for the future

Controlling:
- helps managers monitor and evaluate performance of various activities, processes and departments within the organisation and identify areas for improvement

Decision-making:
- Helps managers make informed decisions based on relevant, timely and accurate information about the costs, benefits, and risks of various alternatives

Communication:
- Helps managers communicate results and implications of their decisions to the internal and external stakeholders of the organisation, such as owners, investors, creditors, regulators, employees and customers

Question 12

What are the roles required of management accountants?

Answer 12

• Management accountants act as business partners, advisors, and consultants to the managers and other stakeholders of the organisation
• They help the managers plan, control, and make decisions for the organisation by providing relevant, timely and accurate information
• They contribute to developing and improving the organisation’s accounting system processes

Question 13

What are the skills required of management accountants?

Answer 13

• Technical skills
• Interpersonal skills
• Ethical and professional skills

Question 14

What are the functions of management accounting systems?

Answer 14

Management accounting systems should:
- provide relevant information to help managers make better decisions
- provide information for planning, cost, performance measurement and continuous improvement

Question 15

What is the difference between cost and management accounting?

Answer 15

Cost accounting:
- concerned with cost accumulation for inventory valuation to meet their requirements of external reporting and internal profit measurement

Management accounting:
- relates to the provision of appropriate information for decision-making, planning, control and performance valuation

Question 16

How can cost be estimated?

Answer 16

By using these methods:
- engineering
- graphical or scattergraph
- multiple regression analysis

Question 17

In the formula ‘y=ax+b’ what does each letter represent?

Answer 17

y = total cost for the period at an activity level of x

a = total non-variable (fixed) cost for the period

b = average variable cost per unit of activity

x = volume of activity levels or cost driver for the period