L1 - Introduction to Management Accounting Flashcards
What is Accounting?
“the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information”
(American Accounting Association, 1966)
Who are the main users of Accounting?
- Managerial accounting provides information for managers of an organisation who direct and control its operations
- Financial accounting provides information to stockholders, creditors and others who are outside the organisation
When was Management Accounting Developed?
- During the industrial Revolution - 1840-60
- Referred to as cost-accounting
What is the Management Cycle?
- Management Accountants provide a service for the managers - help them make more effective and better decisions within an organisation
Questions that can help managers answer:
- What product should they sell from a range?
- Who should they serve?
- Who will be lucrative and lead to repeat purchases?
- Where should we invest?
What is Management Accounting?
“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.” (CIMA Official Terminology)
What is the role of the Management Accountant?
Management accounting services information needs of management by:
- Developing plans and analysing alternatives
- Communicating plans to key personnel
- Providing budgets
- Evaluating performance
- Reporting the results of activities
- Accumulating, maintaining, and processing an organisation’s financial and non-financial information
- e.g. quality, service provided
Characteristics of Useful Information?
- Accurate - need accurate costs to make useful inferences and forecasts
- Relevant - need to costs and revenue of what you sell
- Timely
- Understandable - assume a given level of knowledge, but a manager needs to be able to quickly discern the relevant details
- Comparable
- Complete
These are ideal but sometimes you need to compromise on this information - e.g. in a recession, you may need more timely information but may have to sacrifice some accuracy.
What can be a problem with information provision?
- Information provision should ultimately be aimed at achieving organisation objectives
BUT
- objective(s) may be poorly defined
- there may be several objectives in conflict
- a delivery company may want to grow profits but carbon neutral
- objectives could change over time
What is the Cost/Benefit Criterion?
- Management Accountants provide information as long as the costs do not exceed the benefits.
What are the Similarities between Management Accounting and Financial Accounting?
- Both predominately quantitative
- Do take into account some qualitative elements too
- Share certain data sources
- Both are key elements of the MIS
What are the differences between Management Accounting and Financial Accounting?
How is the Role of Management Accounting expanding?
- Increasing complexity and size of organisations
-
Regulatory environment
- the larger focus on sustainability - but 2035 no petrol or diesel vehicles
- management accountants now have a budget for carbon and now undertake scenario planning (planning for a situation that may occur and how to adapt and mitigate any damage that might ensue)
-
Worldwide competition
- Organisations are under pressure to produce high-quality goods at even cheaper prices
- However, this is just a bad thing as we now have a global network of raw material suppliers
- Need to think of how goods are going to be distributed not only domestically but globally
-
Rapid development and implementation of technology
- IT systems can automate data collecting processes
- Allows the management accounts to take on a more analytical role
- Data protection now becomes a problem - can the integrity of the data be maintained
- Increased emphasis on quality
Generally, how has the role of the management accountant developed overtime?
Before…emphasis on:
- Achieving cost-efficiency
- Same input to produce more output
- Effective cost management
Now…management accountants need to be prepared to:
- Manage value
- Manage for environmental sustainability
What did (Hopwood, 2009) conclude about management accounting during economic crises?
Hopwood (2009) argued that economic information flows are assuming greater salience within the management of organisations such that:
- Budgets are continually set aside and reformulated
- Expectations on revenues and costs are questioned and revised
- Deeper understandings of cash flows and liquidity are required
- Ad hoc analyses are standard practice
- Management accounting is operating in continuous time
What did (Quattrone, 2016) conclude about management accounting during the Digital Revolution?
Quattrone (2016) argues that ‘digital’ accounting information will not automatically make management accounting wiser:
- Technology may create an ‘illusion of control’ –> having lots of graphics and information
- Increased distance in the production of knowledge and decision-making
- Data are given…decisions are pre-fabricated…but are they meaningful?
- Management accounting/accountant to play a role in “validating” information
