Management accounting

Question 1

What is management accounting?

Answer 1

• Reports information to internal users
• Uses financial and non-financial informations to manage and control operational activities and strategic direction.
• Uses cost information to cost products/services and set selling prices to generate profit
• Concerned with the present and the future not the past
• Short, medium and long term decision making focus

Question 2

Definition of management accounting?

Answer 2

Management accounting is “the sourcing, analysis, communication, and use of decision-relevant financial and non-financial information to generate and preserve value for organisations
(Source: www.cimaglobal.com).

Question 3

Key differences between financial and management accounting

Answer 3

Financial accounting:

• Reports on past events
• Highly regulated
• Detailed annual financial statements
• Follows set formats for statements

Management accounting:

• Often involves planning for the future
• Not regulated. However, guidelines are set by professional bodies
• Frequent management accounting reports
• No pre-set and often detailed reports

Question 4

Characteristics of financial and management reports

Answer 4

Frequency:
FR- Usually produced annually
MR- As frequent as necessary for management purposes

Timeliness:
FR- Usually there is a significant time lag between the period covered by the report and the date of publication
MR- Can be produced with minimal delay, provided that appropriate systems are in place

Orientation to future or past:
FR- Summarise transactions and events that have already taken place; they are not orientated to the future
MR- Can be orientated to future or past, depending on managers’ information requirements

Level of details:
FR- Not detailed: transactions are summarised under a few headings
MR- Can be as detailed or aggregated as necessary

Question 5

Features of management accounting

Answer 5

Lack of regulation: Management accounting information is for internal use, and needs to be tailored towards the specific needs of the organisations.

Orientation towards past and future: Management accounting information draws upon the past events for information but is also oriented towards the future. For example, how much profit is the business likely to make next year?

Timely Production: timeliness is one of the main characteristics of useful information. Managers need timely information to respond quickly to changing circumstances.

Frequent Reporting: Management accounting information is produced and reported as it is required (for example large retailers are likely to produce sales figures daily).

Question 6

Functions of management accounting

Answer 6

Cost allocation:

• cost of goods sold and stock/inventories
• internal & external profit reporting

Provision of relevant information:

• to make informed decisions
• to plan, control, measure performance and continue improvement

Question 7

The decision making process

Answer 7

Planning Process:

1. Identify objectives of the organisation
2. Search for alternative courses of action
3. Select appropriate course of action
4. Implement the decisions

Controlling Process:

5. Compare actual and planned outcomes
6. Respond to divergences from plan

Question 8

Role of management accounting

Answer 8

1. Direct attention
2. Keeping score
3. Solving problems

Question 9

Management reports

Answer 9

Decision Making:
-Marginal Costing for decision making
-Cost – Volume – Profit Analysis
-Pricing
-Capital Investment
Planning & Control:
-Budgeting
-Management control
-Variance analysis

Question 10

Users of management information

Answer 10

1. Managers
   - Functional
   - Strategic
2. Directors
3. Employees