Management Accounting
The Role of Management Accounting
Management accounting as defined by the National Association
of Accountants (NAA) is the process of identification, measurement, accumulation,
analysis, preparation, interpretation, and communication of financial information,
which is used by management to plan, evaluate, and control within an organization.
It ensures the appropriate use of and accountability for an organization's resources.
Management accounting also comprises the responsibility for the preparation of financial
reports for non management groups such as regulatory agencies and tax authorities.
Simply stated, management accounting is the accounting for the planning, control,
and decision-making activities of an organization.
Financial Accounting vs. Management Accounting
Financial accounting is mainly concerned with the historical
aspects of external reporting, that is, providing financial information to outside
parties such as investors, creditors, and governments. To protect those outside
parties from being misled, financial accounting is governed by what are called generally
accepted accounting principles (GAAP). Management accounting, on the other hand,
is concerned primarily with providing information to internal managers who are charged
with planning and controlling the operations of the firm and making a variety of
management decisions. Due to its internal use, management accounting is not subject
to GAAP. More specifically, the differences between financial and management accounting
is summarized below:
Financial Accounting
1. Provides data for external users
2. Is required by the law
3. Is subject to GAAP
4. Must generate accurate and timely data
5. Emphasizes the past
6. Looks at the business as a whole
7. Primarily stands by itself
Management Accounting
1. Provides data for internal users
2. Is not mandatory by law
3. Is not subject to GAAP
4. Emphasizes relevance and flexibility of data
5. Has more emphasis on the future
6. Focuses on parts as well as on the whole of a business
7. Draws heavily from other disciplines such as finance,
economics, and operations research
8. Is a means to an end
8. Is an end in itself?
Cost Accounting vs. Management Accounting
The difference between cost accounting and management
accounting is a subtle one. The NAA defines cost accounting as "a systematic set
of procedures for recording and reporting measurements of the cost of manufacturing
goods and performing services in the aggregate and in detail. It includes methods
for recognizing, classifying, allocating, aggregating, and reporting such costs
and comparing them with standard costs." From this definition of cost accounting
and the NAA's definition of management accounting, one thing is clear: the major
function of cost accounting is cost accumulation for inventory valuation and income
determination. Management accounting, however, emphasizes the use of the cost data
for planning, control, and decision-making purposes.
The Work of Management
In general, the work that management performs can be classified
as (a) planning, (b) coordinating, (c) controlling, and (d) decision making.
Planning: The planning function of management involves
the selection of long-range and short-term objectives and the drawing up of strategic
plans to achieve those objectives.
Coordinating: In performing the coordination function,
management must decide how best to put together the firm's resources in order to
carry out established plans.
Controlling:
Controlling entails the implementation of a decision method
and the use of feedback so that the firm's goals and specific strategic plans are
optimally obtained.
Decision Making:
Decision making is the purposeful selection from among
a set of alternatives in light of a given objective.
Management accounting information is important in performing
all of the aforementioned functions.
The Organizational Aspect of Management Accounting
There are two types of authorities in the organizational
structure: line and staff.
Line authority is the authority to give orders to subordinates.
Line managers are responsible for attaining the goals set by the organization as
efficiently as possible. Production and sales managers typically possess line authority.
Staff authority is the authority to give advice, support,
and service to line departments. Staff managers do not command others. Examples
of staff authority are found in personnel, purchasing, engineering, and finance.
The management accounting function is usually a staff function with responsibility
for providing line managers and also other staff people with a specialized service.
The service includes (a) budgeting, (b) controlling, (c) pricing, and (d) special
decisions.
Controllership
The chief management accountant or the chief accounting
executive of an organizationis called the controller (often called comptroller,
especially in the government sector.) The controller is in charge of the accounting
department. The controller's authority is basically staff authority in that the
controller's office gives advice and service to other departments. But at the same
ti!Ile, the controller has line authority over members of his or her own department
such as internal auditors, bookkeepers, budge! analysts, etc. (See Figure 15-1 for
an organization chart of a controllership situation.) The principal functions of
the controller are:
1. Planning for control
2. Financial reporting and interpreting
3. Tax administration
4 . Management audits, development of accounting systems,
and computer data processing
5. Internal audits
The Certificate in Management Accounting (CMA)
Management accounting has
expanded in scope to cover a wide variety of business disciplines such as finance,
economics, organizational behavior, and quantitative methods. In line with this
development, the National Association of Accountants (NAA) has created the Institute
of Management Accounting, which offers a program leading to the Certificate in Management
Accounting (CMA). The CMA program requires candidates to pass a series of uniform
examinations covering a wide range of subjects. The objectives of the program are
threefold: (1) to establish management accounting as a recognized profession, (2)
to foster higher educational standards in the area of management accounting, and
(3) to establish objective measurement of an individual's knowledge and competence
in the area of management accounting.
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