Management in Accounting and Quantitative Methods

What is Management Accounting

The Role of Management Accounting Management accounting:  ( defined by the National Association of Accountants (NAA))

( 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 organizations 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.

Financial accounting vs Management accounting

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 NAAs 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 that management performs can be classified as

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 firms 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 firms 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 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.
Stuff 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:

  • Budgeting
  • Controlling
  • Pricing
  • Special decisions.

Controller-ship The chief management accountant or the chief accounting executive of an organization called the controller (often called comptroller, especially in the government sector.) The controller is in charge of the accounting department. The controllers authority is basically staff authority in that the controllers office gives advice and service to other departments. But at the same title, 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 controller-ship 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
  3. to establish objective measurement of an individuals knowledge and competence in the area of management accounting.