ACCT26600 Management Accounting
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Management Accounting
To provide an understanding of the nature of management accounting and its role in the process of managing and controlling the enterprise.
You are required to suggest:
Key Concepts
â–ª Management accounting
â–ª Management control
â–ª Decision making
The Role of Management Accounting
Most enterprises face a process of constant change in their environment. Change is also a continuous process within the enterprise. To survive the enterprise must be able to face up to and manage these changes. The ability to manage change is a critical success factor for all enterprises.
Management accounting is concerned with the process of change management by:
â–ª The analysis of past decisions.
â–ª The provision of information which explains current trends.
â–ª The provision of information for decision making.
â–ª The provision of information for planning and control.
Traditionally management accounting provided cost information to management for the control and decision making process. The concern of the management accountant today is much wider and includes the provision of both financial information and non-financial information.
Management accounting is concerned with the process of management. By considering the process of management it is possible to establish a framework for management accounting.
A framework for Management Accounting
Management is a social process entailing responsibility for the effective and economic planning and regulation of the enterprise in fulfillment of a given purpose or objective. (T Lucey, Management Information Systems)
Consider now how the following terms from the definition relate to the management accounting system:
Social process – management accounting is concerned with the control of people and therefore when designing and using management accounting systems we must be aware of their impact on the individual.
Responsibility and Effectiveness – managers are given responsibility and authority for the effective use of resources. The management accounting system is concerned with measuring how well a manager has exercised his authority and responsibility when using resources.
Topical Quote
If you can’t measure it how can you manage it?
Economic planning – a plan is a course of action designed to ensure that the enterprise achieves a pre-determined objective. The process of planning will be considered in more detail at a later stage.
Regulation – involves the process of controlling the enterprise. Management must control the enterprise so that it achieves its objectives. The process of control will be considered in more detail at a later stage.
Objectives – what are the objectives of the enterprise? If the managers of the enterprise are to be rational decision-makers they must be aware of the enterprise’s objectives and support them!
The Planning Process
A plan is a course of action designed to ensure that the enterprise achieves a pre-determined objective. We can look at planning under three headings collectively known as “The hierarchy of control” *.
â–ª Strategic
â–ª Tactical
â–ª Operational
At the strategic level the planning process involves the following stages:
Setting objectives
Assessing the environment
Assessing existing resources
Determining the strategy
Designing a programme to achieve selected strategic goals.
Traditionally the management accounting system did not play a major role in the strategic planning process. But today organisations are increasingly looking to management accounting as a means of improving planning at the strategic level.
In practice it is very unlikely that the enterprise will have one single objective. The enterprise will have a range of objectives that will change over time and in importance as the relative strengths of the enterprise’s stakeholders change.
Who are the stakeholders?
â–ª Owners/Shareholders
â–ª Managers
â–ª Debtors
â–ª Employees
â–ª Customers
â–ª The community
â–ª Creditors
â–ª Government
An enterprise then has many stakeholders and objectives. A manager needs to be aware of the multiple objectives of the enterprise when making a decision. Multiple objectives are a major problem when making decisions.
One, theoretical, solution to this problem has been to use a single objective that it is felt represents, to a certain extent, the firm’s multiple objectives, namely future cash flow. The reason for choosing this objective is that it clearly shows the firm’s ability to survive, which is of concern to all the stakeholders.
Whether in practice this single objective is used is open to question. Much work is currently being undertaken to develop a range of performance indicators for organisations.
Organising
This is the process of setting up the administrative structures and responsibility centres necessary for implementing decisions. A major purpose of any organisational structure is to facilitate the flow of information to and from decision-makers. The design of the management accounting system must, therefore, be appropriate for, or ‘match’, the enterprise’s organisational design.
Control
Control is closely linked to the planning function in that its purpose is to ensure that the enterprise’s activities conform to its plans. It is achieved by means of an information feedback system that enables performance to be compared with planned targets. The management accounting system plays a major part in this process of feedback control and performance evaluation.
Communication
Communication is an exchange of facts, ideas and opinions by two or more persons. The exchange is successful only when actual understanding results. The management accounting system is an information system for the communication of financial and other data relating to the management of the enterprise. As such when designing or assessing the management accounting system you should bear in mind the features of good information, e.g.
â–ª Relevant
â–ª Sufficiently accurate
â–ª Complete
â–ª Confidence in the source
â–ª Communicated to the right person
â–ª Timely
â–ª Right level of detail
â–ª Appropriate channel
â–ª Understandable
Motivation
This involves getting all the members of the enterprise to pull their weight, and finding ways in which individual performances can be improved. We are looking at the influence of human behaviour on the enterprise, the social process aspect of management accounting. Management accounting systems can either motivate or demotivate and so must be used with care.
Decision Making
Since the quality of information available is crucial to the quality of decision making, an efficient and adequate information system is a prerequisite of managerial success. The management accounting systems is an essential part of the information system.
The Overlap with Financial Accounting
There are several areas of overlap between financial accounting and management accounting. By and large the same pool of data satisfies both sets of requirements but may be used in very different ways. Areas of conflict are principally due to financial accounting regulations, where for example stock records and depreciation methods are maintained to satisfy financial record keeping and the same data is also used for management accounting, management accounting preferring to record these items differently.
It will important to read
out following chapters:
Summary
Management Accounting is concerned mainly with the internal management of the enterprise but is increasingly involved in interacting with the enterprise’s environment.
Its main role within this process is the provision of financial and non-financial numerical information for purposes of organisational control and decision making.
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