LESSON I

NATURE OF MANAGEMENT ACCOUNTING

Definition: Various definitions of management accounting have been put forward, they include:
American Association of Accountants (AAA):
Managerial accounting is the application of appropriate techniques and concepts in processing
historical and projected economic data of an entity to assist the management in establishing plans
for reasonable economic objectives and in the making of rational decisions with a view to
achieving its objectives.
Institute of Chartered Management Accountants of London:
Managerial accounting is the application of professional knowledge and skills in the preparation
of accounting information in such a way as to assist the management in the formation of policies
and in the plan and control of operations.
Institute of Chartered Management Accountants of England and Wales:
Managerial accounting is the preparation of accounting information in such a way as to assist the
management in creation of policies and the day to day operations of the undertaking.

From the above definitions, we can conclude the following:

i) Management accounting is concerned with providing information to the managers.
ii) Management accounting deals in the principles of Financial Accounting to satisfy the
reporting needs of the managers.
iii) Any study of management accounting must be preceded by some study of management
process and the organization in which the managers work.

FUNCTIONS OF MANAGEMENT
Managers carry out four major functions in an organization i.e.

i) Planning
In planning, managers outline the steps to be followed or taken in achieving the organization’s
objectives
The plans of the management are expressed formally as budgets which are typically prepared on
an annual basis and expresses the desires and the goals of the management in specific
quantitative terms

ii) Organizing and directing

In organizing, a manager decides how best to put together the organization’s human and other
resources in such a way as to most efficiently carry out the established plans. In directing the
managers oversee the day to day activities that keep the organization functioning. Therefore, to
meet these objectives the managers have a constant need of cost accounting information in the
routine conduct of the organization.

iii) Controlling
In controlling, managers take those steps necessary to ensure that each part of the organization is
following the plans that were outlined for it at the planning stage. Accounting information that
assist in the controlling function by supplying performance reports help the managers to progress
or opportunities that may be unnoticed. A performance report is written report to management
comparing budgeted data to the actual data for a specific time period. In the performance report
of a particular department in case that problems exist, then the manager will need to find out the
cause of the problem and take corrective action.

iv) Decision making

In decision-making, managers decide to make rational choices from among alternatives. All
decisions are based on information and accounting information is often a factor in analyzing
alternative methods to solve a problem. This is because alternatives usually have different costs
and benefits that can be measured and used as an input to decide which alternative is the best.
Accounting is generally responsible for gathering valuable cost and benefit data and
communicating it in a usable form to the appropriate manager.

Differences between management accounting and financial accounting

 i. The objective of financial accounting is to ascertain profitability and the financial
position of the firm while the objective of management accounting is to assist internal
management in policy formulation and decision making
ii. Financial accounting is mandatory i.e. financial records must be kept so that sufficient
information will be available to satisfy the requirements of various interested parties.
Management accounting on the other hand is not mandatory, there are no regulatory
bodies or outside parties, that specifies what is to be done or prepared.
iii. Financial accounting is primarily concerned with reporting business activities for a
company as a whole while management accounting focuses on some segments or some
sections of the organization.
iv. Management accounting focuses in providing information for internal uses by the
manager who must direct the day to day operations, plan for the future, solve problems
and make several routine and non- routine operations, all of which requires special
information inputs. Financial accounting, however, focuses on providing data for external
use.
v. Financial accounting statements are prepared in accordance with GAAP’s, management
accounting however is not governed by the GAAP’s i.e. managers can set their own
ground rules on the content and the form of information that is to be reported internally.
vi. Management accounting places more emphasis on the future since a large part of the
overall responsibilities of the manager has to do with planning of a manager’s
information needs. As such, the managers planning framework is built largely on
establishing data that may or may not be effective on the past experience. In contrast,
financial accounting records the financial history of an organization and has little to do
with estimates and projections of the future.
vii. Financial statements are often prepared at the end of the financial period while
management accounting reports are prepared at regular intervals as per the requirements
of management
viii. Management accounting places more emphasis on non-monetary data, financial
accounting however emphasizes on monetary and quantitative data.
ix. Management accounting borrows heavily from other disciplines while financial
accounting relies on its own conceptual and regulatory framework.
Limitations of management Accounting
i) Accounting Records: Management accounting information is derived from financial
accounting, cost accounting and other records. The accuracy of management records
will therefore depend on the accuracy or otherwise of the basic records
ii) Its only a tool: Management accounting is not a substitute for management but just a
tool to assist management. The ultimate decision will ultimately depend on
management ability to interpret management accounting reports.
iii) Heavy cost of installation. The heavy cost of installing a proper management
accounting system may be a concern to most small entities.
iv) Personal biases: the interpretation of management accounting information depends
on the capability of the interpreter and his personal prejudices.

Ethical issues in Management Accounting

Practitioners in management accounting have an obligation to the general public and their
organizations to serve in their interests and to maintain the highest standard of ethical conduct. In
recognition of this obligation the institute of management has promulgated the following
standards of ethical conduct:
1.Competence
Maintain an appropriate level of professional competence through ongoing development of
knowledge and skill.
Perform their professional duties in accordance with the relevant rules, regulations and ethical
standards.
2. Confidentiality
Practitioners have a responsibility to:
a) Refrain from disclosing confidential information acquired in the cause of their work
except when authorised legally or obligated to do so in public interest.
b) Refrain from using or appearing to be using confidential information acquired in the
cause of their work for un ethical or illegal advantage.
3. Integrity
Practitioners have a responsibility to
a) Avoid actual or perceived conflict of interest and advise all parties of any potential
conflict of interest.
b) Refrain from engaging in actitivity that may prejudice their ability to carry out their
activities
c) Refrain from any favours, gifts and hospitality that may influence their activities.
4. Objectivity
Practitioners have a responsibility to:
a) Communicate fairly and objectively
b) Disclose fully all the relevant information than can reasonably influence decision making.