CHAPTER # 01

CHAPTER # 01

MANAGERIAL ACCOUNTING

Faculty: FJ MohaimenSUMMARY

Managerial accounting assists managers in carrying out their responsibilities, which includes, planning, directing and motivating, and controlling. Since managerial accounting is geared to the needs of the manager rather than to the needs of outsiders, it differs substantially from financial accounting. Managerial accounting is oriented more toward the future, places less emphasis on precision, emphasizes segments of an organization (rather than the organization as a whole), is not governed by generally accepted accounting principles, and is not mandatory.

The business environment in recent years has been characterized by increasing competition and a relentless drive for continuous improvement. Several approaches have been developed to assist organizations in meeting these challenges-including just-in-time (JIT), total quality management (TQM), process reengineering, and the theory of constraints(TOC).

JIT emphasizes the importance of reducing inventories to the barest minimum possible. This reduces working capital requirements, frees up space, reduces throughput time, reduces defects, and eliminates waste.

TQM involves focusing on the customer, and it employs systematic problem solving using teams made up of front-line workers. Specific TQM tools include benchmarking and the plan-do-check-act (PDCA) cycle. By emphasizing teamwork, a focus on the customer, and facts, TQM can avoid the organizational infighting that might otherwise block improvement.

Process Reengineering involves completely redesigning a business process in order to eliminate non-value-added activities and to reduce opportunities for errors. Process Reengineering relies more on outside specialists than TQM and is more likely to be imposed by top management. The theory of constraints emphasizes the importance of managing the organization's constraints. Since the constraint is whatever is holding back the organization, improvement efforts usually must be focused on the constraint in order to be really effective.

Most organizations are decentralized to some degree. The organization chart depicts who works for whom in the organization and which units perform staff functions rather than line functions. Accountants perform a staff function-they support and provide assistance to others inside the organization.

Ethical standards serve a very important practical function in an advanced market economy. Without widespread adherence to ethical standards, the economy would slow down dramatically. Ethics are the lubrication that keep a market economy functioning smoothly. The Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management provide sound, practical guidelines for resolving ethical problems that might arise in an organization.Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. Unlike financial accountancy information (which, for public companies, is public information), management accounting information is used within an organization (typically for decision-making) and is usually confidential and its access available only to a select few.

According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology)

Aims1. Formulating strategies;

2. Planning and constructing business activities;

3. Making decisions;

4. Optimal use of resources;

5. Supporting financial reports preparation; and

6. Safeguarding assets.

Traditional vs. innovative management accounting practicesIn the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment. Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.

The distinction between traditional and innovative management accounting practices can be illustrated by reference to cost control techniques. Traditionally, management accountants principal technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period.While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind. Lifecycle costing recognizes that managers ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i.e., before the design has been finalised and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product. Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of activities (e.g., the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Activity-based accounting is also known as Cause and Effect accounting.Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on acitivities that drive costs, such as the provision of a service or the production of a product component.