Introduction to Management Accounting - Management Accounting | CMA Inter Syllabus

Table of Content

1. Conceptual Understanding
   
2. Relationship between Management Accounting and Cost Accounting
   
3. Role of a Management Accountant in Modern Business World
   
4. Exercise

CMA Inter Blogs :

1. Activity Based Costing - Management Accounting
2. Applications of Marginal Costing in Short Term Decision Making - Management Accounting
3. Material Costs
4. CMA Inter Syllabus (New Updates)

---

1. Conceptual Understanding

1.1 Introduction

Accounting is, primarily, the process of keeping records of financial transactions. It encompasses systematic recording, reporting, and analysis of the financial activity of an organisation. Interested parties can analyse the financial performance of companies using accounting information which is the end product of the process of accounting. Accounting information is used by the stakeholders of the company, namely the employees, shareholders, creditors, banks and other lenders, regulatory agencies and tax authorities, etc. for decision making purpose. It is also the language through which the organizations can communicate with the external world.
In 2014, Warren Buffet1 gave valuable advice to a 17-year-old intern at an investment firm2. Buffet referred to accounting as the language of business, since much like a foreign language it must be learned before understanding. This captures the essence of the function of accounting. Language is the basis of communication between two people. So is accounting. It is the language in which the business communicates with the stakeholders, who are also referred as the users3
It is important to note that the users are either internal (managers, shareholders, employees, creditors) or external (potential investors and government).
The user considers the financial information communicated by the business through the language of accounting for purpose of decision making. Various users have various information needs. In the following lines some of the major users along with their financial information needs are given:

• Owners/investors - The primary4 objective of accounting is to provide necessary information to the owners/investors relating to their business. The shareholders of a company are interested in the accounting information with a view to ascertaining the profitability and financial strength of the company.
• Management – Generally, there is a separation of the ownership and management functions. The managements require a different set of financial information which helps them in their internal decision making.
• Creditors - Trade creditors, debenture holders, bankers, and other lending institutions are interested in knowing the short-term as well as long-term position of the company. The financial statements provide the required information for ascertaining such position.
• Regulatory Agencies - Various governments and other agencies use accounting reports not only as a basis for tax assessment but also in evaluating how well the business are operating under regulatory framework.
• Government - Governments use financial statements for compiling statistics concerning business units, which,assist compilation of national accounts.
• Potential Investors – potential investors use the information in accounting reports to a greater extent in order to determine the relative merits of various investment opportunities.
• Employees - Employees are interested in the earnings of the enterprise because their remuneration depend on the quantum of profits earned.
• Researchers – Research scholars in their research in accounting theory as well as business affairs and practices also use accounting data. 

The above list is not exhaustive and there are various other stakeholders whose financial information need is varied. Thus, the list of actual and potential users of accounting information is exhaustive.
From the above, it is obvious that the accounting information need of the management is different from the others. The term management encompass the entire range of activities involved in running an organisation. There are basically three levels of the management; top level, middle level and lower level. Though the financial information need of the three levels varies but their essence is similar: decision making. The top level management is entrusted with the critical task of making effective and efficient decisions which is reflected in company performance measured in terms of profit and market share.

• Financial Accounting
• Cost accounting
• Management Accounting.

The above categorisation is on the basis of the presentation, legal requirements and the financial information each of them generate. Though the aspect is taken up in details in the next section of this module, in a nutshell it may be noted that the management accounting is concerned with the provision of accounting information to people within the organisation (internal users) to help them make better decisions and improve the efficiency and effectiveness of existing operations, whereas financial accounting is concerned with the provision of accounting information to external users. Thus, management accounting is often related to internal reporting5 while financial accounting is related to external reporting. Though the scope of cost accounting is narrow, it is important as it discusses the nuances of the process of cost accumulation for fixation of sale price and valuation of inventory which are the most important aspects of management decision making.

1.2 What is Management Accounting?

Management Accounting comprise of two terms ‘management’ and ‘accounting’. While management is all about running an organisation in consonance with the strategic goal, accounting may be seen to encompass any of the activities that attempt to gauge the performance of an organisation. It includes the traditional ‘accounting’ roles of stewardship, control and audit. In a nutshell, management accounting is accounting (i.e. producing useful information) for management (people with the task of running the business). In this sense, management accounting includes the production of all information useful in running the organisation. Information, as such, may be6

•  financial or non-financial; 
•  accurate, or broadly correct; 
•  actual (certain) or estimated (uncertain); 
•  based in the past or the future; 
•  detailed, or in a highly aggregated form; 
•  presented in any of a variety of spoken or written forms, such as numbers, tables, and graphs; 
•  related to profits/losses, costs/incomes, volumes, quality indicators, trends, etc.On the other, ‘management’ may include the activities of individuals in a number of positions, for example:
•  senior managers; 
•  mid-level managers; 
•  lower-level managers; 
•  executive directors with management responsibilities;:

Chartered Institute of Management Accounting (CIMA) have taken a more wide-ranging view of the scope of management accounting and have tended to take a broader ‘management consultancy’ view of the work of their members. CIMA provides a comprehensive definition of the term. CIMA official terminology7 states that management accounting is the application of the principles of accounting and financial management to create, protect, preserve and increase value for the stakeholders of or-profit and not-for-profit enterprises in the public and private sectors. The document further states that management accounting is an integral part of management. The discipline requires the identification, generation, presentation, interpretation and use of relevant information to: 
     1) Inform strategic decisions and formulate business strategy 
     2) Plan long, medium and short-run operations 
     3) Determine capital structure 
     4) Design reward strategies for executives and shareholders 
     5) Inform operational decisions 
     6) Control operations and ensure the efficient use of resources 
     7) Measure and report financial and non-financial performance to management and other stakeholders
     8) Safeguard tangible and intangible assets 
     9) Implement corporate governance procedures, risk management and internal controls.
The above nine points, thus, encompasses the scope and significance of management accounting. Colin Drury8states that management accounting combines accounting, finance and management with the leading edge techniques needed to drive successful businesses. Professionals, in this discipline are functionaries who:

•  Advise managers about the financial implications of projects. 
•  Explain the financial consequences of business decisions. 
•  Formulate business strategy. 
•  Monitor spending and financial control. 
•  Conduct internal business audits. 
•  Explain the impact of the competitive landscape and 
•  Bring a high level of professionalism and integrity to business

From the above definition provided by CIMA it is obvious that Management Accounting refers to presentation of accounting information to management by the Management Accountant, in such a way as to assist them in their managerial functions of decision-making, planning and control. Thus, Management Accounting deals with creation and presentation of accounting information for managerial or other decision making purposes. The purpose of management accounting is to assis management in running the business in ways that will improve the performance of the business. Various authors have provided insights about what management accounting comprises of. The 

following four conceptualisation are noteworthy: 

1) Garrison and Noreen (2000)9 state that managerial accounting10 is ‘concerned with providing information to managers – that is, people inside an organisation who direct and control its operations’. The authors further states that it ‘provides the essential data with which organisations are actually run’ and that it is ‘concerned with providing information to managers for use in planning and controlling operations and in decision making’.
2) Wilson and Way (1993)11 state that ‘managerial accounting encompasses techniques and processes that are intended to provide financial and non-financial information to people with an organisation to make better decisions and thereby achieve organisational control and enhance organisational effectiveness’. 
3) Johnson and Kaplan (1987)9
 explain that management accounting theory arises from the needs of manufacturing companies. They also explain that the development of management accounting happened mainly because of the need to measure and value the work-in-progress and inventory for financial statements and tax purposes which therefore raised a few issues to the service sector due to the absence of inventory.
4) Horngren, Datter and Rajan12 (2015) argues that management accounting is the process of measuring, analyzing, and reporting financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. Managers use management accounting information to: 
      (i) Develop, communicate, and implement strategies and 
      (ii) Coordinate product design, production, and marketing decisions and evaluate a company’s performance
The above mentioned definitions put forward by the authors sums up the discussion of what management accounting is. 
There have been some significant changes during the last few decades, like enhanced global competition, deregulation, growth in the service industries, decline in product life cycles, advances in manufacturing and information technologies, changing dimension of the environmental issues and companies becoming more customer driven to sustain in the competitive environment these issues have changed the fundamental nature of the business environment. These changes have significantly altered the ways in which firms operate, which in turn, have resulted in changes in management accounting practices. In order to survive in today’s competitive environment, companies have had to become more customer driven and have started recognizing that customers are crucial to the success of the companies. This has resulted in companies making customer satisfaction an overriding priority and to focus on identifying and achieving the key success factors that are necessary to be successful in today’s competitive environment. Management accounting, which focuses on decision making, is becoming increasingly important as efficient and effective decision making is key to realizing strategic goal which is all important in the new VUCA13 environment

1.3  Scope of Management Accounting.

In the previous section it is reiterated that there is no single definition of management accounting. Therefore, the work of a management accountant cannot be listed exhaustively. It is also important to note that the scope of management accounting is evolving with the advent of time and business environment and thus some traditional areas may have become obsolete and are to be discarded while some new areas may gradually become accepted as mainstream management accounting activities. Based on coverage of contemporary management accounting textbooks, some of the broad areas considered to be part of ‘management accounting’ is summarised in the following lines:

• Budgeting, planning and forecasting
• Measuring organisational, divisional and departmental performance
• Comparing results and performance within and between organisations
• Assisting in the process of increasing effectiveness and efficiency
• Assessing the performance of past and future capital investments
• Advising on decisions about product mix, markets to be served and selling prices
• Advising on decisions on whether to outsource products, components, activities and services
• Advising on decisions involving the investment of scarce funds between a range of possible alternatives
• Assisting in the making of a wide range of strategic decisions
  The above mentioned are some of the relatively precarious activities of the higher level management. While the fundamental activities of management accounting would include: 
• calculating the profitability of products, services and operations, 
• allocating costs to products, 
• setting inter-divisional transfer prices. 

There are also some functions of the management accountant which are focussed on delivering critical information to the top level management for initiating the process of increasing effectiveness and efficiency. Techniques such as activity-based cost management and theory of constraints are examples of such specialised activities. 
A moot question arises as to whether capital investment appraisal14 would be included in the discipline of management accounting or in the discipline of financial management. Some authors prefer to include this within the scope of management accounting while others prefer this to be included within the scope of financial management. Possible reason for this dual coverage is that capital investment appraisal deals with investment decisions that have a strategically important effect upon the organisation. Thus, when the strategic aspects of management accounting are considered, investment decisions are part of the work of management accountants. Whereas when the strategic financing decisions related to such investments are made, these decisions form part of financial management¹⁵.
It is obvious from the above discussion that decisions relating to capital investment appraisal cannot be made in a one-dimensional way as financial managers, management accountants, cost accountant and financial accountants are all related to various facets of investment decision. 

1.4 Evolution of Management Accounting

Management accounting is an offshoot of financial accounting and has specific linkages with cost accounting. With advent of time the discipline of Management accounting developed as a faculty and it has evolved as a profession. Financial literature suggest that the beginning of management accounting is linked with the requirement for accounting information to optimize economic resources during the Industrial Revolution in the United Kingdom. Creation of large corporations and increased competition put pressure on corporations to internalize transactions that were previously priced by the market. This is yet another reason for the development of the discipline of management accounting. The International Accounting Federation (IFAC, 1998) has described the evolution of managerial accounting through four phases. 
       a) First stage (prior to 1950s) 
       b) Second stage (1950s – 1965)
       c) Third stage (1965 – 1985) 
       d) Fourth stage (1985 – till date16) 

• The first stage (prior to 1950) which is also referred as the ‘classical era’ is the period where the focus was on cost determination and financial control. At this stage, the development of managerial accounting was oriented to determining costs and financial control of business processes. IFAC describes this period of Management accounting as ‘the technical activity needed to achieve organizational objectives. Managerial accounting before the 1950s was mainly focused on determining the cost of the product. Production technology was relatively simple, with products passing through a number of distinct processes. Societies produced relatively homogeneous products that consumed the same amount of resources and identifying the cost of work and material was easy and the processes were driven by the speed of manual operations. 
• The second stage (1950-1965) is referred as the age of information for management planning and control. During this period the main focus of managerial accounting was to provide information on planning and control issues. This phase is characterized by the use of traditional accounting management techniques that support decision making and responsibility accounting. Management accounting techniques such as: Standard Costs and Profitability Analysis were introduced during this period. The second phase is described as ‘management activity, but in the role of staff17. During this period, the management was focused on the company’s production process and internal analysis and paid less attention to external business environment.
• During the third stage (1965 - 1985), management accounting focussed on reduction of waste of resources in production processes by eliminating ‘no-value activities17. During this period, Japan’s economic progress and rapid technological developments contributed to the growth of global competition. The priority for the companies was to adapt to the new business environment. Companies began to seek both cost reduction and quality improvement at the same time. The use of robotics and computer-controlled processes enabled companies to improve their quality and in many cases impact on cost reduction.
• Creation of value through effective resource use is the epitome of the Fourth Stage (1985-2000). During this period, technological innovations were at the forefront and competition was intensified. Companies, as they were faced with major business uncertainties were made to focus on value creation through effective use of resources, which could be achieved ‘with the use of technology that drives companies to create costumer value, shareholder value, and organizational innovations17. The managerial accounting techniques that dominated this period are: Activity-based Cost (ABC); Production just in time (JIT); Target cost; balanced scorecard; Value chain analysis and strategic management accounting.

The evolution of management accounting as discussed in the previous lines may be pictorially represented as follows:

The distinction between Stage 2, Stage 3 and Stage 4 is the shift of focus from providing information to management in the form of loss reduction to and value creation. The focus on providing information in Stage 2, however, did not disappear, but is refreshed in Stage 3 and 4. Information becomes a resource, along with other organizational resources. Management Accounting in Stage 3 and 4 is seen as, ‘An integral part of the management process because timely information is directly attributed to management and the distinction between staff and management of the first line becomes invisible17 (IFAC, 1998). The use of resources to create value today is an essential part of the management process in contemporary organisations.
One very conceptual summarization of the evolution of the various tools and techniques of management accounting is found in the study of Gliaubicas (2012)19. The various tools and techniques developed in various stages is being contextualised in the study. In the following lines a pictorial representation is presented which is self-explanatory.

Focus	Cost determination and financial control	Information for planning and control	Reduction of waste of resource in Business operation	Creation of Value through effective resource use
Stages →	1760 -1950	1950 -1965	1965 -1985	1985 - till date
Methods ↓
Cost determination and accounting	Cost determination	Standard cost accounting - developments
	Standard costing	Marginal costing
	Direct Costing	Target costing
	Records of cost accounting		Activity based costing
	allocation of indirect cost		Activity based management
	Uniform costing
	Absorption costing
Planning	Budgeting	Application of discounted cash flow
		Transfer costing
Controlling	Return on investments (ROI)	Responsibility accounting	Application of Kaizen
	ton -mile ratio	Gentani system	Just in time system
		Kaizen costing
Strategic analysis			Life Cycle costing	Value chain analysis
				Five Forces Model
				PEST, SWOT analysis
				Customer profitability analysis
				Competitors analysis
				Balanced scorecard

It is evident from the above table that till the second stage, more or less traditional management accounting techniques were prevalent but with the advent of the 3rd stage and especially in the 4th stage the focus shifted to strategic analysis and various contemporary tools and techniques were adopted into the management accounting discipline which primarily focussed on strategic analysis. In the following lines a classification of some of the traditional and contemporary accounting management techniques is presented, which is derived from the discussion.

Traditional Techniques	Contemporary Techniques
Financial statement analysis	Target Cost
Cash Flow analysis	Just in time
Marginal Costing	Total Quality Management
Absorption Costing	Theory of Constraints
Standard Costing	Value chain analysis
Opportunity Cost	Benchmarking
Budgeting	SWOT analysis
Cost-volume-profit (CVP) analysis	Balanced scorecard
Activity based costing (ABC)	Kaizen (continuous improvement)

1.5 The Management Accountant and Strategic Decisions²⁰

Strategies are long term plans which help organisations to realise its goal. Strategy is defined as a general direction set for the company and its various components to achieve a desired state in the future. A company’s strategy specifies how the organisation matches its own capabilities with the opportunities in the marketplace.
Basically businesses follow one of two broad strategies. Some companies follow a cost leadership strategy. These companies, for long term sustenance, choose to provide quality products or services at low prices and by cautiously managing their costs.
Other companies follow a product differentiation strategy. These companies offer differentiated or unique products or services that appeal to their customers. The products are often priced higher than the products or services of their competitors.
Mangers are faced with various challenges. One such is to decide between the two strategies discussed above. The crucial issue is that this have long term impact on profitability and growth of the company. Management accountants work closely with managers in various departments to formulate strategies by providing information about the sources of competitive advantage, such as:

• the company’s cost, productivity, or efficiency advantage relative to competitors or
• the superior prices the company can charge relative to the costs of adding features that make its products or services distinctive.

Strategic cost management describes cost management that specifically focuses on strategic issues.
Management accounting information helps managers formulate strategy by answering the following questions:
a) Who are the most important customers, and how can the company deliver value to the customers?
b) What substitute products exist in the marketplace, and how do they differ from products of the company in terms of features, price, cost, and quality?
c) What is most critical capability of the company which may be technology, production, or marketing?
d) How can we leverage it for new strategic initiatives?
e) Will adequate cash be available to fund the strategy, or will additional funds need to be raised?
The best-designed strategies and the best-developed capabilities are useless unless they are effectively executed which depends primarily on the information generated and provided by the management accountant. This linkage between successful implementation of strategy and the accounting information generated by management accounting is the subject matter of strategic cost management.

---

2. Relationship between Management Accounting and Cost Accounting

Financial accounting, cost accounting and management accounting are branches of the discipline of Accounting. Any discussion on management accounting and cost accounting is incomplete if the broader aspect of accounting and the important classification of it, namely financial accounting, is set aside. In the below mentioned lines a comparative analysis of the three branches of accounting is considered. The focus being on Management Accounting and Cost Accounting²¹.
Financial accounting, generally, provides information on financial transactions that have occurred in the past, while management accounting provides financial and non-financial information that influences future decision making.Management accounting is not subject to externally-imposed reporting rules (e.g., provisions of Companies Act, 2013 regarding preparation and presentation of financial statements and Ind AS).
Information provided by management accounting is much more detailed and multidisciplinary than the information generated by financial accounting. Both are part of the overall accounting information system. Financial accounting and management accounting cannot exist independently though they make up two different areas of study. Both the areas of study provide useful accounting information. Financial accounting aids recording of countless transactions, and compare an entity’s performance between two or more periods or performance comparison between two entities. In contrast, management accounting helps analyse and evaluate performance, which enables management to make effective judgments regarding the establishment of strategy, plans, and policies for the future.
From the above analysis, the difference between financial accounting and management accounting is obvious as the disciplines are well demarcated. Though the difference between financial accounting and management accounting has been discussed in module 1 of paper 8, it is reiterated below for easy referencing.
The key difference between financial accounting and management accounting is that financial accounting is the preparation of financial reports for the analysis by the external users interested in knowing the company’s financial position. In contrast, management accounting is the preparation of financial and non-financial information, which helps managers (internal user) make policies and strategies for the company. The distinguishing features of the two are presented in a tabular format in the next few line.

Basis for Comparison	Financial Accounting	Management Accounting
	Financial Accounting classifies, analyses, records, and summarizes the financial transactions of a particular period of the company.	Management accounting helps management make effective decisions about the business.
Application	Financial accounting is prepared to reflect true and fair picture of financial affairs.	Management accounting helps management to take meaningful steps and strategize.
Scope	The scope is pervasive, but not as much as the management accounting.	The scope is much broader
Information type	Quantitative.	Quantitative and qualitative.
Inter dependence	It is not dependent on management accounting.	Management accounting is basically decision making accounting and depends on information created by Financial Accounting as well as Cost Accounting.
Statutory requirement	It is legally mandatory to prepare financial accounts of all companies. (for example in the Indian Context Companies Act 2013, relevant rules of Accounting standards furnishes the statutory requirements)	Management accounting has no statutory requirement.
Format	Financial accounting has specific formats for presenting and recording information.	There’s no set format for presenting information in management accounting
Users	Mainly for potential investors as well as all stakeholders.	Only for management.
Verifiable	The information presented is verifiable.	The information presented is predictive and not immediately verifiable.

 

2.1  Cost Accounting and Management Accounting – a comparative analysis

The difference between cost accounting and management accounting are not so well defined and the demarcation line is not clearly drawn. Management accounting is very closely linked to cost accounting; so closely, in fact, that it is difficult to say where cost accounting ends and where management accounting begins. They overlap with each other. A study of the literature reveals that the distinction between cost accounting and management accounting is not clear cut and the two terms are often used synonymously. But it is apparent that cost accounting deals with the process of cost accumulation for inventory valuation to meet the requirements of external reporting and to some extent, profit measurement as computation of cost and sale price fixation are integral aspects of cost accounting. Whereas management accounting relates to the provision of suitable information for decision-making, planning, control and performance evaluation22. Point wise comparison of the cost accounting and management accounting is presented below:

Cost Accounting and Management Accounting – A comparison: 
     (i) The scope of management accounting is broader than that of cost accounting.
     (ii) It is not legally binding to have cost and management accounting systems installed in the organisations as the information generated by both cost accounting and management accounting are for the use of the internal users only.
     (iii) Cost accounting provides only cost information for managerial use whereas management accounting provides all types of accounting information i.e., cost accounting as well as financial accounting information.
     (iv) In Cost accounting, the main emphasis is on cost ascertainment and cost control whereas in management accounting the main emphasis is on decision-making.
     (v) Cost Accounting is a part of Management Accounting whereas Management accounting is an extension of managerial aspects of cost accounting with the ultimate intention to protect the interests of the business.
     (vi) The tools and techniques of cost accounting and management accounting differs.

A comparative analysis between the two is presented in tabular format in the below mentioned lines:

The basis for Comparison	Cost Accounting	Management Accounting
Meaning	Cost accounting revolves around cost computation, cost control, and cost reduction.	Management accounting helps management make effective decisions about operations of the business
Application	Cost accounting prevents a business from incurring costs beyond budget.	Management accounting offers a big picture of how management should strategize
Scope	The scope is much narrower.	The scope is much broader.
Measuring grid	Quantitative	Quantitative and qualitative.
Sub-set	Cost accounting is one of the many sub-sets of management accounting.	Management accounting is the universal set.
Basis of decision making	The task of decision making very less. Even if there is some, it is based on historic information	Historic and predictive information is the basis of decision-making.
Statutory requirement	Statutory audit of cost accounting is a requirement in some specified industries23	The audit of management accounting has no statutory requirement
Dependence	Cost accounting isn’t dependent on management accounting to be successfully implemented	Management accounting is dependent on both cost & financial accounting for successful implementation.
Used for	Management, shareholders, and vendors.	Only for management.

Thus, it may be inferred that management accounting greatly assists the management in achieving better results by making a clear shift in emphasis from mere recording of transactions to an analysis and interpretation of the transactions which provide a new dimension to the management in their decision making efforts. The tools and techniques of management accounting focuses primarily on formulation of budgets and pre-setting of standards as well as evaluation of deviations in actual performance and also implementation of prompt remedial measures. Management Accounting involves the interpretation of accounting information intended specifically to aid management in running the business. It is concerned with the presentation of accounting information and not with its preparations. Managers use this information in setting the company’s overall goals, evaluating the performance of departments and individuals, deciding whether to introduce a new line of products etc. Much of the management accounting information is financial in nature and is prepared in a manner suitable to the making of the decision on the table. Financial information, as such, comprises the largest component of every management information system. The simple reason is that every economic decision involves financial consideration.

---

3. Role of a Management Accountant in Modern Business World

The business world has radically changed from what it used to be a few decades ago and accordingly the role of the management accountant has evolved substantially. The functions of management accountants are dictated by their job positions, agreement with the organisation, knowledge, and capabilities. Before sketching the role of the management accountant in the modern business world, it is pertinent to look into the traditional function of the management accountant which are given in the below mentioned lines.

3.1 Functions of the Management Accountant 

The management accountant is responsible for the installation, development and efficient functioning of the management accounting system. They are an important part of an organisation’s decision-making process. They are responsible for ensuring that managers on behalf of the businesses make well-informed decisions. Financial analysis of management information is provided by management accountants. This is accomplished through preparing, developing, and analyzing financial data which enables strategic and operational decisions to be made by the organization. The functions of a management accountant can be categorized as below:

a) Planning and Accounting - Management accountants prepare an accounting system covering costs, sales forecasts, profit planning, production planning, and allocation of resources. It should also include capital budgeting, short-term and long-term financial planning. They also prepare the procedures necessary to implement the plan effectively.
b) Controlling - Management accountants assist in the control of an organisation’s performance through the use of standard costing, budget control, accounting ratios, funds flow statements, cost-cutting initiatives, and assessing capital expenditure proposals and returns on investment.
c) Reporting - Management accountants assist the top management in finding out the root cause of an unfavorable operation or event by identifying the real reasons for the adverse events as well as the responsible parties and comprehensively reporting them.
d) Coordinating - Management accountants improve an organisation’s efficiency and profits by providing various coordination tools such as budgeting, financial reporting, financial analysis and interpretation, and so on. These tools aid management by comparing cost and financial records, preparing financial budgets and establishing standard costs, and analyzing cost deviations to enable management by exception.
e) Communication - Management accountants create a wide range of reports to communicate results to the superiors. Through published financial statements and returns, they also inform the outside world about their company’s success.
f) Financial evaluation and Interpretation - Management accountants analyze the data and present it to the management in a non-technical approach, together with their comments and ideas, so that the shareholders and senior management can understand it and make informed decisions.
g) Tax Administration - Management accountants are in charge of tax policies and processes. They make the reports that are required by various authorities. Further, they ensure that quarterly tax payments are made in advance, as required by the relevant Act, to prevent the payment of penal interest on late tax payments.
h) Evaluation of external effects - There may be changes in government policy and existing laws. These amendments and policy changes can affect business goals. Management accountants assess the extent of any impact of these external factors on the business and report it to the stakeholder to take necessary precautionary measures.
i) Economic appraisal - When the government makes regular announcements about the country’s economic situation, management accountants is entrusted with making the economic study and determine the influence of current economic conditions on the company’s operations. They compile a report containing their observations and present it to high management.
j) Asset Protection - Management accountants separate fixed asset registers for each type and provide internal checks and controls to protect the company’s assets. They also create the rules and regulations for each type of fixed asset and get insurance coverage for all types of fixed assets.

On the basis of the above discussion it is evident that the role of the management accountant is broad and includes identifying and managing risk, analyzing information, and using it to make plans, and budgets which are cordial to making informed business decisions. The roles of management accountants can be classified as:
        a) To consult with the segments of management responsible for policies and procedures and look into the effectiveness of those policies and procedures.
        b) To make comparisons to the operational plan and standards, as well as to report and evaluate operational outcomes to all levels of management and the business owners.
       c) Establish, coordinate, and execute an adequate plan of operation and control as an inherent aspect of management. Such a plan would include spending budgets, profit planning, sales forecasts, and capital investment and financing program, as well as the procedures necessary to carry out the plan.
        d) To ensure the financial security of the company’s assets through effective internal controls and adequate insurance coverages.

3.2 The Management Accountant and the Modern Business World

The word ‘modern’ is a misnomer and cannot be defined precisely. So is the concept of ‘modern business world’. It is ever changing and cannot be precisely set within a time frame. As such, the era of globalization may be considered as a not –so –precise definition of the ‘modern business world’. The term ‘globalization’ was proposed for the first time in 1983, by Theodore Levitt24, when he talked about the convergence of the markets around the world. The International Monetary Fund defined globalization as the ‘growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free international capital flows and also more rapid and widespread diffusion of technology25. Thus, cross border transaction of goods and services or free trade, free international capital flows and diffusion of technology may be considered as the three pillars of globalisation. With the emergence of globalization, more and more companies started going global by undertaking business activities across their national frontiers. 
Under the circumstances there has been a paradigm shift in the role of the management accountant in the era of globalisation. The focus shifted to strategic analysis. This ushered in the fourth stage of the evolution of management accounting (this is discussed in previous section of this module). It is observed that conventional management accounting of the earlier stages did not provide the financial information required to monitor existing strategies or support strategy formulation. Strategic management accounting seeks to remedy this situation by providing the financial analysis to support the formulation of successful competitive strategies. On the basis of this there was severe criticism regarding the use of management accounting in the business. Authors have opined that most of the management accounting practices used, were actually developed by 1925, and for the next 60 years there was a slowdown, or even a halt, in management accounting innovation. Thus, the third stage is often referred as the period of lost relevance8. In repose to the criticisms, the CIMA Report26 identified strategic management accounting as a potential area of development that would enhance the future contribution of management accounting. They identified the need for management accounting to adopt a more strategic perspective by reporting information relating to a firm’s markets and its competitors. 
Globalisation brought about significant changes in the business environment. Along with the changes the roles of the management accountant had to be redefined. In the following lines some of the impacts of the new business environment on management accounting is discussed:

1.Global competition- Prior to the era of globalisation, many organizations operated in a protected competitive environment. Globalisation ushered in changes where there have been reductions in tariffs and duties on imports and exports as well as dramatic improvements in transportation and communication systems. This has facilitated firms to operate globally and resulted in stiff competition from the very best organisations worldwide. Business operations also changed significantly. The new competitive environment has increased the demand for information relating to quality and customer satisfaction. Customer profitability analysis and value analysis are important issues being incorporated in the arena of management accounting. 

2. Changing product life cycles– Changing profile of the customer along with behavioural issues have contributed to drastically reduce the product life cycle. First mover advantage is critical and every organisation is desperately seeking the advantage by increasing their investment in research and development. In this respect, the management accountant plays a crucial role as in order to compete successfully, companies must be able to manage their costs effectively at the design stage, have the capability to adapt to new environment, different and changing customer requirements and reduce the time to market of new and modified products.

3. Advances in manufacturing technology- In order to compete effectively, companies must be able to manufacture high quality innovative products at a low cost, and also provide a first-class customer service. Flexibility to cope with short product life cycles, demands for greater variety of product, more discriminating customers and increasing international competition has created enormous pressure on the operational activities of the business. Some internationally reputed manufacturing companies have responded to these by replacing traditional production systems with lean manufacturing systems that seek to reduce waste by implementing just-in-time (JIT) production systems, focusing on quality, simplifying processes and focussing on advanced manufacturing technologies (AMTs).

4. The impact of information technology- The use of information technology (IT) to support business activities has increased dramatically. Along with electronic business communication technologies known as e-business, e-commerce or internet commerce have also developed significantly. Consumers have become more discerning in their purchases as in online transactions it is relatively easy to compare the merits of different products and services. This have a significant impact on the work of management accountants. The role of the management accountant as a gatherer and processor of information is lost as the managers can directly access the management accounting system on their personal computers to derive the information they require for decision making. Management accountants have now become more involved in interpreting the information generated from the accounting system and providing business support for managers.

5. Environmental and sustainability issues– In recent times, ESG27 has become the focal point in the operations of the company. Along with this, ethical issues have also come to the forefront as the business has to deal with customers who are more aware of this issues then they were a decade back. Thus, there is desperate need for organisations to be run in a suitable way. Sustainable development, where it is acknowledged that environmental resources are limited and should be preserved for future generations, is the order of the day. Management accounting with specific focus on environmental issues is becoming increasingly important in organizations as environmental costs are large in many organisations. There are three specific reasons for this.

• Environmental costs are often high in the many manufacturing organisations.
• Regulatory requirements often impose huge fines for non-compliance.
• Companies are increasingly realizing that being socially and environmentally responsible improves their image and this has positive impact on their bottom line.
  The above mentioned changes impacted the management of the companies and the managers have realized that they need to develop system for measuring and reporting environmental costs along with preparation of detailed report on the consumption of scarce environmental resources, hazardous materials used and pollutants emitted to the environment.

6. Deregulation and privatization– Prior to the era of globalization, companies in many industrial sectors were government –owned monopolies and operated in a highly regulated, protected and non-competitive environment. Thus the organisations, especially those incurring losses, were not under any pressure to improve the quality and efficiency of their operations and to improve profitability by adding or dropping particular products or services from their array of product or service. Thus trivial attention was given to developing management accounting systems that accurately measured the costs and profitability of individual products or services. Globalization ushered in the privatization and deregulation which resulted in the elimination of pricing and competitive restrictions. Thus, companies were compelled to design an elaborate management accounting system that made them to realize their cost base and determine the source of profitability for their products, customers and markets.

7. Focus on value creation– The scope of management accounting is enormous. Managers who are in charge of the operations of the organisations depends on the management accountants in realisation of the strategic goal of the organisations. With the advent of time, the role of the management accountant has changed from merely interpreting, managing and recording costs to creating value. Though cost reduction still remains as the basic function of the management accountant as it has specific impact on selling price fixation which impacts customer value. The new business environment resulted in management accounting distinguishing between value-added and non-value-added activities.
There is another aspect of new business paradigm which the management accountant has to consider as they develop the company’s management accounting system. Intangibles28 have increased manifold. This presents a challenge to management accountants as to how to identify, measure and report on the value of intangibles.

8. Customer orientation– In the new business environment, gaining competitive advantage29 has become the singular goal of every business organisation. Companies have realized that in order to sustain in today’s competitive environment they need to become more customer driven and recognize that customers are crucial to their future success. This has made the companies realize that customer satisfaction is one of the most important critical success factor (CSF) which helps companies realize their strategic goal. Customer satisfaction is relational to cost, quality, reliability, delivery and the choice of innovative new products.
Discussion made in this section regarding the role of the management accountant in the new business world is reflected in the developments in the arena of management accounting during the fourth stage in the evolution of management accounting (Creation of Value through effective resource use) which ushered in after 1985. This is discussed at length in the previous section of this module. The focus has shifted to strategic analysis. Thus the two collides and the newer tools and techniques which are aligned to the value chain and are thus relational to the attainment of the strategic goal of the organisation have changed the focus of management accounting to strategic management accounting.

---

Exercise

• Theoretical Questions

• Multiple Choice Questions

1) Management Accounting

     A. Accumulates, summarizes and analyses the available data.
     B. Is primarily concerned with the requirements of the management.
     C. Makes Corporate Planning and Strategy effective.
     D. All of the above

Answer:- D. All of the above

2) Management accounting can be viewed as __________.

     A. Marketing-oriented Accounting
     B. Management-oriented Accounting
     C. Accounting-oriented Management
     D. Manager-oriented Accounting

Answer:- B. Management-oriented Accounting

3) The main objective of management accounting is _________

     A. To maintain the accounting records
     B. To know the amount due from customers and suppliers
     C. To ascertain analyse and interpret the results of business operations
     D. To record all the business transactions

Answer:- C. To ascertain analyse and interpret the results of business operations

4) ____________ is the study of managerial aspects of financial accounting

     A. Cost accounting
     B. Financial accounting
     C. Management accounting
     D. Business accounting

Answer:- C. Management accounting

5) The purpose of management accounting is to help ______ make decisions

     A. Managers
     B. Investors
     C. Marketers
     D. Banks

Answer:- A. Managers

6) Management accounting assists the management in _______

     A. Planning
     B. Directing
     C. Controlling
     D. All of the above

Answer:-  D. All of the above

7) ‘Period of lost relevance’ is the _______ of the evolution of management accounting.

     A. 1st stage
     B. 2nd stage
     C. 3rd stage
     D. 4th stage

Answer:- C. 3rd stage

8) Creation of value through effective use of resources is the focus area of the _______

     A. 1st stage
     B. 2nd stage
     C. 3rd stage
     D. 4th stage

Answer:- D. 4th stage

9) Just in time management and Activity based costing developed during the __________

     A. 1st stage
     B. 2nd stage
     C. 3rd stage
     D. 4th stage

Answer:- C. 3rd stage

10) Management accounting deals with _______ data

     A. Qualitative
     B. Quantitative
     C. Both qualitative and quantitative
     D. Non-financial

Answer:- C. Both qualitative and quantitative

• State True or False

1) Management Accounting is primarily not concerned with the requirements of the management. Answer:- False
2) One of the main characteristic of Management Accounting is cause and effect analysis. Answer:- True
3) Management accounting is mainly past oriented. Answer:- False
4) The primary objective of management accounting is to manage company account and improves sales. Answer:- False
5) Key success factors- also known as competitive emphasis. Answer:- True
6) Benchmarking is a process of measuring the performance of a company’s products, services, or processes against those of another business considered to be the best in the industry. Answer:- True
7) In organizations, there are typically three levels of management: top-level, middle-level, and first-level. Answer:- True
8) Management accounting concentrates on post-mortem analysis. Answer:- False
9) Evaluation and control of performance is not a limitation of Management accounting. Answer:- True
10) Deregulation- the act or process of removing legislative controls or restrictions from an industry, commodity, etc. Answer:- True

•  Fill in the blanks

1) Lean manufacturing systems that seek to reduce waste by implementing just-in-time (JIT) production systems production systems and focussing on advanced manufacturing technologies
2) There has been a paradigm shift in the role of the management accountant in the era of globalisation. The focus shifted to strategic analysis
3) Management accounting ensued with the simple aspect of Cost determination and financial control
4) Strategic management accounting provides the financial analysis to support the formulation of successful competitive strategies
5) Environmental, social and governance criteria are a set of standards for a company’s behaviour used by socially conscious investors to screen potential investments

• Short Essay Type Questions

1) Mention two point of difference between cost accounting and management accounting

Answer:-

View solution in koncept education app - Download App

2) identify and describe the elements involved in the decision-making, planning and control process.

Answer:-

View solution in koncept education app - Download App

3) Justify the view that a major objective of commercial organizations is to broadly seek to maximize future profits.

Answer:-

View solution in koncept education app - Download App

4) Explain the important changes that have taken place in the business environment that have influenced management accounting practice.

Answer:-

View solution in koncept education app - Download App

5) Outline the key success factors that directly affect customer satisfaction.

Answer:-

View solution in koncept education app - Download App

6) Identify and describe the functions of a cost and management accounting system.

Answer:-

View solution in koncept education app - Download App

• Essay Type Questions

1) Identify and describe the different users of accounting information.

Answer:-

View solution in koncept education app - Download App

2) Describe the differences between management accounting and financial accounting.

Answer:-

View solution in koncept education app - Download App

3) Though management accounting is very closely linked to cost accounting, there is clear demarcation between the two – elucidate.

Answer:-

View solution in koncept education app - Download App

4) Explain each of the elements of the decision-making, planning and control process.

Answer:-

View solution in koncept education app - Download App

5) Explain how the business environment that businesses face has changed over the past decades and discuss.

Answer:-

View solution in koncept education app - Download App

6) Elucidate the various functions of management accounting.

Answer:-

View solution in koncept education app - Download App

7) Do you think management accounting help in planning and forecasting?

Answer:-

View solution in koncept education app - Download App

8) Management accounting is the accounting system for making decisions of the business enterprise – Discuss.

Answer:-

View solution in koncept education app - Download App

9) Management accounting serves as a tool to management – elucidate.

Answer:-

View solution in koncept education app - Download App

10) Write note on the four stages of evolution of management accounting.

Answer:-

View solution in koncept education app - Download App

11) Compare and contrast between the tools and techniques used in traditional and contemporary management accounting.

Answer:-

View solution in koncept education app - Download App

12) Identify current trends in management accounting.

Answer:-   PJSK, GT, MI, CSK, KKR, DC, RR, SRH, RCB, 

View solution in koncept education app - Download App

• Unsolved Case

Medical devices are normally associated with use by hospitals and medical practices. Some devices are used by normal consumers and, according to an article on the Medical Device and Diagnostic Industry website are proliferating³¹. The market for devices such as insulin pumps and blood pressure monitors has become more consumer-driven and is putting pressure on manufacturers to design better products and get them to the market faster. According to the article, ‘patients want their medical devices to have the same kind of design and appeals as iPods’. This convergence of medical and mass consumer electronics is creating many challenges for medical device manufacturers. These challenges include widely divergent product life cycles, varying scenarios of use and safety, and efficacy concerns. The typical life cycle of a consumer device is likely to be measured more in months than years. Compare this to the long approval cycles of drug and medical device regulatory authorities – which, according to the article32, can be anything from 27 to 36 months in the USA depending on the type of medical device. During this timeframe, an iPod/iPad has probably gone through at least two generations, and smart devices are now the norm. It may be that medical devices will never get as savvy as a consumer iPad due to regulatory concerns and device efficacy. However, increasing consumer-driven requirements are likely to shorten the product life cycle over coming years as devices move further towards personal smart devices. As of April 2016, for example, a Financial Times31 article notes there are more than 1,65,000 health and fitness apps available at the Apple App Store. While Apple’s devices are not medical devices they do pose a competitive threat.

Questions

a) Do you think the costs of the electronic components in a smart device such as an iPod/iPad are more or less than those in a medical device like a blood pressure monitor?
b) Would decreasing the product life cycle of medical devices, or medical devices being more like consumer electronics, pose any risks for manufacturers?