Chapter

15
The Nature of Management Accounting

McGraw-Hill/Irwin

Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Financial Accounting
Focuses on preparation of FS required by GAAP.
Prepared for use by external users. Provides an overall picture of an entitys financial condition and results of activities.

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Management accounting
Process that provides info used by managers for:
Planning, implementing, and controlling.

Applies to all organizations. Management needs more detailed info. Accounting systems provide operating info needed for operating decisions. Managers are interested in summaries.
In general, management accounting is summary information.
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Management vs. financial accounting

Necessity
Financial Accounting (FA): SEC (or banks or suppliers) requires publicly traded companies to publish financial statements according to GAAP. Management accounting (MA) is optional.

Purpose.
FA: Produce financial statements for outside users. MA: Help managers plan, implement and control.

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Management vs. financial accounting (2 of 6)

Users.
FA: faceless group, external users, present or potential shareholders. MA: Known managers who influence information needs.

Underlying structure.
FA: built around: Assets = Liabilities + Stockholders Equity. MA: 3 purposes each with its own set of concepts and constructs (addressed later).
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Management vs. financial accounting (3 of 6)

Source of principles.
FA: GAAP. MA: whatever managers believe useful.

Time orientation.
FA: historical, tell it like it was. MA: future/decision oriented, tell it like it will be. (However, past is often a good predictor of future.)
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Management vs. financial accounting (4 of 6)

Information content.
FA: summary of primarily monetary events MA: non-monetary as well as monetary info.

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Management vs. financial accounting (5 of 6)

Report frequency:
FA: Publicly traded, SEC: quarterly, with more detailed info annually. MA: Up to management.

Report timeliness.
FA: Usually, several weeks to months after fiscal close of accounting period. MA: Quickly to be useful for decision making.
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Management vs. financial accounting (6 of 6)

Report entity.
FA: Organization as a whole. MA: Relatively small parts (responsibilities centers such as departments, product lines, divisions, subsidiaries as well as organization as a whole.)

Liability potential.
FA: May be sued by shareholders if believed to be misleading. MA: Used internally unlikely to give rise to legal liability.
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Types of management accounting info and their uses

Purposes of MA system:
Measurement of revenues, costs, and assets. Control. Aid decisions among alternative courses of action.

For each purpose there is a set of principles and generalizations.

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Characterization of Management Accounting Reporting

Historical information:
Score keeping (How are we doing?) or Attention directing (What problems require looking into?)

Future estimates:
Problem solving (What is best way to deal with a problem?) Influencing impact (influences actions of managers).
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Measurement
Full cost accounting measures resources used in performing some activity. Full cost of producing goods or providing services = direct costs + indirect costs.
Direct costs = costs directly traced to goods or services. Indirect costs = fair share of costs incurred jointly in producing goods or services.
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Control
Costs (also, revenues and assets) are identified to and measured by responsibility center.
A manager heads each responsibility center. Corrective action can only be taken by individuals. To help identify problems (and opportunities) actual costs are measured and compared to a benchmark (budget, last year, industry average).
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Alternative choice decisions

Differential costs of alternative possible actions are developed. Management may only consider direct costs for some short run decisions.

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