FUNDAMENTALS

OF MANAGEMENT
ACCOUNTING
MANAGEMENT ACCOUNTING
• Financial accounting is the presentation of accounting information for
stakeholders and regulators. It presents the financial position for an entire
time period. On the other hand,  Management accounting is the
presentation of analysis of business activities to the internal management to
facilitate decision making.
• The Institute of Cost and Management Accountants, London, has defined
Management Accounting as: “The application of professional knowledge
and skill in the preparation of accounting information in such a way as to
assist management in the formulation of policies and in the planning and
control of the operation of the undertakings.
Basis for Management accounting Financial accounting
Comparison
Purpose It is used for internal purpose. It is used for external reporting.
Regulation It is not regulated by any law. It has to be presented as per standards
Users Its users are the Its users are shareholders, investors and
management of an regulators.
organization.
Objective It aids in internal decision It aids in investment decision by
making. outsiders and monitoring by regulators.
Mandatory Preparation and presentation Preparation and presentation is
of financial statements is not mandatory.  
mandatory.

Audit It is not subject to audit. Financial statements must be audited.

Frequency There is no defined Financial statements must be prepared

frequency for preparation and for the financial year and presented.
presentation of the
statements.

Contents Management accounts Financial accounts include only

include both monetary and monetary information.
non-monetary information.
 BENEFITS OF M.A
• Planning: In management accounting, the financial information and non
financial information is presented at regular intervals say weekly, fortnightly
to the management. This presentation includes forecasts, budgets and
indepth analysis. It assists the management in planning the business
activities.
• Decision making: Since management accounting presents various charts,
 forecasts and analysis the management uses it for decision making.
• Identify early signs of problems: If a product is not performing well the
management can identify it early on as the accounts are presented at
regular intervals. This will aid in overcoming the constraints early on and
avoiding future losses.  
• Strategic management: Based on the information presented in
management accounting, the management can take decisions about
continuing a product or modifying the sale strategy. Since management
accounting is not regulated by any law,  the management can decide the
areas that require more analysis, investigation and accordingly draw up
strategies.
 FUNCTIONS OF M.A
• Profitability: Management accounting determines the profit from a particular
product,  project or line of business.
• Break even analysis: It determines the number of units at which the
organization will attain a no profit no loss situation.  
• Forecasting: It determines the bottlenecks in the organization and their
impact on the organization.
• New product analysis: It prepares analysis for the new product in terms of
standard costs,  actual cost and reasons for deviations.
• Stock valuation: Determine the direct and indirect costs of stock in hand and
presenting it to management.
• Variance analysis: Performing trend analysis for various costs incurred and
understanding the causes for the variances.
• Capital budgeting analysis: Understanding the need for acquiring fixed
assets and the costs involved and allocation of finances to the best available
option.
• Aids in Financial accounting: Management accounting presents financial
information at regular intervals and hence it aids in the preparation of
financial statements at year-end. 
• The various functions of management accounting like capital budgeting,
 variance analysis, profitability are performed by ERP systems and reports
are generated. The management accountant has to ensure correctness of
the information inputted and reports generated.
• Management accounting provides the management with better control of the
business. Although not regulated by any law it provides the management an
assurance. It provides the management the confidence to face auditors and
regulators. It aids in better management.  
 GLOBAL MANAGEMENT
ACCOUNING PRINCIPLES
• Effective management accounting practices can improve decision-making in
organizations. According to Chartered Institute of Management Accountants
(CIMA) & American Institute of Certified Public Accountants (AICPA),
management accounting has lacked the same level of guidance as financial
accounting to ensure that these practices are consistently used worldwide.
• So, the AICPA and the CIMA last month released 
four global management accounting principles that they say can be “universally
applied in organizations large and small, public and private, anywhere in the
world.”
• The four global management accounting principles are as follows:
1. Influence: Communication provides insight(understanding) that is
influential(powerful). Management accounting begins and ends with
conversations. It improves decision-making by communicating insightful
information at all stages of decision-making. The principles have been
designed to help organizations encourage integrated thinking, leading to better
decision making.
2. Relevance: Information is relevant. Management accounting scans the best
available resources for information that is relevant to the decision that needs to
be taken, the persons making the decision, and the decision style or process
being used. By understanding the needs of stakeholders, the most relevant
information for decision-making is identified, collected, and prepared for
analysis. It requires achieving an appropriate balance between:
(i) Past, present, and future-related information
(ii) Internal and external information
(iii) Financial and nonfinancial information, including environmental and
social issues
3. Value: Impact on value is analyzed. Management accounting connects the
organization’s strategy to its business model and requires a thorough
understanding of the wider macroeconomic environment. It involves analyzing
information along the value-generation path, evaluating opportunities, and
focusing on the risks, costs, and value-generation potential of opportunities.
• 4. Trust: Stewardship(supervision) builds trust. Accountability and scrutiny
make the decision-making process more objective. Balancing short-term
commercial interests against long-run value for stakeholders enhances
credibility and trust. Management accounting professionals are trusted to be
ethical, accountable, and mindful of the organization’s values, governance
requirements, and social responsibilities.

• After these factors have been considered, the four principles can then be
applied to the following 13 key practice areas of the management
accounting function:
1. Cost transformation and management
2. External reporting
3. Financial strategy
4. Internal control
 5. Investment appraisal
6. Management and budgetary control
7. Price, discount, and product decisions
8. Project management
9. Regulatory adherence and compliance
10. Resource management
11. Risk management
12. Strategic tax management
13. Treasury and cash management
 MANAGEMENT
INFORMATION
Key to successful business is good decision making and the key to good decision
making is good, relevant information. Due to technological advancement, organisation
generate a huge quantity of data which consist of raw facts before they are processed.
Once data is processed into a useful form, it can be called Information.
Characteristics of good information : The characteristics of good information is
ACCURATE. This stands for-
A. ACCURATE- The accuracy of information is needed to make sound decision making.
C. COMPLETE- Managers should be given all the information they need, but information
should not be excessive.
C. COST BENEFICIAL- The cost of producing information should not exceed its value.
U. UNDERSTANDABLE- Use of technical language must be limited. Accountant must
take care of presenting financial statement to non financial managers
R. RELEVANT- The information contained within a report must be relevant.
A. AUTHORITATIVE- Information should be trusted and provided from reliable sources
so that the users can have confidence in their decision making.
T. TIMELY- Information should be provided on time so that it can be used in decision
making. Using outdated information can result in poor decision making.
E. EASY TO USE- We must always think of the person using the information and make
sure the information meets their needs.
•Example 1: M is a management accountant. One of her roles is to provide each
functional manager with a monthly report. The production manager has
complained to M about his report, stating the following:
(i) The report for month 2 was not received until month 5 making the
information too out dated to be useful.
(ii) The report contained terminology which he didn’t understand
(iii) The report was too long which made it difficult for him to find the parts he
really needed and some of the important information he required was
missing.
Which element of ACCURATE has M not managed to address in her report for the
production manger?
A. Accurate B. Complete
C. Cost beneficial D. Understandable
E. Relevant F. Authoritative
G. Timely H. Easy to use
Information for different levels of management : Organisation are generally split into
three levels and information needs differ at all levels.
(i)Strategic level- Top level management need to know about developments in the
markets in which they operate and in general economic situation. They also need to
know about any new technology that emerges, and about the activities of competitors.
Decision made at this level
(a) will have a large impact on the whole organisation
(b) will be long term
(c) tend to be unstructured
(ii)Tactical/Managerial level- Management needs to know about issues such as
product or service quality, customer satisfaction levels, employee skills level and
employee morale. Decision made at this level
(a) will have a medium impact on the whole organisation
(b) will be medium term
(c) will act as a bridge between the strategic and operational levels
(iii) Operational level- Lower level of management (supervisor) may want to know the
number of rejects per machine, the lead time for delivering materials. Decision
made at this level
(a) will have a small impact on the whole organisation, will affect one department
(b) will be short term
(c) tend to be highly structured
Example 2: XYZ is a successful pizza restaurant which currently operates a chain
of 4 restaurants, all of which offer the same standard menu. The following
decision were taken. Suggest at what levels these decisions would be made:
(i)Start producing frozen pizza and selling these through supermarkets.
(ii)Hire a new waiter in one of the restaurants.
(iii)Decide on the pricing of the dishes on the standard menu
(iv)Open a new restaurant.
Example 3: Use the following words to complete the sentences regarding levels of
information.
• Strategic
• Tactical
• Operational
• Higher
• Lower
• More
• Less
A decision to diversify into a new market would be taken at the _________ level.
Information for operational level decisions will have a ___________ level of detail
than information for strategic level decisions.
Strategic level information will be ____________ subjective than operational level
information.
 Non-financial information
• In the example of a pizza business, some of the information was financial, such as
the cost of ingredients, but some was not, such as the number of expected
customers.
• Financial information is important for management because many objectives of an
organization are financial in nature, such as making profits. While profit cannot be
ignored as it is usually the main objective of commercial organizations, performance
measures should not focus on profit alone. Managers also need information of a non-
financial nature such as customer numbers, number of complaints or the number of
orders processed.
• Management information is required by a variety of different users, each with
different needs. Below we briefly consider the needs of different types of
organizations.
• Commercial organisations The main objective of commercial organisations is
usually to maximize the wealth of its shareholders (owners). Key financial information
required by this type of business would focus on the profit made by each area or
each product/service. There are different types of commercial organisations. For
example manufacturing companies produce goods, retail companies sell goods and
 service companies sell services. Each of these types of organisations could require
different types of information relevant to their type of operation.
•Not-for-profit organisations Not-for-profit organisations are organisations whose main
objective is not to make profit. These include public bodies, such as state run schools
and hospitals, and charities. The objective of not-for-profit organisations is often value
for money. The main objective of public bodies is to provide services to the public in line
with government requirements. The information requirement of public bodies will differ
from commercial organisations. There will be no profit measurements but there will still
be a requirement for financial information which will focus more on cost management
and efficiency. As these bodies must be run in the public interest, the level of information
must be detailed and accurate and allow assessment of the efficiency and effectiveness
of the organisation to be assessed by central government and by the public.
•Society In addition to the organisations discussed above, society also has a need for
information relating to the organisations it deals with. Members of the public may be
shareholders, employees or customers of these organisations and they will have an
interest in how these organisations are run and are performing. Society will also be
interested in the impact organisations have on the local and wider community. For
example, environmental reporting, where organisations measure and report on their
impact on the environment, can be of great use to the public.
 The purpose of management
accounting
• We have now looked at the importance of providing relevant information and
the types of information we may need to provide to management so that
they can make good decisions.
• usually include three main elements:
• Planning • Control • Decision making.
Planning: Planning involves establishing the objectives and goals of an
organisation, i.e. what they are trying to achieve, and formulating relevant
strategies (long- term plans) that can be used to achieve those objectives
and goals. Planning can also be done at different levels in an organisation:
• Strategic – long-term planning carried out by the highest level of the
organisation.
• Tactical – short- to medium-term planning, carried out by middle level
management.
• Operational – short-term planning for day-to-day operations.
• Control - Once planning has been carried out, and budgets prepared, targets can be
set. This allows for evaluation of performance. Without targets it is difficult to judge
how good the performance has been. The differences between the actual and the
planned results are known as variances. This type of information facilitates
managers to control their operations. Some common performance measurements
are:
• Variances – comparison of actual results against budgeted results.
• Financial/profitability measures.
• Non-financial measures.
• Decision making - Decision making involves making a choice between two or more
alternatives. Managers need reliable information to compare the different courses of
action available and understand what the consequences might be of choosing each
of them.
 The positioning of
management accounting
within the organisation
Breadth of the work carried out by management accountants, Accountants
within business can be part of an internal finance function, or may be part of a
business partnering role. When deciding on their structure, it is important for
organisations to consider where best to position the management accountant
within the organisation. There are three options available:
• Dedicated business partners
• Shared services centers (SSC)
• Business Process Outsourcing (BPO).
1. Dedicated business partners : With this approach, the management
accountant is an integral part of the business area that they support. This
brings many benefits to both the accountants and the management of the area.
The relationship between the management accountant and the managers of the
business area is an important business relationship. To work in the best
interests of the company, they must work as business partners and the
relationship must be based on trust, honesty and respect.
From the accountant’s point of view, they must:
• act professionally at all times – as representatives of the accounting profession,
they are expected to show professional care and attention in the way they conduct
themselves
• demonstrate technical awareness – this can be demonstrated by being a
qualified member of CIMA and maintaining their technical knowledge through
continued professional development (CPD)
• demonstrate business awareness – they must be aware of the nature of the
business and the needs of the managers
• act with integrity – the work of the management accountant should be done in the
best interests of the company and society and they should never put themselves in a
position where their personal interests conflict with these interests.
From the manager’s point of view, they must:
• trust the accountant and the information being provided
• respect the accountant’s knowledge, experience and professionalism
• be able to discuss all aspects of work confidentially with the accountant
• be able to state clearly what their requirements are.
It is important to remember that both the management accountant and the managers
of the business want the business to succeed and they have to work together to
achieve this.
The management accountant as an adviser
The management accountant plays a range of roles within the organisation, an
advisory role falls in between these extremes. As a technical expert, the management
accountant is expected to advise management on a range of topics, including
financial and non-financial analysis, costing, pricing, Business Process Reengineering
and performance management. As advisers, management accountants no longer
simply need financial skills, but increasingly, communication and presentation skills.
The advantages of this approach are:
• The management accounting function is part of the business it serves.
• Increased knowledge of the business area and its needs.
• Strong relationships can be built up between the accountant and the business.
The disadvantages of this approach are:
• Duplication of effort across the organisation.
• Lack of knowledge sharing. There is no sharing of knowledge which can happen
within a larger, more diverse team.
• The accountants can feel isolated within the business and may develop their own
ways of working which may not constitute best practice.
• The accountant can lose sight of the overall goals of the organisation.
2. Shared services centre (SSC) : An alternative to having the management
accountant as a dedicated business partner is to set up a shared services centre
(SSC). This is where the whole finance function is brought together as one centre and
this centre provides all the accounting needs of the whole organisation.
The advantages of this approach are:
• Cost reduction. This comes from reduced headcount, premises and associated
costs. The SSC, for example, may be located in a geographic area with favourable
labour or property rates.
• Increased quality of service. The central team can become very experienced and
adopt best practice.
• Consistency of management information throughout the organisation.
The disadvantages of this approach are:
• Loss of strong relationships between the accountant and the business.
• Less knowledge of the business areas and their needs.
• Standard reporting may not provide for all of the needs of each business area.
3. Business Process Outsourcing (BPO) : While setting up a SSC is often thought
of as 'internal outsourcing', some organisations decide to outsource the finance
function completely. BPO is contracting with a third party (external supplier) to provide
all or part of a business process or function. Typically the functions which are
outsourced include procurement, ordering, invoicing and reporting functions, although
decision support and other corporate functions may also be outsourced.
The advantages of this approach are:
• Cost reduction. As with SSCs, there will be headcount reduction and reduction in
property and associated costs.
• Access to specialist providers. This can bring new expertise into the organisation.
• Release of capacity. If only the more routine functions are outsourced, the retained
finance function can concentrate on their role of providing the best information for
management decision making.
The disadvantages of this approach are:
• Loss of control. The work is being carried out remotely so management are unable
to supervise the function on a day-to-day basis.
• Over-reliance on external providers. Often the systems containing the information
are not accessible to the organisation, meaning that they are only able to get the
information the outsourcers provide. It can also become very difficult to bring the
function back in-house.
• Confidentiality risk. Important information could end up getting into the wrong
hands.
• Loss of quality. Quality requirements must be specified when the contract is set up
and quality control must be put in place to monitor the work of the outsourced
function.