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Accountancy
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Key concepts
Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS
Financial statements
Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings
Auditing
Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act · Big Four auditors
Fields of accounting
Cost · Financial · Forensic · Fund · Management · Tax

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

In contrast to financial accountancy information, management accounting information is:

  • designed and intended for use by managers within the organization, whereas financial accounting information is designed for use by shareholders and creditors.
  • usually confidential and used by management, instead of publicly reported;
  • forward-looking, instead of historical;
  • computed by reference to the needs of managers, often using management information systems, instead of by reference to financial accounting standards.

This is because of the different emphasis: management accounting information is used within an organization, typically for decision-making.

Contents

Definition

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).

The American Institute of Certified Public Accountants(AICPA) states that management accounting as practice extends to the following three areas:

  • Strategic Management—Advancing the role of the management accountant as a strategic partner in the organization.
  • Performance Management—Developing the practice of business decision-making and managing the performance of the organization.
  • Risk Management—Contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.

The Institute of Certified Management Accountants(ICMA), states "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented 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 undertaking." Management Accountants therefore are seen as the "value-creators" amongst the accountants. They are much more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and compliance (scorekeeping) aspects of the profession. Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc.

Traditional vs. innovative practices

In 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. Cost accounting is a central method in management accounting, and 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. Life-cycle 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 life-cycle (i.e., before the design has been finalized 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 activities that drive costs, such as the provision of a service or the production of a product component.

Role within a corporation

Consistent with other roles in today's corporation, management accountants have a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization.

The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability may be more meaningful to the business management team vs. the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management scorecarding, and client profitability analysis. Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. One widely held view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. Consistent with the notion of value creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavor.

In corporations that derive much of their profits from the information economy, such as banks, publishing houses, telecommunications companies and defence contractors, IT costs are a significant source of uncontrollable spending, which in size is often the greatest corporate cost after total compensation costs and property related costs. A function of management accounting in such organizations is to work closely with the IT department to provide IT Cost Transparency.[1]

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An alternative view

A very rarely expressed alternative view of management accounting is that it is neither a neutral or benign influence in organizations, rather a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory. Stated differently, Management Accounting information is the mechanism which can be used by managers as a vehicle for the overview of the whole internal structure of the organization to facilitate their control functions within an organization.

Specific concepts

Grenzplankostenrechnung (GPK)

Grenzplankostenrechnung (GPK) is a German costing methodology, developed in the late 1940s and 1950s, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service. The term Grenzplankostenrechnung, often referred to as GPK, has best been translated as either Marginal Planned Cost Accounting[2] or Flexible Analytic Cost Planning and Accounting.[3]

The origins of GPK are credited to Hans George Plaut, an automotive engineer and Wolfgang Kilger, an academic, working towards the mutual goal of identifying and delivering a sustained methodology designed to correct and enhance cost accounting information. GPK is published in cost accounting textbooks, notably Flexible Plankostenrechnung und Deckungsbeitragsrechnung[4] and taught at German-speaking universities today.

Lean accounting (accounting for lean enterprise)

In the mid to late 1990s several books were written about accounting in the lean enterprise (companies implementing elements of the Toyota Production System). The term lean accounting was coined during that period. These books contest that traditional accounting methods are better suited for mass production and do not support or measure good business practices in just in time manufacturing and services. The movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn, MI. 320 individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. 520 individuals attended the 2nd annual conference in 2006.

Resource consumption accounting (RCA)

Resource Consumption Accounting is formally defined as a dynamic, fully integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA emerged as a management accounting approach around 2000 and was subsequently developed at CAM-I the Consortium for Advanced Manufacturing–International, in a Cost Management Section RCA interest groupin December 2001. After spending the next seven years carefully refining and validating the approach through practical case studies and other research, a group of interested academics and practitioners established the RCA Institute to introduce RCA to the marketplace and raise the standard of management accounting knowledge by encouraging disciplined practices.

Throughput accounting

The most significant, recent direction in managerial accounting is throughput accounting; which recognizes the interdependencies of modern production processes. For any given product, customer or supplier, it is a tool to measure the contribution per unit of constrained resource.

Transfer pricing

Management accounting is an applied discipline used in various industries. The specific functions and principles followed can vary based on the industry. Management accounting principles in banking are specialized but do have some common fundamental concepts used whether the industry is manufacturing based or service oriented. For example, transfer pricing is a concept used in manufacturing but is also applied in banking. It is a fundamental principle used in assigning value and revenue attribution to the various business units. Essentially, transfer pricing in banking is the method of assigning the interest rate risk of the bank to the various funding sources and uses of the enterprise. Thus, the bank's corporate treasury department will assign funding charges to the business units for their use of the bank's resources when they make loans to clients. The treasury department will also assign funding credit to business units who bring in deposits (resources) to the bank. Although the funds transfer pricing process is primarily applicable to the loans and deposits of the various banking units, this proactive is applied to all assets and liabilities of the business segment. Once transfer pricing is applied and any other management accounting entries or adjustments are posted to the ledger (which are usually memo accounts and are not included in the legal entity results), the business units are able to produce segment financial results which are used by both internal and external users to evaluate performance.

Resources and continuous learning

There are a variety of ways to keep current and continue to build one's knowledge base in the field of management accounting. Certified Management Accountants (CMAs) are required to achieve continuing education hours every year, similar to a Certified Public Accountant. A company may also have research and training materials available for use in a corporate owned library. This is more common in "Fortune 500" companies who have the resources to fund this type of training medium.

There are also numerous journals, on-line articles and blogs available. Cost Management and the Institute of Management Accounting(IMA) site are sources which includes Management Accounting Quarterly and Strategic Finance publications. Indeed, management accounting is needed in an organization.

Management accounting tasks/ services provided

Listed below are the primary tasks/ services performed by management accountants. The degree of complexity relative to these activities are dependent on the experience level and abilities of any one individual.

  • Variance Analysis
  • Rate & Volume Analysis
  • Business Metrics Development
  • Price Modeling
  • Product Profitability
  • Geographic vs. Industry or Client Segment Reporting
  • Sales Management Scorecards
  • Cost Analysis
  • Cost Benefit Analysis
  • Cost-Volume-Profit Analysis
  • Life cycle cost analysis
  • Client Profitability Analysis
  • IT Cost Transparency
  • Capital Budgeting
  • Buy vs. Lease Analysis
  • Strategic Planning
  • Strategic Management Advise
  • Internal Financial Presentation and Communication
  • Sales and Financial Forecasting
  • Annual Budgeting
  • Cost Allocation
  • Resource Allocation and Utilization

Related qualifications

There are several related professional qualifications and certifications in the field of accountancy including:

Methods

See also

References

  1. ^ * "Taking Control of IT Costs". Nokes, Sebastian. London (Financial Times / Prentice Hall): March 20, 2000. ISBN 978-0-273-64943-4
  2. ^ Friedl, Gunther; Hans-Ulrich Kupper and Burkhard Pedell (2005). "Relevance Added: Combining ABC with German Cost Accounting". Strategic Finance (June): 56–61. 
  3. ^ Sharman, Paul A. (2003). "Bring On German Cost Accounting". Strategic Finance (December): 2–9. 
  4. ^ Kilger, Wolfgang (2002). Flexible Plankostenrechnung und Deckungsbeitragsrechnung. Updated by Kurt Vikas and Jochen Pampel (12th Edition ed.). Wiesbaden,Germany: Gabler GmbH. 

External links


Accountancy
Key concepts

Accountant

  1. REDIRECT template:· Bookkeeping
  2. REDIRECT template:· Cash and accrual basis
  3. REDIRECT template:· Constant Item Purchasing Power Accounting
  4. REDIRECT template:· Cost of goods sold
  5. REDIRECT template:· Debits and credits
  6. REDIRECT template:· Double-entry system
  7. REDIRECT template:· Fair value accounting
  8. REDIRECT template:· FIFO & LIFO
  9. REDIRECT template:· GAAP / International Financial Reporting Standards
  10. REDIRECT template:· General ledger
  11. REDIRECT template:· Historical cost
  12. REDIRECT template:· Matching principle
  13. REDIRECT template:· Revenue recognition
  14. REDIRECT template:· Trial balance
Fields of accounting

Cost

  1. REDIRECT template:· Financial
  2. REDIRECT template:· Forensic
  3. REDIRECT template:· Fund
  4. REDIRECT template:· Management
  5. REDIRECT template:· Tax
Financial statements

Balance sheet

  1. REDIRECT template:· Statement of cash flows
  2. REDIRECT template:· Statement of changes in equity
  3. REDIRECT template:· Statement of comprehensive income
  4. REDIRECT template:· Notes
  5. REDIRECT template:· MD&A
Auditing

Auditor's report

  1. REDIRECT template:· Financial audit
  2. REDIRECT template:· GAAS / ISA
  3. REDIRECT template:· Internal audit
  4. REDIRECT template:· Sarbanes–Oxley Act
Professional Accountants

CWA/CMA

  1. REDIRECT template:· ACCA
  2. REDIRECT template:· CA
  3. REDIRECT template:· CGA
  4. REDIRECT template:· CMA
  5. REDIRECT template:· CPA
  6. REDIRECT template:· PA

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

In contrast to financial accountancy information, management accounting information is:

  • designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators;
  • usually confidential and used by management, instead of publicly reported;
  • forward-looking, instead of historical;
  • computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards.

Contents

Definition

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).

The American Institute of Certified Public Accountants(AICPA) states that management accounting as practice extends to the following three areas:

  • Strategic Management—Advancing the role of the management accountant as a strategic partner in the organization.
  • Performance Management—Developing the practice of business decision-making and managing the performance of the organization.
  • Risk Management—Contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.

The Institute of Certified Management Accountants(ICMA), states "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented 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 undertaking." Management Accountants therefore are seen as the "value-creators" amongst the accountants. They are much more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and compliance (scorekeeping) aspects of the profession. Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc.

Traditional vs. innovative practices

In 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’accounting practices can be illustrated by reference to cost control techniques. Cost accounting is a central method in management accounting, and 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. Life-cycle 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 life-cycle (i.e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the products. 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 activities that drive costs, such as the provision of a service or the production of a product component.

Role within a corporation

Consistent with other roles in today's corporation, management accountants have a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization.

The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability may be more meaningful to the business management team vs. the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management scorecarding, and client profitability analysis. Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. One widely held view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. Consistent with the notion of value creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavor.

In corporations that derive much of their profits from the information economy, such as banks, publishing houses, telecommunications companies and defence contractors, IT costs are a significant source of uncontrollable spending, which in size is often the greatest corporate cost after total compensation costs and property related costs. A function of management accounting in such organizations is to work closely with the IT department to provide IT Cost Transparency.[1]

An alternative view

A very rarely expressed alternative view of management accounting is that it is neither a neutral or benign influence in organizations, rather a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory. Stated differently, Management Accounting information is the mechanism which can be used by managers as a vehicle for the overview of the whole internal structure of the organization to facilitate their control functions within an organization.

Specific concepts

Cost accounting

Cost accounting is a central element of managerial accouting.

Grenzplankostenrechnung (GPK)

Grenzplankostenrechnung is a German costing methodology, developed in the late 1940s and 1950s, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service. The term Grenzplankostenrechnung, often referred to as GPK, has best been translated as either Marginal Planned Cost Accounting[2] or Flexible Analytic Cost Planning and Accounting.[3]

The origins of GPK are credited to Hans Georg Plaut, an automotive engineer and Wolfgang Kilger, an academic, working towards the mutual goal of identifying and delivering a sustained methodology designed to correct and enhance cost accounting information. GPK is published in cost accounting textbooks, notably Flexible Plankostenrechnung und Deckungsbeitragsrechnung[4] and taught at German-speaking universities today.

Lean accounting (accounting for lean enterprise)

In the mid to late 1990s several books were written about accounting in the lean enterprise (companies implementing elements of the Toyota Production System). The term lean accounting was coined during that period. These books contest that traditional accounting methods are better suited for mass production and do not support or measure good business practices in just in time manufacturing and services. The movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn, MI. 320 individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. 520 individuals attended the 2nd annual conference in 2006.

Resource consumption accounting (RCA)

Resource Consumption Accounting (RCA) is formally defined as a dynamic, fully integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA emerged as a management accounting approach around 2000 and was subsequently developed at CAM-I the Consortium for Advanced Manufacturing–International, in a Cost Management Section RCA interest group in December 2001.

Throughput accounting

The most significant recent direction in managerial accounting is throughput accounting; which recognizes the interdependencies of modern production processes. For any given product, customer or supplier, it is a tool to measure the contribution per unit of constrained resource.

Transfer pricing

Management accounting is an applied discipline used in various industries. The specific functions and principles followed can vary based on the industry. Management accounting principles in banking are specialized but do have some common fundamental concepts used whether the industry is manufacturing based or service oriented. For example, transfer pricing is a concept used in manufacturing but is also applied in banking. It is a fundamental principle used in assigning value and revenue attribution to the various business units. Essentially, transfer pricing in banking is the method of assigning the interest rate risk of the bank to the various funding sources and uses of the enterprise. Thus, the bank's corporate treasury department will assign funding charges to the business units for their use of the bank's resources when they make loans to clients. The treasury department will also assign funding credit to business units who bring in deposits (resources) to the bank. Although the funds transfer pricing process is primarily applicable to the loans and deposits of the various banking units, this proactive is applied to all assets and liabilities of the business segment. Once transfer pricing is applied and any other management accounting entries or adjustments are posted to the ledger (which are usually memo accounts and are not included in the legal entity results), the business units are able to produce segment financial results which are used by both internal and external users to evaluate performance.

Resources and continuous learning

There are a variety of ways to keep current and continue to build one's knowledge base in the field of management accounting. Certified Management Accountants (CMAs) are required to achieve continuing education hours every year, similar to a Certified Public Accountant. A company may also have research and training materials available for use in a corporate owned library. This is more common in "Fortune 500" companies who have the resources to fund this type of training medium.

There are also numerous journals, on-line articles and blogs available. Cost Management and the Institute of Management Accounting(IMA) site are sources which includes Management Accounting Quarterly and Strategic Finance publications. Indeed, management accounting is needed in an organization.

Management accounting tasks/ services provided

Listed below are the primary tasks/ services performed by management accountants. The degree of complexity relative to these activities are dependent on the experience level and abilities of any one individual.

  • Rate & Volume Analysis
  • Business Metrics Development
  • Price Modeling
  • Product Profitability
  • Geographic vs. Industry or Client Segment Reporting
  • Sales Management Scorecards
  • Cost Analysis
  • Cost Benefit Analysis
  • Cost-Volume-Profit Analysis
  • Life cycle cost analysis
  • Client Profitability Analysis
  • IT Cost Transparency
  • Capital Budgeting
  • Buy vs. Lease Analysis
  • Strategic Planning
  • Strategic Management Advise
  • Internal Financial Presentation and Communication
  • Sales and Financial Forecasting
  • Annual Budgeting
  • Cost Allocation

Related qualifications

There are several related professional qualifications and certifications in the field of accountancy including:

Methods

See also

References

  1. ^ * "Taking Control of IT Costs". Nokes, Sebastian. London (Financial Times / Prentice Hall): March 20, 2000. ISBN 978-0-273-64943-4
  2. ^ Friedl, Gunther; Hans-Ulrich Kupper and Burkhard Pedell (2005). [Expression error: Unexpected < operator "Relevance Added: Combining ABC with German Cost Accounting"]. Strategic Finance (June): 56–61. 
  3. ^ Sharman, Paul A. (2003). [Expression error: Unexpected < operator "Bring On German Cost Accounting"]. Strategic Finance (December): 2–9. 
  4. ^ Kilger, Wolfgang (2002). Flexible Plankostenrechnung und Deckungsbeitragsrechnung. Updated by Kurt Vikas and Jochen Pampel (12th ed.). Wiesbaden,Germany: Gabler GmbH. 

External links


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