Before inerwive mba finance fresher s


Published on

Babasab mba finance BEFRE INTeRWIVE

Published in: Economy & Finance, Business
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Before inerwive mba finance fresher s

  1. 1. SAAB MARFIN MBAFinance is often defined simply as the management of money or“funds” management. [1]Modern finance, however, is a family ofbusiness activity that includes the origination, marketing, andmanagement of cash and money surrogates through a variety ofcapital accounts, instruments, and markets created for transacting andtrading assets, liabilities, and risks. Finance is conceptualized,structured, and regulated by a complex system of power relationswithin political economies across state and global markets. Finance isboth art (e.g. product development) and science (e.g. measurement),although these activities increasingly converge through the intensetechnical and institutional focus on measuring and hedging risk-returnrelationships that underlie shareholder value. Networks of financialbusinesses exist to create, negotiate, market, and trade inevermore-complex financial products and services for their own aswell as their clients’ accounts. Financial performance measures assessthe efficiency and profitability of investments, the safety of debtors’claims against assets, and the likelihood that derivative instrumentswill protect investors against a variety of market risks. [2]The financial system consists of public and private interests and themarkets that serve them. It provides capital from individual andinstitutional investors who transfer money directly and throughintermediaries (e.g. banks, insurance companies, brokerage and fundmanagement firms) to other individuals, firms, and governments thatacquire resources and transact business. With the expectation ofreaping profits, investors fund credit in the forms of (1) debt capital(e.g. corporate and government notes and bonds, mortgage securitiesand other credit instruments), (2) equity capital (e.g. listed andunlisted company shares), and (3) the derivative products of a widevariety of capital investments including debt and equity securities,property, commodities, and insurance products. Although closelyrelated, the disciplines of economics and finance are distinctive. The“economy” is a social institution that organizes a society’s production,distribution, and consumption of goods and services,” all of whichmust be financed. Economists make a number of abstract assumptionsfor purposes of their analyses and predictions. They generally regardfinancial markets that function for the financial system as an efficientmechanism. In practice, however, emerging research is demonstratingthat such assumptions are unreliable. Instead, financial markets aresubject to human error and emotion. [3]New research discloses themischaracterization of investment safety and measures of financialproducts and markets so complex that their effects, especially underconditions of uncertainty, are impossible to predict. The study offinance is subsumed under economics as finance economics, but thescope, speed, power relations and practices of the financial system canuplift or cripple whole economies and the well-being of households,businesses and governing bodies within them—sometimes in a singleday. SAAB MARFIN MBA
  2. 2. SAAB MARFIN MBAThree overarching divisions exist within the academic discipline offinance and its related practices: 1) personal finance: the finances ofindividuals and families concerning household income and expenses,credit and debt management, saving and investing, and incomesecurity in later life, 2) corporate finance: the finances of for-profitorganizations including corporations, trusts, partnerships and otherentities, and 3) public finance: the financial affairs of domestic andinternational governments and other public entities.[4][5]Areas of studywithin (and the interactions among) these three levels affect alldimensions of social life: politics, taxes, art, religion, housing, healthcare, poverty and wealth, consumption, sports, transportation, laborforce participation, media, and education. Whileeach has a vastaccumulated literature of its own, the effects of macro and micro levelfinancing that mold and impact these and other domains of humanand societal life typically have been treated by researchers as “policy,”“welfare,” “work,” “stratification,” and so forth, or have been largelyunexplored. Recent research in "behavioral finance" is promising,albeit a relative newcomer, to the existing body of financial researchthat focuses primarily on measurement.Loans have become increasingly packaged for resale, meaning that aninvestor buys the loan (debt) from a bank or directly from acorporation. Bonds are debt instruments sold to investors fororganizations such as companies, governments or charities.[6]Theinvestor can then hold the debt and collect the interest or sell the debton a secondary market. Banks are the main facilitators of fundingthrough the provision of credit, although private equity, mutual funds,hedge funds, and other organizations have become important as theyinvest in various forms of debt. Financial assets, known as investments,are financially managed with careful attention to financial riskmanagement to control financial risk. Financial instruments allowmany forms of securitized assets to be traded on securities exchangessuch as stock exchanges, including debt such as bonds as well asequity in publicly traded corporations.Central banks, such as the Federal Reserve System banks in the UnitedStates and Bank of England in the United Kingdom, are strong playersin public finance, acting as lenders of last resort as well as stronginfluences on monetary and credit conditions in the economy SAAB MARFIN MBA
  3. 3. SAAB MARFIN MBAFinancial marketsa financial market is a mechanism that allows people and entities tobuy and sell (trade) financial securities (such as stocks and bonds),commodities (such as precious metals or agricultural goods), andother fungible items of value at low transaction costs and at pricesthat reflect supply and demand. Both general markets (where manycommodities are traded) and specialized markets (where only onecommodity is traded) exist. Markets work by placing many interestedbuyers and sellers in one "place", thus making it easier for them tofind each other. An economy which relies primarily on interactionsbetween buyers and sellers to allocate resources is known as a marketeconomy in contrast either to a command economy or to anon-market economy such as a gift economy. In finance, financialmarkets facilitate: The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) The transfer of liquidity (in the money markets) International trade (in the currency markets)– and are used to match those who want capital to those who have it.Typically a borrower issues a receipt to the lender promising to payback the capital. These receipts are securities which may be freelybought or sold. In return for lending money to the borrower, thelender will expect some compensation in the form of interest ordividends. In mathematical finance, the concept continuous-timeBrownian motion stochastic process is sometimes used as a model. Definitionthe term market means the aggregate of possible buyers and sellers ofa certain good or service and the transactions between them. The term"market" is sometimes used for what are more strictly exchanges,organizations that facilitate the trade in financial securities, e.g., astock exchange or commodity exchange. This may be a physicallocation (like the NYSE, BSE, NSE) or an electronic system (likeNASDAQ). Much trading of stocks takes place on an exchange; still,corporate actions (merger, spinoff) are outside an exchange, while anytwo companies or people, for whatever reason, may agree to sell stockfrom the one to the other without using an exchange.Trading ofcurrencies and bonds is largely on a bilateral basis, although somebonds trade on a stock exchange, and people are building electronicsystems for these as well, similar to stock exchanges. Financialmarkets can be domestic or they can be international. SAAB MARFIN MBA
  4. 4. SAAB MARFIN MBATypes of financial marketsThe financial markets can be divided into different subtypes: Capital markets which consist of: o Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. o Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.The capital markets may also be divided into primary markets andsecondary markets. Newly formed (issued) securities are bought orsold in primary markets, such as during initial public offerings.Secondary markets allow investors to buy and sell existing securities.The transactions in primary markets exist between issuers andinvestors, while in secondary market transactions exist amonginvestors.Analysis of financial marketsMuch effort has gone into the study of financial markets and howprices vary with time. Charles Dow, one of the founders of Dow Jones& Company and The Wall Street Journal, enunciated a set of ideas onthe subject which are now called Dow Theory. This is the basis of theso-called technical analysis method of attempting to predict futurechanges. One of the tenets of "technical analysis" is that market trendsgive an indication of the future, at least in the short term. The claimsof the technical analysts are disputed by many academics, who claimthat the evidence points rather to the random walk hypothesis, whichstates that the next change is not correlated to the last change.The scale of changes in price over some unit of time is called thevolatility. It was discovered by Benoît Mandelbrot that changes inprices do not follow a Gaussian distribution, but are rather modeledbetter by Lévy stable distributions. The scale of change, or volatility, SAAB MARFIN MBA
  5. 5. SAAB MARFIN MBAdepends on the length of the time unit to a power a bit more than 1/2.Large changes up or down are more likely than what one wouldcalculate using a Gaussian distribution with an estimated standarddeviation.A new area of concern is the proper analysis of international marketeffects. As connected as todays global financial markets are, it isimportant to realize that there are both benefits and consequences toa global financial network. As new opportunities appear due tointegration, so do the possibilities of contagion. This presents uniqueissues when attempting to analyze markets, as a problem can ripplethrough the entire connected global network very quickly. For example,a bank failure in one country can spread quickly to others, whichmakes proper analysis more difficult.Cost accountingCost accounting information is designed for managers. Sincemanagers are taking decisions only for their own organization, there isno need for the information to be comparable to similar informationfrom other organizations. Instead, the important criterion is that theinformation must be relevant for decisions that managers operating ina particular environment of business including strategy make. Costaccounting information is commonly used in financial accountinginformation, but first we are concentrating in its use by managers totake decisions. The accountants who handle the cost accountinginformation generate add value by providing good information tomanagers who are taking decisions. Among the better decisions, thebetter performance of your organization, regardless if it is amanufacturing company, a bank, a non-profit organization, agovernment agency, a school club or even a business school. Thecost-accounting system is the result of decisions made by managersof an organization and the environment in which they make them.The organizations and managers are most of the times interested inand worried for the costs. The control of the costs of the past, presentand future is part of the job of all the managers in a company. In thecompanies that try to have profits, the control of costs affects directlyto them. Knowing the costs of the products is essential fordecision-making regarding price and mix assignation of products andservices.The cost accounting systems can be important sources of informationfor the managers of a company. For this reason, the managersunderstand the forces and weaknesses of the cost accounting systems,and participate in the evaluation and evolution of the costmeasurement and administration systems. Unlike the accountingsystems that help in the preparation of financial reports periodically,the cost accounting systems and reports are not subject to rules andstandards like the Generally Accepted Accounting Principles. As aresult, there is a wide variety in the cost accounting systems of the SAAB MARFIN MBA
  6. 6. SAAB MARFIN MBAdifferent companies and sometimes even in different parts of the samecompany or organization.The following are different cost accounting approaches: standardized or standard cost accounting lean accounting activity-based costing resource consumption accounting throughput accounting marginal costing/cost-volume-profit analysisClassical cost elements are: o Raw materials o Labor o Indirect expenses/overhead Elements of cost Material (Material is a very important part of business) o Direct material Labor o Direct labor Overhead (Variable/Fixed) o Indirect material o Indirect labor o Maintenance & Repair o Supplies o Utilities o Other Variable Expenses o Salaries o Occupancy (Rent) o Depreciation o Other Fixed Expenses(In some companies, machine cost is segregated from overheadandreported as a separate element)They are grouped further based on their functions as, Production or works overheads Administration overheads SAAB MARFIN MBA
  7. 7. SAAB MARFIN MBA Selling overheads Distribution overheads Financial ExpensesClassification of costsClassification of cost means, the grouping of costs according to theircommon characteristics. The important ways of classification of costsare: By nature or element: materials, labor, expenses By functions: production, selling, distribution, administration, R&D, development, By traceability: direct and indirect By variability: fixed, variable, semi-variable By controllability: controllable, uncontrollable By normality: normal, abnormal Types of accounts Asset accounts: represent the different types of economic resources owned by a business, common examples of Asset accounts are cash, cash in bank, building, inventory, prepaid rent, goodwill, accounts receivable] Liability accounts: represent the different types of economic obligations by a business, such as accounts payable, bank loan, bonds payable, accrued interest.] Equity accounts: represent the residual equity of a business (after deducting from Assets all the liabilities) including Retained Earnings and Appropriations.] Revenue accounts or income: represent the companys gross earnings and common examples include Sales, Service revenue and Interest Income. Expense accounts: represent the companys expenditures to enable itself to operate. Common examples are electricity and water, rentals, depreciation, doubtful accounts, interest, insurance.[citation needed] Contra-accounts: Some balance sheet items have corresponding contra accounts, with negative balances, that offset them. Examples are accumulated depreciation against equipment, and allowance for bad debts against long-term notes receivable. SAAB MARFIN MBA
  8. 8. SAAB MARFIN MBATrial balanceA trial balance is a list of all the nominal ledger (general ledger)accounts contained in the ledger of a business. This list will containthe name of the nominal ledger account and the value of that nominalledger account. The value of the nominal ledger will hold either a debitbalance value or a credit value balance. The debit balance values willbe listed in the debit column of the trial balance and the credit valuebalance will be listed in the credit column. The profit and lossstatement and balance sheet and other financial reports can then beproduced using the ledger accounts listed on the trial balance.The name comes from the purpose of a trial balance which is to provethat the value of all the debit value balances equal the total of all thecredit value balances. Trialing, by listing every nominal ledger balance,ensures accurate reporting of the nominal ledgers for use in financialreporting of a businesss performance. If the total of the debit columndoes not equal the total value of the credit column then this wouldshow that there is an error in the nominal ledger accounts. This errormust be found before a profit and loss statement and balance sheetcan be produced.The trial balance is usually prepared by a bookkeeper or accountantwho has used daybooks to record financial transactions and then postthem to the nominal ledgers and personal ledger accounts. The trialbalance is a part of the double-entry bookkeeping system and usesthe classic T account format for presenting values.Accounting periodAccounting period in bookkeeping is the period with reference towhich accounting books of any entity are prepared.It is the period for which books are balanced and the financialstatements are prepared. Generally, the accounting period consists of12 months. However the beginning of the accounting period differsaccording to the jurisdiction. For example one entity may follow theregular calendar year, i.e. January to December as the accounting year,while another entity may follow April to March as the accountingperiod.The International Financial Reporting Standards even allows a period of52 weeks as an accounting period instead of a proper year.[1]In some of the ERP tools there are more than 12 accounting periods ina financial year. They put one accounting period as "Year Open" periodwhere all the carried over balances from last financial year are clearedand one period as "Year Close" where all the transactions for closed forthe same financial year. SAAB MARFIN MBA
  9. 9. SAAB MARFIN MBABookkeepingBookkeeping is the recording of financial transactions. Transactionsinclude sales, purchases, income, receipts and payments by anindividual or organization. Bookkeeping is usually performed by abookkeeper. Bookkeeping should not be confused with accounting.The accounting process is usually performed by an accountant. Theaccountant creates reports from the recorded financial transactionsrecorded by the bookkeeper and files forms with government agencies.There are some common methods of bookkeeping such as thesingle-entry bookkeeping system and the double-entry bookkeepingsystem. But while these systems may be seen as "real" bookkeeping,any process that involves the recording of financial transactions is abookkeeping process.A bookkeeper (or book-keeper), also known as an accounting clerk oraccounting technician, is a person who records the day-to-dayfinancial transactions of an organization. A bookkeeper is usuallyresponsible for writing the "daybooks." The daybooks consist ofpurchases, sales, receipts, and payments. The bookkeeper isresponsible for ensuring all transactions are recorded in the correctday book, suppliers ledger, customer ledger and general ledger.The bookkeeper brings the books to the trial balance stage. Anaccountant may prepare the income statement and balance sheetusing the trial balance and ledgers prepared by the bookkeeper.Abbreviations used in bookkeeping A/C – Account Acc – Account A/R – Accounts receivable A/P – Accounts payable B/S – Balance sheet c/d – Carried down b/d – Brought down c/f – Carried forward b/f – Brought forward Dr – Debit record Cr – Credit record G/L – General ledger; (or N/L – nominal ledger) P&L – Profit and loss; (or I/S – income statement) PP&E – Property, plant and equipment TB – Trial Balance GST – Goods and services tax VAT – Value added tax CST – Central sale tax TDS – Tax deducted at source AMT – Alternate minimum tax SAAB MARFIN MBA
  10. 10. SAAB MARFIN MBA EBITDA – Earnings before interest, taxes, depreciation and amortisation EBDTA – Earnings before depreciation, taxes and amortisation EBT – Earnings before taxes EAT – Earnings after tax PAT – Profit after tax PBT – Profit before tax Depr – Depreciation Depn – DepreciationBookkeeping systemsTwo common bookkeeping systems used by businesses and otherorganizations are the single-entry bookkeeping system and thedouble-entry bookkeeping system. Single-entry bookkeeping usesonly income and expense accounts, recorded primarily in a revenueand expense journal. Single-entry bookkeeping is adequate for manysmall businesses. Double-entry bookkeeping requires posting(recording) each transaction twice, using debits and credits.DaybooksA daybook is a descriptive and chronological (diary-like) record ofday-to-day financial transactions also called a book of original entry.The daybooks details must be entered formally into journals to enableposting to ledgers. Daybooks include: Sales daybook, for recording all the sales invoices. Sales credits daybook, for recording all the sales credit notes. Purchases daybook, for recording all the purchase invoices. Purchases credits daybook, for recording all the purchase credit notes. Cash daybook, usually known as the cash book, for recording all money received as well as money paid out. It may be split into two daybooks: receipts daybook for money received in, and payments daybook for money paid out. Petty Cash daybook, for recording small value purchases paid for by cash General Journal daybook, for recording journalsPetty cash bookA petty cash book is a record of small value purchases usuallycontrolled by imprest system. Items such as coffee, tea, birthday cardsfor employees, stationery for office working, a few dollars if youreshort on postage, are listed down in the petty cash book.Journalsjournals are recorded in the general journal daybook. A journal is aformal and chronological record of financial transactions before their SAAB MARFIN MBA
  11. 11. SAAB MARFIN MBAvalues are accounted for in the general ledger as debits and credits. Acompany can maintain one journal for all transactions, or keep severaljournals based on similar activity (i.e. sales, cash receipts, revenue,etc.) making transactions easier to summarize and reference later. Forevery debit journal entry recorded there must be an equivalent creditjournal entry to maintain a balanced accounting equation.[2] LedgersA ledger is a record of accounts. These accounts are recordedseparately showing their beginning/ending balance. A journal listsfinancial transactions in chronological order without showing theirbalance but showing how much is going to be charged in each account.A ledger takes each financial transactions from the journal and recordsthem into the corresponding account for every transaction listed. Theledger also sums up the total of every account which is transferredinto the balance sheet and income statement. There are 3 differentkinds of ledgers that deal with book-keeping. Ledgers include: Sales ledger, which deals mostly with the accounts receivable account. This ledger consists of the financial transactions made by customers to the business. Purchase ledger is a ledger that goes hand and hand with the Accounts Payable account. This is the purchasing transaction a company does. General ledger representing the original 5 main accounts: assets, liabilities, equity, income, and expensesCash basisCash basis tax payers include income when it is received, and claimdeductions when expenses are paid.[5]A cash basis taxpayer can look tothe doctrine of constructive receipt and the doctrine of cashequivalence to help determine when income is received. Mostindividuals start as cash basis taxpayers. There are four types oftaxpayers that cannot use the cash basis: (1) corporations with over$5,000,000 in gross receipts; (2) partnerships with at least one Ccorporation partner; (3) tax shelters;[6]and (4) taxpayers required tokeep inventory (retail, wholesale, manufacturer etc...)[7]Exceptions (1)Farming Businesses (2) Qualified PSCs (3) Entities with gross receiptsof not more than $7,000,000 [8]Similar definition of cash basis accounting is true for financialaccounting purposes.[9] Accrual basisAccrual basis taxpayers include items when they are earned and claimdeductions when expenses are incurred.[10]An accrual basis taxpayerlooks to the “all-events test” and “earlier-of test” to determine whenincome is earned.[11]Under the all-events test, an accrual basis taxpayergenerally must include income "for the taxable year when all the SAAB MARFIN MBA
  12. 12. SAAB MARFIN MBAevents have occurred that fix the right to receive income and theamount of the income can be determined with reasonableaccuracy."[12]Under the "earlier-of test", an accrual basis taxpayerreceives income when (1) the required performance occurs, (2)payment therefore is due, or (3) payment therefore is made, whicheverhappens earliest.[13]Under the earlier of test outlined in Revenue Ruling74-607, an accrual basis taxpayer may be treated as a cash basistaxpayer when payment is received before the required performanceand before the payment is actually due. An accrual basis taxpayergenerally can claim a deduction “in the taxable year in which all theevents have occurred that establish the fact of the liability, the amountof the liability can be determined with reasonable accuracy, andeconomic performance has occurred with respect to the liability.”[14]Similar definition of accrual basis accounting is true for financialaccounting purposes, except that revenue cant be recognized until itsearned even if a cash payment has already been received.[9]Management accounting or managerial accounting is concerned withthe provisions and use of accounting information to managers withinorganizations, to provide them with the basis to make informedbusiness decisions that will allow them to be better equipped in theirmanagement and control functions.In contrast to financial accountancy information, managementaccounting information is: primarily forward-looking, instead of historical; model based with a degree of abstraction to support decision making generically, instead of case based; 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; computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards.Management accounting or managerial accounting is concerned withthe provisions and use of accounting information to managers withinorganizations, to provide them with the basis to make informedbusiness decisions that will allow them to be better equipped in theirmanagement and control functions.In contrast to financial accountancy information, managementaccounting information is: primarily forward-looking, instead of historical; model based with a degree of abstraction to support decision SAAB MARFIN MBA
  13. 13. SAAB MARFIN MBA making generically, instead of case based; 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; computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards. DefinitionIFAC Definition of Managerial Accounting showing Cost Measurementembracing three broad areas: Cost Accounting; PerformanceEvaluation & Analysis; Planning & Decision Support. Copyright July2009 Professional Accountants in Business Committee. InternationalGood Practice Guidance: Evaluating and Improving Costing inOrganizations [1] p.7According to the Chartered Institute of Management Accountants(CIMA), Management Accounting is "the process of identification,measurement, accumulation, analysis, preparation, interpretation andcommunication of information used by management to plan, evaluateand control within an entity and to assure appropriate use of andaccountability for its resources. Management accounting alsocomprises the preparation of financial reports for non-managementgroups such as shareholders, creditors, regulatory agencies and taxauthorities"(CIMA Official Terminology). SAAB MARFIN MBA
  14. 14. SAAB MARFIN MBAThe Institute of Management Accountants (IMA)[2] recently updated itsdefinition as follows: "management accounting is a profession thatinvolves partnering in management decision making, devisingplanning and performance management systems,and providingexpertise in financial reporting and control to assist management inthe formulation and implementation of an organization’s strategy".The American Institute of Certified Public Accountants(AICPA) statesthat management accounting as practice extends to the followingthree 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 "Amanagement accountant applies his or her professional knowledgeand skill in the preparation and presentation of financial and otherdecision oriented information in such a way as to assist managementin the formulation of policies and in the planning and control of theoperation of the undertaking". Management Accountants therefore areseen as the "value-creators" amongst the accountants. They are muchmore interested in forward looking and taking decisions that will affectthe future of the organization, than in the historical recording andcompliance (score keeping) aspects of the profession. Managementaccounting knowledge and experience can therefore be obtained fromvaried fields and functions within an organization, such as informationmanagement, treasury, efficiency auditing, marketing, valuation,pricing, logistics, etc. Traditional vs. innovative practices SAAB MARFIN MBA
  15. 15. SAAB MARFIN MBAManagerial Costing Timeline presented at IMAs Annual Conference -Managerial Costing Conceptual Framework Session Sep 7, 2011(Orlando, FL). Used with permission by the author A.van der MerweCopyright 2011 All Rights Reserved.Within the area of Management Accounting there are almost an infinitenumber of tools, methods, techniques and approaches floatingaround.[1]The distinction between ‘traditional’ and ‘innovative’ accountingpractices is perhaps best illustrated with the visual timeline (seesidebar) of managerial costing approaches presented at the Institute ofManagement Accountants 2011 Annual Conference.Traditional Standard Costing (TSC), used in Cost Accounting datesback to the 1920’s and is a central method in management accountingpracticed today because it is used for financial statement reporting forthe valuation of Income Statement and Balance Sheet line items suchas Cost of Goods Sold (COGS) and Inventory valuation. TraditionalStandard Costing must comply with generally accepted accountingprinciples (GAAP US) and actually aligns itself more with answeringFinancial Accounting requirements rather than providing solutions formanagement accountants. Traditional approaches limit themselves bydefining cost behavior only in terms of production or sales volume.In the late 1980s, accounting practitioners and educators were heavilycriticized on the grounds that management accounting practices (and,even more so, the curriculum taught to accounting students) hadchanged little over the preceding 60 years, despite radical changes inthe business environment. In 1993, the Accounting Education ChangeCommission Statement Number 4[2]calls for faculty members to comedown from their ivory towers and expand their knowledge about theactual practice of accounting in the workplace.[3]Professional SAAB MARFIN MBA
  16. 16. SAAB MARFIN MBAaccounting institutes, perhaps fearing that management accountantswould increasingly be seen as superfluous in business organizations,subsequently devoted considerable resources to the development of amore innovative skills set for management accountants.Variance analysis, which is a systematic approach to the comparison ofthe actual and budgeted costs of the raw materials and labor usedduring a production period. While some form of variance analysis isstill used by most manufacturing firms, it nowadays tends to be usedin conjunction with innovative techniques such as life cycle costanalysis and activity-based costing, which are designed with specificaspects of the modern business environment in mind. Life-cyclecosting recognizes that managers’ ability to influence the cost ofmanufacturing a product is at its greatest when the product is still atthe design stage of its product life-cycle (i.e., before the design hasbeen finalized and production commenced), since small changes to theproduct design may lead to significant savings in the cost ofmanufacturing 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 ofproduction equipment idle time) and that the key to effective costcontrol is therefore optimizing the efficiency of these activities. Bothlifecycle costing and activity-based costing recognize that, in thetypical modern factory, the avoidance of disruptive events (such asmachine breakdowns and quality control failures) is of far greaterimportance than (for example) reducing the costs of raw materials.Activity-based costing also deemphasizes direct labor as a cost driverand concentrates instead on activities that drive costs, As the provisionof a service or the production of a product component.Other approaches that can be viewed as innovative to the U.S. is theGerman approach, Grenzplankostenrechnung (GPK). Although it hasbeen in practiced in Europe for more than 50 years, neither GPK northe proper treatment of unused capacity’ is widely practiced here inthe U.S. Thus GPK and the concept of unused capacity is slowingbecome more recognized in America, and "could easily be consideredadvanced by U.S. standards".[1]One of the more innovative accounting practices available today isResource consumption accounting (RCA). RCA has been recognized bythe International Federation of Accountants (IFAC) as a “sophisticatedapproach at the upper levels of the continuum of costing techniques”[4] because it provides the ability to derive costs directly fromoperational resource data or to isolate and measure unused capacitycosts. RCA was derived by taking the best costing characteristics ofthe German management accounting approachGrenzplankostenrechnung (GPK), and combining the use ofactivity-based drivers when needed, such as those used inActivity-based costing. With the RCA approach, resources and their SAAB MARFIN MBA
  17. 17. SAAB MARFIN MBAcosts are considered as “foundational to robust cost modeling andmanagerial decision support, because an organization’s costs andrevenues are all a function of the resources and the individualcapacities that produce them”.[4]Role within a corporationConsistent with other roles in todays corporation, managementaccountants have a dual reporting relationship. As a strategic partnerand provider of decision based financial and operational information,management accountants are responsible for managing the businessteam and at the same time having to report relationships andresponsibilities to the corporations finance organization.The activities management accountants provide inclusive offorecasting and planning, performing variance analysis, reviewing andmonitoring costs inherent in the business are ones that have dualaccountability to both finance and the business team. Examples oftasks where accountability may be more meaningful to the businessmanagement team vs. the corporate finance department are thedevelopment of new product costing, operations research, businessdriver metrics, sales management scorecarding, and client profitabilityanalysis. See Financial modeling. Conversely, the preparation of certainfinancial reports, reconciliations of the financial data to sourcesystems, risk and regulatory reporting will be more useful to thecorporate finance team as they are charged with aggregating certainfinancial information from all segments of the corporation.In corporations that derive much of their profits from the informationeconomy, such as banks, publishing houses, telecommunicationscompanies and defence contractors, IT costs are a significant source ofuncontrollable spending, which in size is often the greatest corporatecost after total compensation costs and property related costs. Afunction of management accounting in such organizations is to workclosely with the IT department to provide IT Cost Transparency.[5]Given the above, one widely held view of the progression of theaccounting and finance career path is that financial accounting is astepping stone to management accounting. Consistent with the notionof value creation, management accountants help drive the success ofthe business while strict financial accounting is more of a complianceand historical endeavor.An alternative viewA very rarely expressed alternative view of management accounting isthat it is neither a neutral or benign influence in organizations, rathera mechanism for management control through surveillance. This viewlocates management accounting specifically in the context ofmanagement control theory. Stated differently, ManagementAccounting information is the mechanism which can be used bymanagers as a vehicle for the overview of the whole internal structure SAAB MARFIN MBA
  18. 18. SAAB MARFIN MBAof the organization to facilitate their control functions within anorganization. Specific conceptsCost accountingCost accounting is a central element of managerial accounting.Grenzplankostenrechnung (GPK)Main article: Grenzplankostenrechnung (GPK)Grenzplankostenrechnung is a German costing methodology,developed in the late 1940s and 1950s, designed to provide aconsistent and accurate application of how managerial costs arecalculated and assigned to a product or service. The termGrenzplankostenrechnung, often referred to as GPK, has best beentranslated as either Marginal Planned Cost Accounting[6]or FlexibleAnalytic Cost Planning and Accounting.[7]The origins of GPK are credited to Hans Georg Plaut, an automotiveengineer and Wolfgang Kilger, an academic, working towards themutual goal of identifying and delivering a sustained methodologydesigned to correct and enhance cost accounting information. GPK ispublished in cost accounting textbooks, notably FlexiblePlankostenrechnung und Deckungsbeitragsrechnung and taught at [8]German-speaking universities today.Lean accounting (accounting for lean enterprise)Main article: Lean accountingIn the mid- to late-1990s several books were written about accountingin the lean enterprise (companies implementing elements of theToyota Production System). The term lean accounting was coinedduring that period. These books contest that traditional accountingmethods are better suited for mass production and do not support ormeasure good business practices in just-in-time manufacturing andservices. The movement reached a tipping point during the 2005 LeanAccounting Summit in Dearborn, MI. 320 individuals attended anddiscussed the merits of a new approach to accounting in the leanenterprise. 520 individuals attended the 2nd annual conference in2006.Resource consumption accounting (RCA)Main article: Resource Consumption AccountingResource Consumption Accounting (RCA) is formally defined as adynamic, fully integrated, principle-based, and comprehensivemanagement accounting approach that provides managers withdecision support information for enterprise optimization. RCAemerged as a management accounting approach around 2000 and wassubsequently developed at CAM-I the Consortium for AdvancedManufacturing–International, in a Cost Management Section RCAinterest group in December 2001.Throughput accountingMain article: Throughput accounting SAAB MARFIN MBA
  19. 19. SAAB MARFIN MBAThe most significant recent direction in managerial accounting isthroughput accounting; which recognizes the interdependencies ofmodern production processes. For any given product, customer orsupplier, it is a tool to measure the contribution per unit ofconstrained resource.Transfer pricingMain article: Transfer pricingManagement accounting is an applied discipline used in variousindustries. The specific functions and principles followed can varybased on the industry. Management accounting principles in bankingare specialized but do have some common fundamental concepts usedwhether the industry is manufacturing based or service oriented. Forexample, transfer pricing is a concept used in manufacturing but isalso applied in banking. It is a fundamental principle used in assigningvalue and revenue attribution to the various business units. Essentially,transfer pricing in banking is the method of assigning the interest raterisk of the bank to the various funding sources and uses of theenterprise. Thus, the banks corporate treasury department will assignfunding charges to the business units for their use of the banksresources when they make loans to clients. The treasury departmentwill also assign funding credit to business units who bring in deposits(resources) to the bank. Although the funds transfer pricing process isprimarily applicable to the loans and deposits of the various bankingunits, this proactive is applied to all assets and liabilities of thebusiness segment. Once transfer pricing is applied and any othermanagement accounting entries or adjustments are posted to theledger (which are usually memo accounts and are not included in thelegal entity results), the business units are able to produce segmentfinancial results which are used by both internal and external users toevaluate performance.Management accounting tasks/ servicesprovidedListed below are the primary tasks/ services performed bymanagement accountants. The degree of complexity relative to theseactivities are dependent on the experience level and abilities of anyone individual. Rate and 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 SAAB MARFIN MBA
  20. 20. SAAB MARFIN MBA Client profitability analysis IT cost transparency Capital budgeting Buy vs. lease analysis Strategic planning Strategic management advice Internal financial presentation and communication Sales forecasting Financial forecasting Annual budgeting Cost allocation Related qualificationsThere are several related professional qualifications and certificationsin the field of accountancy including: Management Accountancy Qualifications o CIMA o ICMA o CMA Other Professional Accountancy Qualifications o Chartered Institute of Public Finance and Accountancy, CIPFA o Chartered Certified Accountant, (ACCA) o Chartered Accountant, (CA) o Certified Public Accountant, (CPA) § American Institute of Certified Public Accountants o Certified Practicing Accountant (CPA Australia) o Chartered Global Management Accountant Methods Activity-based costing Grenzplankostenrechnung (GPK) Lean accounting Resource Consumption Accounting Standard costing Throughput accounting Transfer pricing SAAB MARFIN MBA