Management Accounting

1. INTRDUCTION TO MA
Key Definitions
Definition of accounting
Accounting is the process of identifying measuring and communicating economic information
to permit informed judgements and decisions by users of information.
It is therefore concerned with providing information that will help decision makers make good
decisions.
To understand accounting one must understand:
The attributes of good information
Process of measuring and communicating information
The decision making process
Users of information
The above points are briefly discussed below:
Users of information
The users of information can be divided into two:
Internal users who are parties within the organization e.g. the management or the employees.
External users who on the other hand, are parties outside the organisation e.g. the shareholder,
creditors, government, customers, etc
From the users point of view accounting can be divided into two:
Management Accounting
Which is concerned with provision of information to people within the organisation to help
them make better decisions. Management accounting is concerned with the provision and
interpretation of the information required by management at all levels for the following
purposes:
Formulating the policies of the organisation
Planning the activities of the organisation in the long-term, medium-term and shortterm
(Strategic to operational planning)
Controlling the activities of the organisation
Decision-making
Performance appraisal
Management accounting can also be said to be concerned with data gathering (both from
internal and external sources), analysing, processing, interpreting and communicating the
resulting information for use within the organisation, so that management can more effectively
plan, make decisions and control operations.

2. Financial Accounting
Which is concerned with the provision of information to external parties outside the
organization. It’s the process of measuring, classifying, summarising and reporting financial
information used in making economic decisions. It’s concerned with the preparation of
financial statements to be used by the firm’s external stakeholders.
The key differences between Management Accounting (MA) and Financial Accounting (FA)
can be summarised as follows:
MA FA
Users Internal External
Nature Future Historical
Details More detailed Summarised
Legality Not legal Legal
Format Not standard standard
It is important to define cost accounting at this point.
Cost accounting
It’s the process of cost ascertainment and cost control. It is a formal system of accounting by
means of which cost of product and services are ascertained and controlled.
Attributes of good information
Information is anything that is communicated and is sometimes said to be processed data. It is
data processed in such a way as to be of meaning to the person receiving it. Good information
should have the following attribute:
It should be relevant to a user’s needs. For the communicator this requires the following:
Identifying the user: Information must be suited and sent to the right person i.e. the person who
requires it to do his job.
Getting the purpose right: It is effective only when it helps the user to make decisions.
Getting the volume right: Information must be complete for its purpose and should not omit
any necessary item. It should be no greater in volume than the users would find helpful or be
able to take in.
It should be accurate within the user’s needs i.e. should be correct and error free.
It should inspire the user’s confidence i.e. information should not give the user any reason
to mistrust it, disbelieve it or ignore it by making sure the information is neutral.
It should be timely: The information must be readily available within the time period
which makes it useful. It must be at the right place at the right time.

3. It must be appropriately communicated: Information will lose its value if it is not
clearly communicated to the users in a suitable format and through a suitable medium.
It should be cost effective: Good information should not cost more than its worth. Gathering,
storing, retrieving and communicating an item of information may require expenses in form of
time, energy and resources. If the expense is greater than the potential value of the item, then
it should not be communicated.
Role of the Management Accountant in the Management Process
The management process involves planning, organising, controlling, directing, communicating
and motivating. We will explain each of these functions:
Planning
Planning is the basic function of the management by means of which the managers decide:
What goals are to be accomplished
How they will be accomplished
Planning gives the manager a warning of possible future crisis and therefore they avoid the
need to make unplanned decisions.
The management accountant helps to formulate future plans by providing information to assist
in deciding what product to sell, in what market and at what prices and in evaluating proposals
for capital expenditure.
In the budgeting process the management accountant provides data on past performance,
establishes budget procedures and budget time tables.
Control
Control involves a comparison of actual performance with the plan so that deviation from the
plan can be identified and corrective action taken.
It can be defined as the process of compelling events to conform to a plan. The management
accountant aids the control process by providing performance reports that compare the actual
performance with the planned outcome for each responsibility centre.
A responsibility centre may be defined as a segment (e.g. a division) of an organisation where
an individual manager holds delegated authority and is responsible for the segments
performance.
The management accountant also draws a manager’s attention to those specific activities that
do not conform to a plan. This aids the process of Management By Exception
Organising
It is the establishment of the framework within which the required activities are to be performed
and the designation of who should perform these activities. It involves the establishment of

4. decision units such as departments, sections, branches, etc.
The management accountant will provide information on the performance of each of these
segments.
Motivation
Motivation involves influencing human behaviour so that the participants identify with the
objectives of the organisation and makes decisions that are in harmony with these objectives.
Budgets and performance reports produced by management accountants motivate the firm’s
employees. To be motivating however, targets should be challenging but achievable.
Communication
To communicate means to make known, impart or transmit the information. The management
accountant aids the communication process by installing and maintaining an effective
communication system such as the Management Accounting Information System (MAIS). An
example of a MAIS is the budgetary system.