Management Accounting (MA)

Annotations:

• Accountancy involves the measurement, analysing and reporting of financial and non-financial information to help managers, shareholders and other interested parties make decisions about organisations.

1. CIMA
   1. Definition
      1. The application of the principles of accounting and financial management to create, protect, preserve and increase value for the stakeholders of for-profit and not-for-profit enterprises in the public and private sectors
   2. Code of Ethics
      1. Integrity
         1. Straightforward, honest and truthful in all professional and business relationships
      2. Objectivity
         1. Not allowing bias, conflict of interesto the influence of other people to override professional judgement
      3. Professional competence and due care
         1. Ongoing commitment to your level of professional knowledge and skill
      4. Confidentiality
         1. Not disclosing professional info unless given specific permission, or a legal or professional duty
      5. Professional behaviour
         1. Compliance with relevant laws and regulations. Must also avoid any action that could negatively affect the reputation of the profession
   3. Role
      1. Management accounting requires the identification, generation, presentation, interpretation and use of relevant information to:
         1. Inform strategic decisions and formulate business strategy
         2. Plan long-, medium-, and short-run operations
         3. Determine capital structure and fund that structure
         4. Design reward strategies for executives and shareholders
         5. Inform operational decisions
         6. Control operations and ensure the efficient use of resources
         7. Measure and report financial and non-financial performance to management and other stakeholders
         8. Safeguard tangible and intangible assets
         9. Implement corporate governance procedures, risk management and internal controls
2. Decision Making Levels

   Annotations:

   • Information needs differ at each of these levels
   1. Strategic

      Annotations:

      • Top-level management need to know about developments in the markets in which they operate and in general economic situations. They also need to know about any new technology that emerges, and about the activities of competitors.  Decisions at this level:
      1. Large impact on the whole organisation
      2. Will be long-term
      3. Tend to unstructured
   2. Managerial

      Annotations:

      • Management at this level might want to know issues such as product or service quality, speed of handling customer complaints, employee skills levels and employee moral. Decisions made at this level:
      1. Medium impance on the whole organisation
      2. Will be medium-term
      3. Will act as a bridge between the strategic and operational levels
   3. Operational

      Annotations:

      • Lower-level management may want to know about the number of rejects per machine, the lead time for delivering materials and the number of labour and machine hours available.  Decisions made at this level:
      1. Small impact on the whole organisation

         Annotations:

         • They will normally only affect one business unit or department
      2. Will be short-term
      3. Tend to be highly structured
3. Purpose of Management Accounting
   1. Planning

      Annotations:

      • Planning involves establishing the objectives and formulating relevant strategies that can be used to achieve those objectives. In order to make plans, it helps to know info from the past, so that deicsion what is achievable in the future can be made. Planning can be done at three different levels:
      1. Strategic Level
         1. Long-term planning carried out by the highest level of the organisation
      2. Managerial Level
         1. Short- to medium-term planning, carried out by middle level management
      3. Operational Level
         1. Short-term planning for day-to-day operations
   2. Control

      Annotations:

      • Once planning has been carried out, targets can be set. This allows for evaluation of performance. Information relating to the actual results of an organisation must be gathered and compared to the targets. The differences (variances) can be reported to management. This type of information facilitates managers to CONTROL their operations. Some common performance measurements are:
      1. Variances

         Annotations:

         • Comparison of actual results against budgeted results
      2. Profitability Measures

         Annotations:

         • Absolute measures such as gross profit or net profit, or relative measures such gross margin %
      3. Return Measures

         Annotations:

         • Financial ratio measures such as return on capital
   3. Decision Making

      Annotations:

      • Decision making involves considering information that has been provided and making informed decisions.  In most situations, 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 one. Self-note: Markov Decision Process model could be an option
4. Roles of Management Accountant
   1. Position in organisation
      1. Dedicated Business Partners

         Annotations:

         • The accountant is an integral part of the business that they support. To work in the best interest of the company, the management accountant and the manager must work as business partners and the relationship must be based on trust, honesty, and respect.
         1. From the accountant's POV, they must:
            1. Act professionally at all times

               Annotations:

               • As representatives of the accounting profession, they are expected to show professional care and attention in the way they conduct themselves.
            2. Demonstrate technical awareness

               Annotations:

               • This can be demonstrated by being a qualified member of CIMA
            3. Demonstrate business awareness

               Annotations:

               • They must be aware of the nature of the business and the needs of the managers
            4. Act with integrity

               Annotations:

               • 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
         2. From the manager's POV, they mus:
            1. Trust the accountant and the information being provided
            2. Respect the accountant's knowledge, experience and professionalism
            3. Be able to discuss all aspects of work confidentiality with the accountant
            4. Be able to state clearly what their requirements are
         3. Advantages
            1. MA function is part of the business it serves
            2. Increased knowledge of the business area and its needs
            3. Strong relationships can be built ip between the accountants and the business
         4. Disadvantages
            1. Duplication of effort across the organisation
            2. Lack of knowledge

               Annotations:

               • There is no sharing of knowledge which can happen within a larger, more diverse team.
            3. MA isolated

               Annotations:

               • The MAs can feel isolated wwithin the business and may develop their own ways of working which may not constitute best practice.
            4. The accountant can lose sight of the overall goals of the organisation
      2. Shared Service Centre (SSC)

         Annotations:

         • 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. This is often thought of as 'internal outsourcing'.
         1. Advantages
            1. Cost reduction

               Annotations:

               • 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
            2. Increased quality of service

               Annotations:

               • The central team can become very experienced and adopt best practice.
            3. Consistency

               Annotations:

               • Consistency of management information throughout the organisation.
         2. Disadvantages
            1. The advantages of dedicated business parters may be lost
      3. Business Process Outscourcing

         Annotations:

         • 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 are procurement, ordering and reporting functions, although decision support and other corporate functions may also be outsourced.
         1. Advantages
            1. Cost reduction

               Annotations:

               • As with SSCs, there will be headcount reduction and reduction in property and associated costs
            2. Access to specialist providers

               Annotations:

               • This can bring new expertise into the organisation.
            3. Release of capacity

               Annotations:

               • 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.
         2. Disadvantages
            1. Loss of control

               Annotations:

               • The work is being carried out remotely so management are unable to supervise the function on a day-to-day basis.
            2. Over-reliance on external providers

               Annotations:

               • 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.
            3. Confidentiality Risk

               Annotations:

               • Important information could end up getting into the wrong hands.
            4. Loss of quality

               Annotations:

               • 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.
   2. Comparison to financial accountant
      1. Internally focused
      2. At the discretion of management
      3. Concerned with provision of information to management to aid decision making
      4. Not governed by rules or regulations, can be provided in any format
   3. The Management Accountant as an Advisor

      Annotations:

      • An 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.
5. Management Information
   1. Information Characteristics

      Annotations:

      • The operations of organisations generate a huge amount of data. Data consists of raw facts and statistics before they have been processed. Once data have been processed into a useful form, it can be called information. Managers need good information in order to make good decisions.
      1. Accurate

         Annotations:

         • The degree of accuracy depends on the reason the information is needed
      2. Complete

         Annotations:

         • Managers should be given all the information they need, but information should not be excessive. e.g. a complete control report on variances should include all standard and actual costs necessary to understand the variance calculations.
      3. Cost Beneficial

         Annotations:

         • The value of information should not excess the cost of producing it.  Management info is valuable, because it assists decision making. If a decision backed by information, is different from what it would have been without the information, the value of information equates the amount of money saved or generated as a result.
      4. Understandable

         Annotations:

         • Limited use of technical language or jargon. Accountants must always be careful about the way in which they present financial information to non-financial managers.
      5. Relevant

         Annotations:

         • The info in a report should be relevant to its purpose. Redundant parts should be removed.
      6. Authoritative

         Annotations:

         • Information should be trusted and provided from reliable sources so that the users can have confidence in their decision making.
      7. Timely

         Annotations:

         • Information should be provided to a manager in good time to allow them to make decisions based on that information.
      8. Easy To Use

         Annotations:

         • We must always think about the person using the information we provide and make sure the information meets their needs.
   2. Nature of Information
      1. Source
         1. S: Historical and Forecasts
         2. O: Historical
      2. Timeliness
         1. S: The timeliness is less crucial at this level as decisions tend to be taken over a period of months or years
         2. O: Information must be available immediately as decisions are taken daily
      3. Accuracy
         1. S: Information will contain many subjective estimates
         2. O: Information will be objective and accurate
      4. Breadth
         1. S: Wide variety of information in different forms, covering many aspects of the organisation's operations
         2. O: Focused on the decision to be made
      5. Detail
         1. S: Highly summarised
         2. O: Detailed
   3. Non-Financial Information

      Annotations:

      • The management accounting systems in many organisations are able to obtain non-financial information for reporting to management.  The importance of non-financial information within the reporting system should not be forgotten; in fact it is often the information which is most valuable to managers in their decision making.