ACT503 Chap.1 The Manager and Management Accounting
The Manager and Management Accounting
Three labels that are used loosely everywhere else
Management accounting measures, analyses and reports financial and non financial information that helps managers make decisions to fulfil the goals of the organisation, and it need not comply with generally accepted accounting principles.
Financial accounting reports outwards, to shareholders, lenders, trade suppliers and government bodies, and its statements have to be prepared under the recognised external framework and signed off by auditors from outside the firm. Cost accounting measures and reports what a firm pays to obtain resources and what it consumes in using them.
The course then makes an admission that saves a lot of argument later: most professionals now treat cost information as part of management accounting, so the boundary between those two is not clear cut and the terms are often used interchangeably.
Six dimensions separate the two reporting systems
Purpose, primary users, focus, rules of measurement, time span and behavioural implications all differ.
Management accounting exists to help managers meet organisational goals, serves internal users, is future oriented, is justified on a cost benefit basis rather than by an external standard, runs from hourly information to horizons of fifteen or twenty years, and is described as designed to influence behaviour.
Financial accounting communicates position to outside parties, serves external users, is past oriented, follows the external rules, reports annually and quarterly on the company as a whole, and influences behaviour only as a by product of pay being linked to reported results.
That last row is stronger than it looks, and it is what makes responsibility accounting, transfer pricing and performance measurement contestable later in the course rather than merely technical.
Strategy, the value chain and the five step process
Strategy is described as the fit a firm chooses between what it is capable of and what the market gives it an opening to do, and the course names two broad kinds: cost leadership, meaning quality at low prices, and product differentiation, meaning unique offerings at premium prices.
The value chain is the ordered set of functions through which a product gains usefulness for the buyer: first research and development, then design work on both the product and the process that makes it, then production, then marketing, then getting the goods to the buyer, and finally looking after them afterwards. The middle two of those last four, making and delivering, are together the supply chain.
Five decision steps run from identifying the problem and its uncertainties through obtaining information and making predictions to choosing between alternatives and then implementing, evaluating and learning; the first four are planning and the fifth is control.
Ethics is examined as a procedure
Two codes are supplied rather than one.
The lecture material sets out four conduct standards published for management accountants by the American professional body for the field, and the Hong Kong code adds a fifth principle of professional behaviour and splits competence from due care. Alongside them sits a seven step ethical decision model, and an ethics question here is marked on whether the framework is walked in order rather than on which conclusion you reach.
The two steps where marks are actually lost are listing the significant stakeholders and specifying compromise alternatives, because a binary answer of report it or stay silent leaves both of them unanswered.
What this chapter covers
- 01
What management accounting measures and who it reports to
- 02
Six dimensions that separate management from financial accounting
- 03
Cost leadership against product differentiation
- 04
The value chain, and the supply chain inside it
- 05
Five key success factors customers expect the chain to improve
- 06
The five step decision process, and where planning becomes control
- 07
Three management accounting guidelines and the signal for each
- 08
Two professional codes and a seven step decision model
Sort four decisions into the three management accounting guidelines
- 3Assign the two decisions that weigh one amount against another.
- 2Assign the decision that is designing a reaction rather than a calculation.
- 3Assign the decision that measures one item twice, and say why that signal wins.
Key terms
- Management Accounting
- The measurement, analysis and reporting of financial and non financial information that helps managers make decisions to fulfil the goals of an organisation. It need not comply with generally accepted accounting principles, and it is described as being designed to influence the behaviour of managers and employees.
- Cost Accounting
- The measurement and reporting of what a firm pays to obtain resources and what it consumes in using them. The course notes that its boundary with management accounting is no longer clear cut and that the two terms are often used interchangeably.
- Value Chain
- The ordered set of business functions through which a product gains usefulness for the buyer, one function at a time, beginning with research, then design of the product and of the process, then making it, then selling it, then getting it to the buyer, then supporting it.
- Supply Chain
- The movement of goods, services and information that begins where the materials originate and ends when the buyer has them, whether the activities happen in one organisation or several. Inside the value chain it is production and distribution taken together.
- Cost Benefit Approach
- The guideline that the benefits of an action or purchase must generally exceed its costs. Its signal in a question is that two amounts are being weighed against each other and the analysis produces one number on each side.
- Budget
- A plan restated in numbers, and the instrument that makes the separate parts of a firm agree on what each will do to deliver it. The course names it the most important planning tool, and it is also the yardstick against which the period is later controlled.
- Key Success Factor
- One of the dimensions on which customers expect a company to deliver ever improving performance through its value chain and supply chain. The course names cost and efficiency, quality, time, innovation and sustainability.
The Manager and Management Accounting FAQ
What is the difference between cost accounting and management accounting?
The course defines cost accounting as reporting on the costs of acquiring or using resources, and management accounting as reporting financial and non financial information to help managers meet organisational goals. It then says plainly that most professionals treat cost information as part of management accounting, so the distinction is not clear cut and the two terms are often used interchangeably.
Do not build an answer on a sharp boundary the course itself declines to draw.
Why does it matter that internal reports need not follow the external rules?
Because the freedom transfers a burden rather than removing one. With no external standard constraining a measurement, the person preparing it has to justify why this particular way of computing a cost is the right one for this particular decision.
That justification is exactly what the application criterion in the published marking rubric is buying, and it is the reason the same underlying item can legitimately be measured two ways for two purposes.
How is an ethics question marked in a management accounting subject?
On whether the framework is walked in order, not on which conclusion is reached.
The seven step model supplied with the course asks what happened and what is still unknown, what the ethical question is and who has something at stake, which principles are in play, what courses are open including the middle ones, whether any value settles the matter on its own, what each course would bring about in the near and long term, and only then a reasoned decision.
Which strategy a company follows changes what numbers it needs. Why?
A cost leader competes on price, so it needs cost per unit tracked tightly through production and distribution and it manages efficiency. A differentiator charges a premium for something unique, so it needs to know what research, design and customer service are costing and whether the premium is holding against those costs. The same reporting package serves one of them well and the other badly.
Exam move
Draw the six value chain functions from memory and put one real cost of your own choosing under each. Then take one decision you have actually seen made at work or in a case and walk it through the five steps, saying which step the decision is currently stuck at. Most bad management accounting advice is a step three prediction offered as though it were a step four decision.
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