Accounting for Management
Chapter 1 sets the scene for the whole of BA2 and is all of syllabus area A. It explains why organisations need management accounting, the Global Management Accounting Principles, the difference between data and information and what makes information good, and the information needed at the strategic, tactical and operational levels.
It then covers the management accountant’s role and how the job relates to the organisation’s managers, including the IFAC description of the professional accountant in business. It ends with the role of CIMA as a professional body and its five fundamental ethical principles. There are no calculations here, but every section can produce an exam question.
1 Introduction
The lecture follows sections 1 to 8 and section 11 of these notes. Sections 9 and 10 (the management accountant within the organisation, and CIMA as a professional body) and the CIMA description of the management accountant’s role in section 2 are in the written notes only, so read them carefully. The lecture also calls the fourth principle “Stewardship brings trust”; the official wording is “Stewardship builds trust”.
The purpose of management accounting is to assist management in running the business in ways that will improve the performance of the business.
Managers have to plan, make decisions and keep the business under control. To do this well they need reliable information about costs, revenues, resources and results. Management accounting provides that information, analyses it and helps managers to use it.
2 The definition of management accounting
CIMA defines management accounting as “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”.
Put simply, management accounting helps managers to make decisions that improve the organisation – to make it more valuable and to protect the value it already has. It applies to every kind of organisation: companies, charities, hospitals and government departments.
The role of the management accountant
CIMA describes management accounting as an integral part of management. The management accountant identifies, generates, presents, interprets and uses relevant information in order to:
inform strategic decisions and help to formulate business strategy
plan long-, medium- and short-term operations
inform operational decisions
control operations and make sure resources are used efficiently
measure and report financial and non-financial performance to management and other stakeholders
safeguard the organisation’s tangible and intangible assets
support corporate governance, risk management and internal control.
The key point is that the management accountant is part of the management team. He or she does not simply keep records: the job is to provide and explain the information that managers need, and to advise them, so that the organisation creates and protects value.
3 The Global Management Accounting Principles
The purpose of the Principles is to help organisations to improve their management accounting systems in order to be able to make better decisions and to respond appropriately to the risks that they face.
The Principles were published jointly by CIMA and the AICPA (the American Institute of Certified Public Accountants), the two bodies behind the CGMA (Chartered Global Management Accountant) designation.
There are four Principles:
Principle | What it means |
Communication provides insight that is influential | By communicating information well, the organisation can make better decisions. Information is only useful if it is understood and acted on. |
Information is relevant | Organisations need to be helped in planning the information needed for the decisions they are making. Decision-makers need the best available information, relevant to the decision, at the right time. |
Impact on value is analysed | It is necessary to consider different possible scenarios in order to be in a position to make better decisions. Managers should see how each option would affect the value of the organisation. |
Stewardship builds trust | The assets, reputation and value of the organisation need protecting. Acting responsibly and ethically builds the trust of everyone the organisation deals with. |
A company must decide what price to charge for a new product. A high price gives a large profit on each unit but fewer units will be sold. A low price gives a smaller profit per unit but many more units may be sold.
Under the principle Impact on value is analysed, the management accountant works out what would happen under each scenario – how many units would be sold at each price and what the total profit would be – so that managers can choose the price that adds most value.
4 Data and information
One way of assisting management is to provide them with good information to help them with their decisions.
The information can be provided to them in different ways, but is usually in the form of reports. For example, a report analysing costs of producing each of several products may assist management in deciding which products to produce.
It is the management accountant who will be expected to provide the information, and in order to do so he/she needs to collect data.
Data consists of the facts that are gathered and stored. Data has no clear meaning until it is processed – analysed and sorted – into information.
A company exports its product all over the world and must decide which country to focus its sales effort on this year.
Its records hold every individual sale: sale 1 was to China, sale 2 to the USA, sale 3 to the UK, and so on. Each of these records is data – facts, with no clear meaning on their own.
The management accountant processes the data by adding up the sales to each country and working out each country’s share of the total – for example, 2% of sales go to China and 50% to the USA. These totals are information: they have meaning and they help the managers to make their decision. The managers do not want a list of every sale; they want the totals.
5 What makes good information?
Good quality information should:
be Accurate
be Complete (but not excessive)
be Cost effective (should cost less than the savings to be made)
be Understandable (to whoever is using it)
be Relevant (to the decision being made)
be Authoritative (be able to be trusted by the users)
be Timely
be Easy to use
The first letters spell ACCURATE, which is an easy way to remember them. Notice that information should be cost effective: producing information takes staff time and costs money, so it is only worth producing if the better decisions it leads to are worth more than it costs.
6 The main managerial processes
The main areas of management accounting are:
Costing
Cost accounting is identifying the cost of producing an item (or providing a service) in order to, for example, assist in deciding on a selling price.
Planning
e.g. plan how many staff will be required in the factory next year
Decision making
e.g. decide on what selling price to charge for a new product
Control
e.g. check month-by-month whether the company is over or under spending on wages
Performance evaluation
Comparing the performance of managers or departments against budgets or targets
Each of these is developed in later chapters: costing in chapters 2 to 7, planning and control through budgets and variances in chapters 8 and 9, performance evaluation in chapters 10 to 12, the cost accounting system in chapter 13, and decision making in chapters 14 to 20.
7 The different levels of planning
Strategic planning
long-term plans (e.g. 5 to 10 years) for the business
e.g. what new offices to open? / what new products to launch?
Tactical planning
medium-term, more detailed, plans – usually involving producing budgets for the next year
e.g. how many staff to employ next year?
Operational planning
short-term planning and decisions
e.g. which supplier to choose for a purchase next week
The information each level needs
The characteristics of the information that managers need depend on the level at which they are planning:
Strategic | Tactical | Operational | |
Who uses it | Senior management (the board) | Middle management | Junior managers and supervisors |
Time horizon | Long term – several years ahead | Medium term – usually the next year | Short term – day to day, week to week |
Source | Much of it external (competitors, markets, the economy) | Both internal and external | Mainly internal |
Level of detail | Summarised, broad | More detailed (e.g. budgets) | Very detailed |
Precision | Often estimates and forecasts | Reasonably accurate | Precise and accurate |
How often | Irregular, when a decision arises | Regular (e.g. monthly) | Very frequent (daily or weekly) |
For example, a company deciding whether to launch a new product (strategic) needs external information on competitors’ prices and market demand, but not fine detail. Once the decision is made, the budget for the new product (tactical) needs internal information on existing staff and wage rates and external information on what other employers pay. The factory manager deciding how many units to produce today (operational) needs detailed internal information.
Adeyemi Ltd is a furniture manufacturer in Nigeria. Classify each of the following as a strategic, tactical or operational planning decision, and say whether the information needed will be mainly internal, mainly external, or both.
Whether to start manufacturing office chairs as well as desks over the next ten years.
How many machine operators to employ in the factory budget for next year.
Which supplier to use for this week’s order of screws and glue.
Whether to open a showroom in Ghana.
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8 Comparison of Management Accounting with Financial Accounting
Financial accounting | Management accounting |
Prepare reports, generally based on past performance; in line with reporting requirements | Collate information such as revenue, cashflow and outstanding debts to produce timely trend reports and statistics to inform important, day-to-day management and business decisions |
Produce the required financial information for use by other functions within the business, for example department managers. | Combine financial information with non financial information data to paint a complete picture of the business. They use this to drive business success. |
The main differences are summarised below:
Financial accounting | Management accounting | |
Users | Mainly external – shareholders, lenders, tax authorities | Internal – the organisation’s managers |
Purpose | To report on the results and financial position of the business | To help managers plan, control and make decisions |
Time focus | Mainly the past | Mainly the future, using past results as a guide |
Rules | Required by law; format governed by company law and accounting standards | Not required by law; no set format – whatever is most useful |
Frequency | Usually annual (sometimes half-yearly) | As often as managers need it – often monthly or weekly |
Scope | The business as a whole; financial information only | Any part of the business (products, departments, customers); financial and non-financial information |
9 The management accountant and the organisation’s managers
The IFAC description of the professional accountant in business
IFAC (the International Federation of Accountants) is the worldwide organisation for the accountancy profession; CIMA is one of its member bodies. IFAC uses the term professional accountant in business for a professional accountant who is employed in commerce, industry, financial services, education, or the public or not-for-profit sector – rather than in an accountancy practice. A management accountant is a professional accountant in business.
IFAC describes the domain of the professional accountant in business through four roles that together add value to the organisation:
Role | What the accountant does |
Creator of value | Takes part in leadership and in making strategic and operational decisions |
Enabler of value | Supports managers’ decisions with analysis, planning, budgeting and performance management |
Preserver of value | Protects the organisation through internal controls, risk management and compliance with laws and regulations, and by safeguarding its assets |
Reporter of value | Prepares and presents financial and non-financial information for managers and for people outside the organisation |
The positioning of management accounting within the organisation
Management accounting is usually part of the finance function, which is headed by the finance director (or chief financial officer) who reports to the board. The finance function is a staff (advisory) function: it supports the line managers who run production, sales and the other operating departments.
Management accountants may work centrally, in the head-office finance team, or be placed inside the operating departments to work closely with their managers – often called being a business partner. In either case the relationship is the same: the management accountant provides information, analysis and advice, but the managers make the decisions and are responsible for them. The management accountant must remain objective and present information as it is, not as a manager would like it to look.
Digital technology has changed how this work is done. Accounting and enterprise resource planning (ERP) systems now record transactions automatically, and data analytics software can produce reports and dashboards that managers read for themselves. The management accountant spends less time collecting and processing data and more time explaining what the information means and advising managers on what to do – but the principles in this chapter, and the costing techniques in the chapters that follow, are unchanged.
10 CIMA as a professional body
The need for a professional body
Managers, employers and the public rely on the information and advice that management accountants give. A professional body exists so that they can trust it. It does this by:
setting the standard of knowledge and skill needed to qualify, through its syllabus and examinations
requiring its members to keep their knowledge up to date
setting ethical standards that members must follow, and disciplining members who break them
developing and promoting good practice in the profession
acting in the public interest.
The role of CIMA
CIMA (the Chartered Institute of Management Accountants) is the professional body for management accountants. With the AICPA it awards the CGMA designation. Its role in developing the practice of management accounting can be seen in its relationships with four groups:
Group | CIMA’s role |
Members | Requires continuing professional development (CPD), provides guidance, research and technical resources, and enforces its Code of Ethics through its disciplinary process |
Candidates (students) | Sets the syllabus and the examinations, so that everyone who qualifies has reached the same standard, and supports students through their studies |
The profession of management accounting | Develops and promotes good practice – for example the Global Management Accounting Principles – and promotes the value of management accountants to employers |
Society | Acts in the public interest by making sure that its members are competent and behave ethically, so that the information organisations rely on can be trusted |
11 CIMA’s Professional Standards
CIMA has a code of ethics which all members and students are required to comply with in order to maintain the highest ethical and professional standards.
There are five fundamental principles:
Principle | What it means |
Integrity | Being straightforward and honest in all professional and business relationships |
Objectivity | Not allowing bias, conflicts of interest or pressure from others to override professional judgement – presenting information as it is |
Professional competence and due care | Keeping professional knowledge and skill up to date, and working diligently and carefully |
Confidentiality | Not disclosing information about the organisation without proper authority (unless there is a legal or professional duty to do so), and not using it for personal advantage |
Professional behaviour | Complying with laws and regulations and avoiding anything that would discredit the profession – at work and outside it |
12 Test your knowledge
Two quick checks before you move on: work through the flashcards to fix this chapter’s terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.
Accounting for Management
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