Management accounting - Wikipedia
In management accounting or managerial accounting, managers use the provisions of One simple definition of management accounting is the provision of financial and non-financial The Association of International Certified Professional Accountants (AICPA) states that .. "Escaping Professional Dominance?". PDF | In this chapter we address the relationship between IT, management accounting Moreover, the high degree of system integration and the dominant role of the accounting .. management accountants and finance professionals. A corollary of that difference is that financial accounting procedures generally The dominant trend in managerial accounting during the latter half of the 20th Professionals within an organization who perform the managerial accounting Second, managerial accountants produce special reports for managers that are.
A corollary of that difference is that financial accounting procedures generally must conform to external standards, such as those developed by the Financial Accounting Standards Board FASBwhile management accounting methods are left almost completely to the discretion of individual organizations.
Cost accounting, the third major sphere of accounting, is the process of determining the cost of a specific output or activity. Although it is sometimes confused with the managerial accounting function, cost accounting information is used by decision makers both inside and outside an organization. Cost and managerial accounting differ in that the latter goes beyond the role of cost accounting by combining multiple management disciplines with financial information to facilitate internal decision making.
Thus, cost accounting may be seen as a necessary component of managerial accounting, but its focus is much narrower. The first evidence of more advanced accounting practices, such as property depreciation, has been traced to ancient Greek and Roman record keepers. The earliest accounting records that expressed accounts in terms of common monetary units currency date back to and come from Genoa.
In fact, it was during the Middle Ages that an emphasis on arithmetic and writing in commercial trade allowed accounting practices to advance significantly. The popularization of property ownership and money lending during the Renaissance in Europe necessitated the creation of performance measurement methods to help bankers and investors rate the success or failure of business ventures. Thus, the first advanced accounting procedures evolved that accounted for interest, depreciation, fixed assets, inventory turnover, and other factors that still represent the core of managerial accounting practices.
Luca Pacioli, a Venetian, was the first to document accounting practices in his book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita.
Modern accounting practices emerged during the Industrial Revolution, when the very nature of business activity began to change. Complicated financing techniques and huge capital investment expenditures resulted in the formalized distinction between such factors as income and capital, and fixed assets and inventory.
It also prompted the creation of advanced means of allocating overhead and accurately determining liabilities and net worth within companies. After the Great Depression, and particularly following World War II, the delineation between financial and managerial accounting became more defined, as government regulations and professional groups began to mandate accuracy and standardization in financial reporting and accounting.
The dominant trend in managerial accounting during the latter half of the 20th century has been the use of increasingly detailed, internally generated accounting data to help steer management decisions and improve profitability. An important reason for the rapid growth in the use of detailed internal accounting information since the s has been the proliferation of computerized information systems that have allowed managers to quickly access and process vast amounts of data.
First of all, they generate routine reports containing information regarding cost control and the planning and controlling of operations. Second, managerial accountants produce special reports for managers that are used for strategic and tactical decisions on matters such as pricing products or services, choosing which products to emphasize or de-emphasize, investing in equipment, and formulating overall policies and long-range planning.
Managerial accounting activities include some or all of the following: Managerial accountants also assist decision makers who use the information they generate, and evaluate the implications of past and future events on proposed plans or decisions.
They also work to ensure the integrity of the information that they produce and strive to implement a system of reporting that contributes to the effective measurement of management's performance.
Accountants prepare reports on the cost of producing goods, expenditures related to employee training programs, and the cost of marketing programs, among other activities. These reports are used by managers to measure the difference, or "variance," between what they planned and what they actually accomplished, or to compare performance to other benchmarks. An accounting report showing inventory waste, average hourly labor costs, and overall per-unit costs, among other statistics, might help the supervisor and superiors to identify and correct inefficiencies.
A detailed report might evaluate the assembly line data and estimate trends and the long-term effects of those trends on the overall profitability of the organization. As another example, a product manager for a line of hair care products at a corporation that manufactured beauty aids would probably want to know how much overhead each of the products is consuming.
A report that breaks down the amount of overhead attributable to each product might help the manager better determine the profitability of each item in the line of goods and to find out if the sales and profit goals for each item are being met.
For instance, a certain type of shampoo may be selling very well and generating large amounts of cash flow. However, a close accounting of that product's actual costs within the organization may reveal that its contribution to overall profits significantly lags that of other offerings in the hair care line.
Armed with that information, the product manager might elect to adjust marketing expenditures to emphasize more profitable items, or to concentrate on reducing expenses related to the shampoo.
Because of the need for detailed information about specific operations within a company, management accounting reports are typically much more in-depth than traditional financial accounting reports, such as balance sheet ratios and net income calculations. Most managerial reports also differ from financial reports in their frequency. Many internal reports, in fact, are generated monthly, weekly, or even daily in the case of information such as cash receipts and disbursements.
Despite their emphasis on detail, a critical characteristic of most managerial accounting reports is that they are presented in summary format. Managers can read the summaries, efficiently identify possible problem areas, and then examine the details within those areas to determine a course of action.
In managerial accounting, the process of setting goals, determining resource requirements, and devising a means of achieving goals is referred to as "planning. Control Charts The acceptable range referred to above may be established intuitively, not recommended or by using a tool referred to as a statistical control chart. Although intuition is not a reliable way to establish control limits, the statistical control chart is based on the work of Shewhart and the concepts of common or random causes and special or assignable causes.
Observations that are plotted within the statistical control limits on the chart are attributed to common causes, i. Further discussion of the control concept is provided in subsequent chapters. These include manufacturing costs and selling and administrative costs. This functional separation is important because each category of cost is treated differently in the accounting records.
The different treatments are required to obtain proper matching.
Manufacturing Costs There are three types of manufacturing costs. Direct material becomes the product, or becomes a part of the product. Direct labor converts the direct material into a finished product. Factory overhead represents all the other factory costs that cannot be directly identified with a particular product. This indirect category includes a variety of costs that are discussed in more detail in subsequent chapters.
These three types of costs are also referred to as product costs, or inventoriable costs, because they are capitalized in or charged to the inventory, i.
Matching Accountants capitalize manufacturing costs to obtain proper matching. The matching concept is pervasive in accrual accounting and requires that costs and benefits are matched or brought together on the income statement. In a production setting, the idea is to match the costs of producing a product or service against the benefits, i.
When the inventory is sold, these costs are charged to an expense account referred to as cost of goods sold. At the end of the accounting period, cost of goods sold is closed to the income summary where, theoretically, matching takes place. Remember that unexpired costs represent assets. Expired costs represent expenses. When the inventory is sold, we say these costs have expired, i. Thus, manufacturing costs become expenses when they reach cost of goods sold, but represent assets until the sale takes place.
Selling and Administrative Costs In traditional accounting systems 16selling and administrative costs are expensed in the period in which they are incurred. Theoretically, if there are future benefits associated with a cost, the cost should be capitalized as an asset rather than expensed. Certainly there are some future benefits associated with costs such as research and development, training, market promotion and advertising. However, these costs are expensed as incurred because it is difficult if not impossible to relate them to the future benefits.
As a result, these costs are referred to as period costs. This separation is helpful for planning and budgeting purposes. The major types of costs, in terms of cost behavior, are: These concepts are illustrated graphically in Exhibit and discussed individually below.
Variable Costs Variable costs are those costs that vary with changes in the level of activity. Variable costs tend to increase at various rates that generate linear straight line or a variety of non-linear cost functions when the costs are plotted on a graph. Some examples are illustrated in the top left panel of Exhibit Production volume is frequently measured in terms of units produced, direct labor hours used, machine hours used, materials costs or some other production volume related measure.
However, other activities that are not related to production volume might also be important in analyzing cost behavior. The recognition that non-production volume related activities also cause, or drive costs is a fundamental idea associated with activity based costing ABC.
ABC is introduced in the next chapter in connection with the various components of a cost accounting system and discussed in more detail in Chapter 7. Fixed Costs Fixed costs are defined as those costs that do not vary with changes in the activity level. Some horizontal cost functions are presented in the top right panel of Exhibit to illustrate the idea.
However, this does not mean that fixed costs remain constant. If a production volume based measure is used as the activity, a cost that changes for some reason other than a change in production activity is considered fixed. This simply means that the cost is driven by a non-production volume related phenomenon.
For example, property taxes are considered fixed in traditional cost accounting systems that are typically based on production volume related activities. However, property taxes change when the taxing authority changes the tax rate or reassesses the property. The idea to grasp is that the designation of a particular cost as fixed or variable can change when it is analyzed in relation to a different activity.
It is also important to understand that the notion of fixed and variable costs is a short run concept. All costs tend to be variable in the long run. There is a minimum cost the fixed portion and a variable portion that increases as activity increases. Some examples of these mixed costs appear in the lower left panel of Exhibit The point where the cost function intersects the vertical axis represents the fixed portion of the cost.
There are also semi-fixed costs that do not change continuously as the level of activity changes, but do increase in steps as activity increases beyond various levels.
These costs are sometimes referred to as step cost and step functions. For example, a single production supervisor who's salary normally represents a fixed cost might be adequate until production reaches a certain level, then a second supervisor would need to be hired.
Supervisory costs might be driven by the number of production shifts. Step functions can take on many forms as illustrated in the lower right panel of Exhibit Cost Behavior Techniques There are a variety of techniques for analyzing cost behavior.
Some of the methods for estimating linear cost functions are discussed and illustrated in Chapter 3. More descriptive discussions of the various types of cost behavior are provided in Chapter In two fairly recent books, George Lodge and Lester Thurow provide a structure for understanding the global economy.
One familiar variant is the system traditionally practiced in the United States. This is referred to as individualistic capitalism. The other variant is the system practiced in Japan and in the unified European community. This system is referred to as communitarian capitalism. These two variants of capitalism are important because most of the assumptions and practices underlying the individualistic system are incompatible with the assumptions and practices underlying the communitarian system.
The particular variant of capitalism embraced by society, determines to a large extent how individuals interact with each other, how businesses interact with other businesses and government, how companies are managed and more specifically for the purposes of this text, how internal accounting systems are designed and used to measure and evaluate performance. As a result, the dichotomy of capitalism provides a broad framework for the study of management and management accounting.
This framework is discussed below and referred to frequently in subsequent chapters. However, the United States has tended to be the most individualistic and Japan has tended to be the most communitarian. Other nations are somewhere between the two extremes.
How to Optimize the Performance of a System Perhaps the most important philosophical difference between the two variants of capitalism is the assumption concerning how to optimize the performance of a system. In the communitarian model, a system can be optimized only when cooperation exists at all levels within the system. There must be cooperation between individuals, departments and functional areas within a company, union and company, companies, industry groups and business and government.
The source of this philosophy is not entirely clear, but it was promoted by W. Edwards Deming for at least forty years before his death in and practiced in Japan since The source of this philosophy is easily traced to the classical school of economics founded by Adam Smith. Smith wrote that an "invisible hand" leads individuals to unintentionally promote the good of society while seeking their own self interest.
For example, the neoclassical micro economists, who followed Smith, supported individualism and a "laissez faire", or free enterprise market.
To both classical and neoclassical economists, a free market was self regulating and produced the maximum social benefits. Similar ideas can be found at the practice level in the works of Frederick W.
Taylor and the scientific management movement where individual specialization and performance were emphasized to the extreme. To summarize the key concepts, success in a communitarian system is believed to come from the collective efforts, or teamwork of all members of the system, while success in an individualistic system is believed to come from the efforts of individuals seeking their own self interest. In an individualistic system, optimizing the parts is assumed to optimize the whole.
However, the assumption in a communitarian system is that optimizing the parts will automatically produce sub-optimization of the whole because of the interdependences among individuals and groups within the system.
On the other hand, the driving force in an individualistic system is the individual's desire for consumption and leisure in the present. These driving forces influence the goals and behavior of organizations and governmental units as well as individuals within the system. For example, during the five year period from toJapanese investment, as a percentage of its gross national product GNP was over twice that of the United States, i.
People mainly live to contribute, to accomplish, to create and to gain respect from others for their efforts. Consumption and leisure are less important considerations for the individual. This hedonistic attitude can also be traced back to the neoclassical economists or marginalist who assumed that workers would attempt to maximize pleasure and minimize pain. This idea translates into maximizing the utility obtained from consumption and minimizing the disutility associated with work.
Although the lack of work ethic associated with American workers has been challenged by behavioral scientist for a number of years, the structure of most American organizations discussed below has reflected this "lazy man" view until recently. For example, strong high schools with very low drop out rates of six or seven percent are typical in Japan and West Germany.
In contrast, public schools are relatively weak in an individualistic system. For example, in the U. Although colleges are relatively strong in the American individualistic system, many non-college bound students the "neglected majority" do not receive a marketable education.
It is also important for any organization contemplating a change from an individualistic to a team oriented system. Relationship between Government and Business In the communitarian system, government works to support business and to promote cooperation between businesses and industry groups within the system.
Government is responsible for a strong infrastructure including education, communication and transportation systems. Government in an individualistic system also recognizes the need for a strong infrastructure, but the classical view of government is still present in individualistic systems.
To the classical economists, the best government was the government that governed least. However, in an individualistic system such as the United States, government policy is designed to promote as much competition as possible. Cooperation is viewed as detrimental to the economy because it leads to monopoly power. Thus, cooperation between companies and industry groups is to a large extent illegal in the American individualistic system.
Dominant Objective and Focus The primary business objective in a communitarian system is the long term growth and improvement of the organization. Thurow refers to this idea as "strategic conquest". Profitability is secondary and viewed mainly as a requirement for future growth.
Management Accounting: Chapter 1
Individualistic organizations, on the other hand, tend to emphasize short run profitability as the dominant objective. In a survey of U. In a world competitiveness report, U. The Japanese were ranked number one. These so-called bottom-up organizations tend to be horizontal, flat or lean in that there are relatively few layers of management. In contrast, individualistic organizations tend to be structured vertically in a top down manner with a hierarchy of management layers.
Specialized jobs involving a few simple repetitive tasks are designed at the work level using the concepts of scientific management. Even so, the individualistic system includes a relatively large number of supervisory positions to compensate for the "lazy man" work ethic mentioned above. For example, a study comparing the cost of producing Ford Escorts in different countries indicated that forty percent of the Japanese cost advantage resulted from lower white-collar costs in the Japanese organizations.
This follows naturally from the "strategic conquest" objective mentioned above. However, the individualistic enterprise mainly uses profits to enhance the consumption of stockholders. These ideas are supported by a comparison of dividend payout ratios. Individends accounted for only thirty percent of after tax profits for Japanese companies while U.
Employees, customers, and suppliers work together as a family to achieve a common goal. Stockholders are viewed as the most important group, customers are second and employees are a distant third. Employees are treated more as a factor of production like buildings and equipment to be acquired and disposed of as needed.
The four constituencies are definitely not part of the same family. Communitarian firms tend to provide lifetime employment, promote from within the organization and emphasize job enrichment.
Companies in an individualistic system do not provide a comparable level of job security. Labor turnover rates in the U. The Japanese labor turnover rate is around 3. In contrast, the U. It is reasonable to assume that relatively large training expenditures will pay off due to the very low labor turnover rates in these environments.
Individualistic companies logically spend less on training because of high labor turnover coupled with the influence of scientific management. If jobs are limited to a few simple repetitive tasks, employees can be laid-off, or fired and easily replaced when needed.
These ideas are supported by the world competitiveness report mentioned earlier. In the category of quantity and quality of on-the-job training, Japanese companies were ranked number 1, German companies number 2 and U. In a communitarian company, broadly educated college graduates develop a cumulative multi-function knowledge of the organization before they become managers. In other words, they become company generalist through a long internship program, rather than functional specialist.
Since communitarian managers develop company specific knowledge, they are not particularly mobile or marketable outside the organization. The combination of internal mobility and life time employment establishes a bond between the manager and the organization.
From the company perspective, the resulting low labor turnover rates support the relatively heavy expenditures on management training. The individualistic system is quite different. College graduates who have specialized in a particular area of study such as industrial engineering, accounting or marketing are hired by organizations to work in that particular functional area.
After acquiring experience in their particular specialty, they become managers. Their orientation to a specific business function enhances their mobility in the external labor market, but they are frequently locked into their chosen specialty area. Of course some managers do break out of their narrow specialty areas to move up the management hierarchy. External mobility is clearly an advantage to the individual in an environment where employees are treated as factors of production or commodities.
Disloyalty to the company is not an insoluble problem for the organization in an individualistic system however, because a functional specialist can be fairly easily replaced with another functional specialist. Company specific knowledge is less important in a system organized around specialists rather than generalists. Competition among individuals, departments or segments within an organization and management control techniques that emphasize individualistic performance, are viewed as detrimental to the system.
If the performances of the subsystems are optimized, the system will not be optimized. On the other hand, individualistic organizations tend to view teamwork, or any organized group of workers with suspicion.
For example, American companies have had a long adversarial relationship with labor unions.