Chapter 1 Introduction to Management Accounting 2 Definition of Accounting and its Users The American Accounting Association define accounting as: the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. The users of accounting information can be divided into two categories: (i) internal users within the organization (management accounting); (ii) external parties outside the organization (financial accounting). Needs of Management Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. Managerial accounting is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions. 4 Differences between Management Accounting and Financial Accounting Statutory requirement for limited companies to produce annual financial accounts, whereas there it is optional for management accounting. Financial accounting reports describe the whole of the business, whereas management accounting focuses on reporting information for different parts of the business. Financial accounting reports must be prepared in accordance with generally accepted accounting principles (e.g. the International Financial Reporting Standards Board). Financial accounting reports historical information, whereas management accounting places greater emphasis on reporting estimated future costs and revenues. Management accounting reports are produced at more frequent intervals. The Decision-making, Planning and Control Process 5 6 The Impact of the Changing Business Environment on Management Accounting Global competition Changing product life cycles Advances in manufacturing technologies The impact of information technology Environmental and sustainability issues Pressures to adopt higher standards of ethical behaviour Deregulation and privatization Focus on value creation Customer orientation 7 Focus on Customer Satisfaction and New Management Approaches To compete successfully in today’s environment, companies should focus on providing customer satisfaction by concentrating on: Cost efficiency (increased emphasis on accurate product costs and cost management) Quality control (TQM, quality reporting) Time management (customer response time, on-time delivery, eliminating non-value-added activities) Innovation and continuous improvement 8 Functions of Management Accounting A cost and management accounting system should generate information to meet the following: allocate costs between products sold, and fully and partly completed products that are unsold; provide relevant information to help managers make better decisions; provide information for planning, control, performance measurement and continuous improvement. 9 Thank you