MGT. Accounting & Business Environment

Management Accounting :
Its Role in Changing Business

Environment
Prof. Nand Dhameja

16/9/12
Finance Function
 Every organisation has a goal & every activity &
every decision involves inputs or Finance
 Involves Flow of Funds : Inflows & Outflows
 Primary focus is on ‘Decisions’ & ‘Actions’ which

affect value of the organization
 Finance & other functions are inter-related
Finance Function
Concerned with:
 Accounting & Control :Record Keeping
 Controller
 Financial Policy Matters : Fund

Management
 Treasurer
Finance Deptt.
Board of Director
Director, Marketing Director, Finance Director, Operations Director, HR
Treasurer Controller
Fund manager Financial Accounting
Capital expenditure manager Management accounting
Cash/receivables Manager Tax

Accounting
Records:
“Efforts” “Accomplishments”
 Inputs Outputs
 Expenses Sales
 Payments Receipts
 Outflows Inflows
Accounting
 A System for Collecting, Summarising,
Presenting, Analysing, Reporting, in
Monetary Terms, Information about
Business Enterprise
 Business Language =>
Communication=>
Grammer; Concepts;
Principles=>GAAP
Accounting
 A System for Collecting, Summarising, Presenting,
Analysing, Reporting, in Monetary Terms,
Information about Business Enterprise
 Business Language => Communication=>
Grammar, Concepts, common accounting norms,
Principles
 Govt. Financial Rules for Govt. Deptts.
 GAAP/IFRS for Commercial
organisations
Accounting Information-Needed
 a).Score Keeping :
 Historical, GAAP, Mandatory
 b).Attention Directing
 c).Problem Solving
Financial Accounting : is concerned
Partly with (a) above;
Management Accounting serves (b) &
(c)
Accounting System
 General Financial Rules, 2005 GOI-
 Manual of Audit and Accounts
 Accounting Period : April to March
 Basis : Cash Basis
 System : Single Entry
 Funds
Accounting Emerging Role
 Book Keeping
 Financial Accounting
 Cost Accounting
 Management Accounting
 Social Accounting
 Environmental Accounting
 National Accounting
Financial Accounting vs.
Management Accounting
Financial Management
Accounting Accounting
Regulation Statutorily As per needs of
Required Management
As per GAAP
Users Interested parties, Managers within the
outside the organisation
business
Source of Data Summary of Accounting records
accounting records plus other sources
& books
Periodicity Annual Frequent as per needs
of management
Nature of Audited Financial Timely Reports as per
Reports Statements Management Needs
Purpose Concerned with money Concerned with money as
as ‘economic resource’
measure of ‘economic
performance’
Financial Accounting VS Management
Accounting
Financial Accounting Management Accounting

Scope: Concerned with money Concerned with money as
as ‘economic resource’ measure of economic performance
Purpose: One purpose: exhibit More than one purpose- mgt. needs
financial results of enterprise
Coverage : Entire Business One activity/dept./
Requirement : Statutory Optional
Time Span : Historical; Annual Forward Looking; periodical
Governing GAAP Objectives for which inf. needed

Factor
Emphasis: Accuracy; Presentation Prompt & Analysis
Parties External Internal
Interested
Accounting Information: A Few
Facts
 Accounting Figures for a Purpose
 Different Figures for Different
Purposes
 Accounting Figures are
Approximations
 Accounting Evidence- A Means To An
End => Only a Partial Evidence
 People, Not Figures, Get Things
Done
Financial Statements
Every Company Prepares:
a). Balance Sheet => Reflects Financial
Status as on a Date
b). Profit & Loss A/C => Indicates Operating
Results for a period
c). Cash flows Statement => Inflows & out flows
of Cash
 Mandatory
 Contain two years figures: Current Year &
Previous Year
 Indicate completion of Accounting Process for
the Period
 Final Product of Accounting Process
Cost Accounting
 A branch of accounting
 A process of accounting for Costs
 In broader terms covers:
 Management Accounting & Budgeting
 Financial Accounting : concerned with Costs
 Cost accounting & management accounting:
Concerned with Break-up of Costs & decision
making
Management Accounting: Objectives
 Ascertainment of Costs
 Accumulation of cost Elements
 Providing Cost information for decision
making, Planning & control
 Assisting managers directing & controlling
day-to-day operations
 Concerned with Money as a Measure of
Economic Performance i.e measuring
performance of activities, sub-activities
and managers
Management Accounting:
Purposes
 Inventory Valuation & Pricing
 Cost control & Cost Reduction
 Decision Making
Financial & Non-financial
 Management accounting is concerned with
internal operations & business operations: both
financial & non-financial aspects
 So concerned with
 Financial perspective : Profitability
 Internal Perspective : Defect Rate, Lead Time, No. of

Suppliers, Material Turnover
 Customer Perspective: satisfaction, retention, new
customers, market share
 Innovation Perspective: Employee Satisfaction &
Retention, No. of New Products, No. of Patents
 Balance Score Card
Management Accountant :Position in
the Organisation
 Management Accountant Designation

CFO, or Controller or Comptroller
 Staff position vs. Line Position
 Deployed in Central Office as well as

Different Organisation units
Emerging Themes
 Information needs : decision making &
attention direcion
 Behavioural Issues: Team work &
motivational aspects
 Costs & Benefits
 Emerging E-commerce : business linkages -
supply-chain management
 Global Completion & emerging new
businesses – Service and manufacturing
organisations
Emerging Themes contd.
 With Technological changes, product life cycle
is becoming shorter, management function is
shrinking in time involved e.g. JIT, perpetual
inventory control, real time costing
 Shift from ‘historical cost perspective’ to wards
‘proactive cost management perspective’
 To measure cost of various activities
 To eliminate non-value added costs
 To detemine efficiency & effectiveness of major
activities
 To identify new activities with better results
Emerging Themes contd.
 Emphasis of cost management on
organisation’s activities
 To have ‘activity-base costing’ (ABC)
 Linkage between activities and costs
 Emphasis on activities creating values- value
chain system: e.g..
 GAP i.e. retail clothier: Securing RM, R & D, Product
design, production, packing, distribution & sales
 Car manufacturer : demand creation, R & D, Deciding
of market segment, Securing RM, Product design,
Production, Distribution & Sales
Cost: Meaning
 Cost refers to Sacrifice or

Forbearance
 Cost involves Exchange Process
 Relates to a Purpose or Activity or
Job
 Measured in Monetary Terms
Cost measured in monetary terms:
 Actual Cost- Cost Incurred –A Historical Cost
 Budgeted Cost – or forecasted cost
Cost Accumulation & Cost Object
 Cost Accumulation is the Collection of Cost Data in
a systematic way – for a purpose –Cost Object
 Cost Objects : Illustrations
Paper cost : Magazine, A particular issue, A Publishing
House, Macro-level use
Supervision : Magazine Issue, Publication Dept.,
Publishing House
Rent of Premises:Magazine Issue, Publication Dept.
Company
Canteen Expenses : for a batch of production,
Production Dept., Enterprise
Training Expenses : for a batch of production, training
division. HR Dept., Enterprise
Cost Accounting : Principles
 Costs should be Related as closely as possible to their

causes
 Profit appropriations are excluded from costs
 Abnormal Costs are excluded from costs
 Past costs are not charged to future period. Past

costs are those from which no benefit is expected
 A Cost is not charged until it is incurred
 Measuring Costs requires Judgement
 Greater the proportion of prime costs in cost

structure, more confident are managers about cost
accuracy
Cost Accounting
Cost Elements:
 Material
 Labour
 Other Expenses

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Management Accounting :

Its Role in Changing Business

Prof. Nand Dhameja

 Primary focus is on ‘Decisions’ & ‘Actions’ which

 Financial Policy Matters : Fund

Director, Marketing Director, Finance Director, Operations Director, HR

Fund manager Financial Accounting

Capital expenditure manager Management accounting

Cash/receivables Manager Tax

 General Financial Rules, 2005 GOI-

 Manual of Audit and Accounts

 Accounting Period : April to March

 Basis : Cash Basis

 System : Single Entry

Financial Accounting Management Accounting

Coverage : Entire Business One activity/dept./

Requirement : Statutory Optional

Time Span : Historical; Annual Forward Looking; periodical

Governing GAAP Objectives for which inf. needed

 Inventory Valuation & Pricing

 Cost control & Cost Reduction

 Internal Perspective : Defect Rate, Lead Time, No. of

 Management Accountant Designation

 Deployed in Central Office as well as

 Cost refers to Sacrifice or

 Costs should be Related as closely as possible to their

 Abnormal Costs are excluded from costs

 Past costs are not charged to future period. Past

 Measuring Costs requires Judgement

 Greater the proportion of prime costs in cost

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