Management Accounting

-Introduction
Session-1
By
Prof Archana Patro

Institute for Financial Management and Research

INTRODUCE YOURSELF

COURSE CONDUCT
Students are expected to take responsibility for
their learning and take an active role in the
learning process
As such, students are expected to come to class
prepared and ready to learn, which requires
reading and studying the relevant material before
class
Course readings will come from both the
assigned textbook as well as other articles and
cases which supplement the concepts were
learning

PROFESSIONAL CONDUCT
Students are expected to demonstrate professional
conduct for the duration of the course
Some aspects of this include the following:
attending each class and arriving on time, staying
for the entire class, restricting discussions in class
to the current course material, keeping mobile
phones in the off or silent modes, and not
placing or answering calls, text messages, or
emails during class time.

REQUIRED MATERIAL
Text: (Main Reference)
Mangerial Accounting by James Jiambalvo, Wiley
Publication, Fourth Edition
Additional Reference:
Cost accounting- A managerial Emphasis by Charles T
Hongrane, Srikant M.Datar, & Madhav V.Rajan PHI.
Fourteenth Edition
Course Pack: Harvard Cases and Reading articles
Keep Calculator
Laptop (When asked for by email for that particular
session)

GRADING AND EXAMINATIONS

EVALUATION*

WEIGHTAGE

Class Participation:

10%

Quizzes

20%

Mid Term Exam

25%

End term Examination

30%

Case presentation & Submission (Group)

15 %

Total

100%

*Please refer to item 7 of IFMR Grading Policy

Students who miss the exams or Assignments without a valid

excuse will receive a mark of 0%.

DEFINE MANAGERIAL ACCOUNTING

Managerial accounting is the process of

Identifying
Measuring
Analyzing
Interpreting
Communicating information

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Management Accounting and Financial

Accounting
PRIMARY USERS

Financial
External
Investors, Creditors,
Government authorities
Provides summary of an
entitys financial
condition and results of
activities.

Management
Internal Managers of the
business
Assist managers in
formulation and
implementation of
organizations strategy
Use both quantitative and
qualitative information

Management Accounting and Financial

Accounting
PURPOSE OF INFORMATION

Financial
Help investors and
creditors make
investment, and credit
decisions

Management
Help managers plan and
control business
operations, make
decisions, communicate
strategy, evaluate
performance, control/
align behaviour.

Management Accounting and Financial

Accounting
FOCUS AND TIME DIMENSION OF THE INFORMATION

Financial
Relevance and
reliability
Focus on the past
Primarily uses historical
data

Management
Relevance
Focus on future
May use projections
about the future

Management Accounting and Financial

Accounting
SCOPE OF INFORMATION
Financial
Summary reports
primarily on the
company as a whole
On quarterly or annual
basis

Management
Detailed reports on parts
of the company
Often on daily or
weekly basis

Management Accounting and Financial

Accounting
REGULATIONS
Financial
Must follow GAAP and
prescribed formats
Regulated by the
Financial Accounting
Standards Board, and, to
a lesser degree, the
Securities and Exchange
Commission.

Management
Need not follow GAAP
or any prescribed format
unregulated, since it is
intended only for
management.

Management Accounting and Financial

Accounting
VERIFICATION
Financial

Annual independent
audit by CPAs
Emphasis on
verifiability

Management

No independent audit

Emphasis on
relevance for
planning and control

Management Accounting and Financial

Accounting
BEHAVIORAL
Financial
Concern about adequacy
of disclosure
Behavioral implications
are secondary

Management
Concern about how
reports will affect
employee behavior

Managerial Accounting
The demand for managerial accounting info
stems from its use in:
Decision Making and Planning
Cost Management
Strategic Cost Management
Management Control

Decision Making and Planning

Managers make decisions, and therefore need
information.
Suppose your company makes medical probes.
In July, you receive a call from a company that is not a
regular customer. They would like to purchase 5000
probes this month only, and the price they offer is below
your production cost. Should you accept this one-time
special order, and under what circumstances? What
information do you need to make this decision?

Decision Making and Planning

Suppose each probe costs $10 to produce, and
70% of this cost is due to one part, a fibre optic
wire, that you also manufacture.
Should you continue to make this costly part, or
should you buy it from an outside vendor, and
under what circumstances? What information do
you need?

Decision Making and Planning

suppose you manufacture five other types of medical
devices. Should you add another product line, or drop
a line, and under what circumstances?
What information do you need?
suppose you are planning for the upcoming year, and
you need to determine how many units to sell to
breakeven, or to make a target profit figure.
What information do you need?

Cost Management
We used cost estimates to make the decisions
illustrated above.
But how are these costs determined or measured.
Understanding cost measurement helps us manage costs.
Managing cost is especially important today because of:
-global competition, that requires better knowledge of costs.
Some companies choose a low cost leadership strategy.
Measuring and managing costs is the lynchpin of this
strategy;

Cost Management
global competition also requires focus on quality.

Improved quality can result from process improvements

made during the course of identifying cost drivers, since
streamlined process generally improves quality;
It can also come from reduction of waste, which comes
from better measurement of waste;
some companies choose a product differentiation strategy,
which requires analysis of costs from customers viewpoint.
What features are worthwhile to customers? This requires
looking at cost from customers viewpoint, and eliminating
costs that are not valued;

Cost Management
Managing cost is especially important today
because of:
shorter 2 to 3 years product life cycles, which
require more accurate up-front projections about
profitability of proposed investment, and leave less
room for error in production planning and product
costing;
increasing automation, which means that labor is
no longer the only major overhead cost driver.
This requires more care in identifying, measuring
and managing cost drivers.

Cost Management
In product costing, we will shed light on some of
the following issues:
What is the true cost of a product?
How can we refine cost estimates?

What is the cost of excess capacity?

How much is optimal?
Who should bear this cost?

Strategic Cost Management

This requires finding and eliminating nonvalue added activities, structures, etc. in the
business ecosystem, rather than just within the
business itself.
It requires understanding of ecosystem, the value chain
and supply chain.
The supply chain is the sequence activities that
transform the raw materials into finished goods
delivered to the consumer.
The value chain is the portion of the supply chain
within the company.

Strategic Cost Management

Management accounting
questions such as:

helps

answer

important

Who are our most important customers, and how do we

deliver value to them?
What substitute products exist in the marketplace, and how do
they differ from our own?
What is our critical capability?
Will we have enough cash to support our strategy or will we
need to seek additional sources?

Management Accountants Role in

Implementing Strategy

A Value Chain Implementation

Strategic Cost Management

Strategic cost management requires going
beyond providing information demanded by
specific decisions, to proactively
identifying, measuring and managing key
cost drivers within the entire supply chain.
Examples of strategic cost management initiatives
include measuring customer profitability, and working
with suppliers to implement JIT.
Incorporate cost into product design : controlling parts
proliferation; target costing

Management Control
This refers to performance evaluation, incentive alignment
and minimizing divergence of actual results from desired
results.
In the discussion above, we assumed neutrality of
information (i.e., freedom from bias).
Now we introduce bias, by recognizing the presence of
agency issues.
These arise because the interests of the business owners are
not perfectly aligned with the self interest of the owners
agents firm managers and employees.
Decentralized organizations require the assignment of
decision rights to points (people) further away from the
owner

Management Control
To control, or minimize, agency issues requires
measuring or evaluating performance and rewarding
agents appropriately.
How do we measure both organizational and individual
performance which metrics should we use and what
are their implications?
Measure should be hard or verifiable.
Performance metrics determine rewards, and therefore
behavior, which in turn influences profits.
Inappropriate metrics can have costly consequences

Management Control
One of the concepts we will highlight is that using a
piece of information for control
impairs its use for decision making.

For example, getting projected sales from

salespeople when preparing the budget. .
This problem is especially salient in large,
decentralized organizations, in organizations
where specialized knowledge is required for
decision making and where decision timeliness is
critical.

Management Control
We will study some of the following management
control tools and concepts:
budgets
transfer prices, or internal prices which aid in
control of resource usage;
responsibility accounting and responsibility
centers;
variance analysis
multiple performance measures and non-financial
performance measures

Planning and Control Process

Summary
The role of managerial accountants is
identification, measurement, and management
of key operational and financial value drivers
(Institute of Management Accountants, 1999).
Managerial accountants are
problem solvers (e.g., providing information for
decision making),
scorekeepers (e.g., measuring performance of
individuals, groups and processes), and
attention directors (e.g., strategic cost management).

How Managerial Accounting

Adds Value to the Organization
Providing information for decision making and
planning.
Assisting managers in directing and controlling
activities.
Motivating managers and other employees towards
organizations goals.
Measuring performance of subunits, activities,
managers, and other employees.
Assessing the organizations competitive position

A Typical Organizational Structure and the

Management Accountant

Line and Staff Positions

A line position is directly
involved in achieving the
basic objectives of an
organization.
Example: A
production supervisor
in a manufacturing
plant.

A staff position supports

and assists line positions.
Example: A cost
accountant in the
manufacturing plant

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Controller
The chief managerial and financial accountant
responsibility for:
Supervising accounting personnel
Preparation of information and reports, managerial
and financial
Analysis of accounting information
Planning and decision making

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Treasurer
Responsible for raising capital and safeguarding the
organizations assets.
Supervises relationships with financial institutions.
Work with investors and potential
investors.
Manages investments.
Establishes credit policies.
Manages insurance coverage

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Internal Auditor
Responsible for reviewing accounting procedures,
records, and reports in both the controllers and the
treasurers area of responsibility.
Expresses an opinion to top management regarding
the effectiveness of the organizations accounting
system.

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The Chief Financial Officer (CFO)

A member of the top management team responsible for:
Providing timely and relevant data to support planning
and control activities.
Preparing financial statements for external users.

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Code of Conduct for Management

Accountants
Statement of Ethical Professional Practice
consists of two parts that offer guidelines for:
Ethical behavior.
Resolution for an ethical conflict.

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Why Have Ethical Standards?

Ethical standards in business are essential for a
smooth functioning economy.

Without ethical standards in business, the

economy, and all of us who depend on it for
jobs, goods, and services, would suffer.

Abandoning ethical standards in business would

lead to a lower quality of life with less
desirable goods and services at higher prices.

IMA Guidelines for Ethical Behavior

Recognize and
communicate professional
limitations that preclude
responsible judgment.

Maintain
professional
competence.

Competence
Provide accurate, clear,
concise, and timely decision
support information.

Follow applicable
laws, regulations
and standards.

IMA Guidelines for Ethical Behavior

Do not disclose confidential
information unless legally
obligated to do so.

Do not use
confidential
information for
unethical or illegal
advantage.

Confidentiality

Ensure that subordinates do

not disclose confidential
information.

IMA Guidelines for Ethical Behavior

Mitigate conflicts of
interest and advise others
of potential conflicts.
Refrain from
conduct that
would prejudice
carrying out
duties ethically.

Integrity
Abstain from activities that
might discredit the
profession.

IMA Guidelines for Ethical Behavior

Communicate information
fairly and objectively.

Credibility
Disclose all relevant
information that could
influence a users
understanding of reports
and recommendations.

Disclose delays or
deficiencies in information
timeliness, processing, or
internal controls.

Company Codes of Conduct

Broad-based statements of a
companys responsibilities to:

Employees

Customers

And to the communities in

which the company operates.

Suppliers

Codes of Conduct on the

International Level
The Code of Ethics for Professional
Accountants, issued by the International
Federation of Accountants (IFAC), governs the
activities of professional accountants worldwide.

In addition to integrity and objectivity, resolution of ethical

conflicts, competence, and confidentiality, the IFACs code
deals with the accountants ethical responsibilities in:
Taxes,
Independence,
Fees and commissions,
Advertising and solicitation,
Handling of monies, and
Cross-border activities.

The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 was intended to protect the
interests of those who invest in publicly traded companies by
improving the reliability and accuracy of corporate financial
reports and disclosures. Six key aspects of the legislation include:
The Act requires both the CEO and CFO to certify in writing
that their companys financial statements and disclosures
fairly represent the results of operations.
The Act establishes the Public Company Accounting Oversight
Board to provide additional oversight of the audit profession.
The Act places the power to hire, compensate, and terminate
public accounting firms in the hands of the audit committee.
The Act places restrictions on audit firms, such as prohibiting
public accounting firms from providing a variety of non-audit
services to an audit client.

Employment options
CMAs in Job Earlier only Public Sector Undertaking (PSU)
Companies offered job to CMAs, but in the last few years trends
have changed.
Now almost all enterprises/ companies show their interest in giving
job to CMAs
It has shown in Institutes campus placement where, apart from
PSUs, companies such as ITC, ICICI Bank, IDBI Bank, Wipro,
Ashok Leyland, Ford etc. are regular recruiters
we find CMAs doing jobs as Manager Taxation, Manager
Accounts, Manager Credit etc in many companies. Many CMAs
are holding top management positions, viz., Managing Director,
Finance Director, Financial Controller, Cost Controller, Chief
Internal Auditor, CEO, CFO etc.

Employment options
Cost Accountants in Government Department:
Realizing the importance of the profession of the Cost and Management
Accountancy in the economic development of the nation, the Central
Government has constituted an All India Cadre known as Indian Cost
Accounts Service (ICAS) at par with other Class-I services such as IAS, IFS
etc. to advise the Government in cost pricing and in framing the appropriate
fiscal and tax policies. CMAs are eligible for Indian Cost Accounts
Service/Job.

Employment options
Practice as Cost Accountant
In the job market both professional accountant i.e. CA and CMA, are treated as equivalent. It
is in the field of practice, in which CAs has more scope than CMAs but this situation is
changing too, all thanks to Notifications and Cost Orders issued by Ministry of Corporate
Affairs (MCA).
Some of the services offered by practicing CMAs are listed below:
Maintenance of Cost Records
Every company on which Companies (Cost Accounting Records), Rules 2011 (CARR 2011)
apply, (Covering Lakhs of Companies) shall keep Cost Records on regular basis and submit
a Compliance Report, in respect of each of its financial year duly certified by a Cost
Accountant, to the Central Government.
Cost Audit
Almost all organizations / industries engaged in Production, Processing, Manufacturing,
Mining to which CARR 2011 applies are now covered under Annual Cost Audit (MCA
order 52/26/ CAB 2010 dated 06Nov 12). Only Cost Accounts are authorized to sign
Cost Audit Report.

Employment options
Telecom Regulatory Authority of India (TRAI)
Legal Representation before Appellate Tribunal as per Section 17 of TRAI Act,1997
Reporting and Audit for System on Accounting Separation Certification Work
Audit for Metering and Billing Accuracy- authorized to conduct audit
Directorate of Advertising and Visual Publicity (DAVP)
CMAs are authorized for certification of various forms prescribed under Directorate of
Advertising and Visual Publicity (DAVP).
Various Ministries of Government of India have authorized CMAs in practice for
certifying various returns and to issue Compliance Certificate as per their formats. Such
ministries are
Ministry of Finance,
Ministry of Commerce,
Ministry of Corporate Affairs,
Ministry of Chemicals and Fertilizers,
Ministry of Textile,
Ministry of Consumer Affairs,
Food and Public Distribution

THANK YOU

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