Management Accounting

Principles and Applications

Hugh Coombs, Ellis Jenkins, David Hobbs

• Publisher: SAGE Publications Ltd
• Year: 2005
• ISBN:
  9781446225080
• Edition: 1
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

This book adopts a new and accessible approach to helping readers understand how management accounting contributes to decisions in a variety of organisational contexts. It sets out clear explanations of practical management accounting techniques in the context of the application of these techniques to decisions. It recognizes practice through case studies and summarises published research. Uniquely, it examines the analytical and critical issues that often influence decision makers operating within private and public sector organisations. Key features include:

- Case studies of varying complexity that will allow students to work at their own level

- Summaries of important research articles

- Key learning objectives and end of chapter questions.

Chapter 1

AN INTRODUCTION TO MANAGEMENT ACCOUNTING

Key Learning Objectives

By the time you have finished studying this chapter, you should be able to:

• explain the meaning and nature of management accounting;
• describe the scope and content of management accounting;
• discuss the past and current issues affecting the evolution of management accounting;
• list key factors that need to be considered when designing management accounting systems.

The Nature and Role of Management Accounting

This chapter will introduce you to the world of management accounting by presenting an overview of the areas of work in which management accountants operate. It will commence by explaining the nature and scope of management accounting. You will see that management accounting is an evolving subject and that its nature and scope have changed and expanded over time, and will continue to do so. As the world of accounting has expanded, so specialities have developed, and we shall see that management accounting is one such speciality, having its own distinctive features and accepted areas of operation. You will see that, in a number of ways, management accounting is quite different from other forms of accounting.

The chapter will examine the historical beginnings and contexts of management accounting, and will consider the nature of the forces and circumstances that have shaped its development. Consideration will be given to the influences that continue to shape management accounting’s current development and the likely future influences to which management accounting must respond in order to retain its relevance and effectiveness. In particular, we will consider some of the ‘softer’ factors that affect any area of management science, including that of management accounting, and will examine the conditions and system requirements necessary for the successful implementation and maintenance of management accounting systems. We will see that, like many areas of accounting in the current organisational environment, management accounting is not necessarily an exact, entirely reliable, science. Some of these issues will be introduced within this chapter and then developed in later chapters.

What is Management Accounting?

What is management accounting? One might think that a book devoted to management accounting would have little difficulty in answering this question. Not necessarily! A logical start is to examine the words ‘management’ and ‘accounting’ individually. Unfortunately, neither of these words has a single, universally agreed meaning. Management might be seen to encompass the entire range of activities involved in running an organisation, not forgetting that organisations take many forms, including businesses of many types and not-for-profit organisations, within the private or public sectors. Accounting may be seen to encompass any of the activities that attempt to gauge the performance of an organisation, or to plan for an organisation’s future performance. Additionally it may be seen to include the traditional ‘accounting’ roles of stewardship, control and audit. The layman might think of accounting as being concerned only with those financial measurements undertaken by those with the title ‘accountant’ and of management as being concerned only with those activities undertaken by those with the title ‘manager’. Neither is the case in real life.

In competitive business environments, and within a public sector that is increasingly focused upon effectiveness, value for money and ‘best practice’, all organisational participants take on a responsibility for both management and accounting. The actions of each individual within an organisation have, after all, ‘trickle-down’ effects on other parts of the organisation and an ‘upward’ effect on the eventual results of the organisation as a whole.

So, then, what is management accounting? Well, in a nutshell, management accounting is accounting (i.e. producing useful information) for management (whoever those managers happen to be and whatever their job titles). In this sense, ‘accounting’ includes the production of all information useful in running the organisation. Hence, such information may be:

• financial or non-financial;
• accurate, or broadly correct;
• actual (certain) or estimated (uncertain);
• based in the past or the future;
• detailed, or in a highly aggregated form;
• presented in any of a variety of spoken or written forms, such as numbers, tables, and graphs;
• related to profits/losses, costs/incomes, volumes, quality indicators, trends, etc.

Similarly, ‘management’ may include the activities of individuals in a number of positions, for example:

• senior managers;
• mid-level managers;
• lower-level managers;
• executive directors with management responsibilities;
• employees not usually considered to be ‘managers’, such as production line workers, call-centre operatives, and salespeople.

Thus, in many senses, an average person might not consider many of the areas of activity of management accounting to be accounting at all! Indeed, some writers have suggested that the term ‘management accountant’ should be replaced with a term such as ‘information manager’ in order to signify the wide scope of management accounting. Drucker (1994) has, for instance, suggested that the term ‘manufacturing economics’ might be a better contemporary term than management accounting, within the manufacturing environment. Obviously, a different term would be required for the public sector aspects of management accounting. Interestingly, in recent years, management accounting organisations such as the UK’s Chartered Institute of Management Accounting (CIMA) have taken a more wide-ranging view of the scope of management accounting and have tended to take a more broad ‘management consultancy’ view of the work of their members. Perusal of a recent issue of CIMA’s monthly journal Financial Managemet will confirm this trend. It is interesting, too, to note the recent change of name of this journal from the former Management Accounting. This name change and the changing emphasis of CIMA have not, however, met with the universal approval of its members, some of whom take a narrower view of what management accounting should encompass.

A selection of definitions of management accounting, from a range of books on the subject, illustrates the variety of definitions possible. Garrison and Noreen (2000: 4) state that managerial accounting (essentially a US term for management accounting – but see Proctor’s views below) is ‘concerned with providing information to managers – that is, people inside an organisation who direct and control its operations’. They continue that it ‘provides the essential data with which organizations are actually run’ and (2000: 34) that it is ‘concerned with providing information to managers for use in planning and controlling operations and in decision making’. Note, here, the distinction made by Garrison and Noreen between planning, control and decision making. It is our view that planning, control and decision-making activities are inextricably interlinked. Planning, for example, can be seen as decision making for the future, and control can be seen to be ensuring that the decisions of the past are carried out (as well as ensuring that such decisions are still appropriate).

Proctor (2002: xvii) offers the following explanations of management and managerial accounting, making a distinction between the two terms:

Management accounting is orientated towards the future. It is primarily concerned with the provision of information to managers to help them plan, evaluate and control activities. It is essentially a service function; a means to an end rather than an end in itself. Managerial accounting also fits this description but the use of the word ‘managerial’ emphasises the service role. This may seem obvious but, for much of the twentieth century, management accounting was used mainly to serve the needs of financial accounting, rather than to assist managers in their tasks…. Managerial accounting is about improving the future performance of organisations.

Proctor emphasises that management accounting is not an end in itself. In essence, the slogan ‘If it’s not useful, it’s not information’ applies.

Wilson and Wai (1993: 15), writing about managerial accounting, offer the following observations:

Managerial accounting encompasses techniques and processes that are intended to provide financial and non-financial information to people within an organization to make better decisions and thereby achieve organizational control and enhance organizational effectiveness.

It is this last definition that we consider to be the most representative. Note that Wilson and Wai’s definition is broad in scope, reflecting management (managerial) accounting’s broad base, and that the definition incorporates aspects of many areas of study, all interrelated with management accounting:

• both financial and non-financial information – requiring management accountants to be more than just characterless ‘bean-counters’. Additionally, management accountants deal in information, not just data, and thus must have the requisite skills to produce useful, meaningful, relevant information. Management accountants must ‘add value’ to data, processing it into useful information.
• the provision of information to people – requiring management accountants to have ‘people skills’ and be able to communicate effectively.
• organisational control and effectiveness – requiring management accountants to have the ability to see the implications of their advice for the whole organisation and to understand how the various parts of the organisation are interrelated (i.e. the ‘soft’ (people) parts as well as the ‘hard’ parts).

Management Accounting and Financial Accounting

As seen above, management accounting has a rather broad potential coverage as compared with financial accounting, the latter possibly being a more generally understood term. Financial accounting is defined by the Oxford Dictionary of Accounting (Hussey, 1999) as:

The branch of accounting concerned with classifying, measuring, and recording the transactions of a business. [It is] primarily concerned with providing a true and fair view of the activities of a business to parties external to it. … Financial accounting can be separated into a number of specific activities, such as conducting audits, taxation, book-keeping and insolvency …

Thus, financial accounting can be considered to have a more narrow and specific/precise coverage than management accounting. However, the following points are worth noting:

• Although financial accounting is often considered to be a more ‘exact science’ than management accounting, this may not be the case, as can be seen from the recent spate of reported accounting scandals around the world. Both forms of accounting make extensive use of estimation and both may be subject to the application of ‘creative accounting’. Consider, for instance, the current debate on the valuation and disclosure of organisations’ pensions liabilities. The actuarial evaluations of such liabilities may justifiably take many approaches and may arrive at vastly different values for the same organisation.
• Financial accounting is no longer the relatively straightforward affair that it once was. The increasing complexity and sheer volume of financial accounting standards, designed to cope with the increasing complexity of the business world and, for instance, the explosion in financial instruments, have helped to expand the world of financial accounting. Additionally, attempts to harmonise the various systems of accounting standards across the world (e.g. the implementation of International Financial Reporting Standards by all EU listed companies’ group accounts by 2005), increasing public interest in corporate governance and the increasing focus on making the public sector more accountable have all contributed to the accountant’s workload. This ensures that financial accounting is a ‘cutting edge’ subject that can be fascinating (well, to some people, at least!). The international standard dealing with financial instruments, IAS39, is an excellent indicator of the complexity that may be inherent in a single accounting issue, and the arguments it has caused show that there is rarely a universal acceptance of any single accounting approach.
• Both management accounting and financial accounting can maintain their currency only by evolving to keep pace with changes in the organisational environment. Both types of accounting, therefore, are very much ‘living’ subjects.
• The boundaries of financial accounting have become more blurred as financial accountants have increasingly moved into the (more lucrative) areas of taxation advice, financial consultancy etc., raising public concerns, in recent years, about accountants’ conflicts of interest.
• Both management accounting and financial accounting can only be truly useful by presenting information to the right people at the right time and in ways that are meaningful, transparent and cost-effective. There can therefore be no room in the modern organisation for information and for information-gathering methodologies that have outlived their purpose.

The History and Context of Management Accounting

So, where did management accounting come from? Who invented it? Why was it developed, and by what types of person? As with most forms of historical study, a number of partly conflicting ‘stories’ or paradigms exist, each claiming to give authoritative responses to such questions. Such ‘stories’ may concentrate, according to the slant adopted by their authors, on the commercial, organisational, cultural, sociological, political or ideological aspects of management accounting’s history. The past few decades have seen an explosion in the amount and variety of research undertaken into management accounting’s history, practices and trends. While some of this research might be criticised for being repetitive, unnecessary, too specialised and/or impractical, this research base at least provides a wealth of ideas to increase our understanding of the possible forces that shape management accounting. An understanding of these forces is useful in considering individual scenarios within which management accounting is applied and in analysing the likely or observed outcomes of such applications. In this book we will provide information to encourage further background reading, along with summaries of some influential and ground-breaking papers. Obviously, there is a limited amount of time available to you for such background reading, but it is often only by going back to the original papers that you can fully appreciate the worth of such contributions to the literatur...

Table of contents

• Cover Page
• Title
• Copyright
• Contents
• Illustrations
• Preface
• Acknowledgment
• 1 An Introduction to Management Accounting
• 2 Cost Analysis and Decision Making
• 3 Costing Products and Services
• 4 Management Accounting and the Planning Process – 1
• 5 Management Accounting and the Planning Process – 2
• 6 Management Accounting and the Control Process – 1
• 7 Management Accounting and the Control Process – 2
• 8 Operational Decision Making
• 9 Strategic Decision Making
• 10 Management Accountancy and Performance Management Systems
• Bibliography and Recommended Further Reading
• Index