Introduction to Managerial Accounting (Cost or Management Accounting)

What is Managerial Accounting (Management Accounting / Cost Accounting)?

Managerial accounting is concerned with providing information to managers-that is, people inside an organization who direct and control its operation. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization.

Managerial accounting provides the essential data with which the organizations are actually run. Managerial accounting is also termed as management accounting or cost accounting. Financial accounting provides the scorecard by which a company's overall past performance is judged by outsiders. Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed-comparing actual results to plans and to benchmarks. Some reports provide timely, frequent updates on key indicators such as orders received, order backlog, capacity utilization, and sales. Other analytical reports are prepared as needed to investigate specific problems such as a decline in the profitability of a product line. And yet other reports analyze a developing business situation or opportunity. In contrast, financial accounting is oriented toward producing a limited set of specific prescribed annual and quarterly financial statements in accordance with Generally Accepted Accounting Principles (GAAP). (Ray H. Garrison, Eric W. Noreen 1999).

»Financial accounting vs. Managerial accounting: Managerial accounting differs from financial accounting in a number of ways that are briefly discussed below. Click here for a detailed study of the difference between financial and managerial accounting.

 

Financial Accounting		Managerial Accounting
»	Reports to those outside the organization owners, lenders, tax authorities and regulators.	»	Reports to those inside the organization for planning, directing and motivating, controlling and performance evaluation.
»	Emphasis is on summaries of financial consequences of past activities.	»	Emphasis is on decisions affecting the future.
»	Objectivity and verifiability of data are emphasized.	»	Relevance of items relating to decision making is emphasized.
»	Precision of information is required.	»	Timeliness of information is required.
»	Only summarized data for the entire organization is prepared.	»	Detailed segment reports about departments, products, customers, and employees are prepared.
»	Must follow Generally Accepted Accounting Principles (GAAP).	»	Need not follow Generally Accepted Accounting Principles (GAAP).
»	Mandatory for external reports.	»	Not mandatory.

Managerial accounting is managers oriented therefore its study must be preceded by some understanding of what managers do, the information managers need, and the general business environment. Accordingly we shall briefly examine these subjects.

»Need for Managerial Accounting Information: Every organization-large and small-has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations. Every where mangers carry out three major activities-planning, directing and motivating, and controlling. Continue reading.

»History of Managerial Accounting: Managerial accounting has its roots in the industrial revolution of the 19th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets. Since there were no external shareholders and little unsecured debt, there was little need for elaborate financial reports. Continue reading.

»Code of Conduct for Management Accountants: Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the Institute of management Accountants has promulgated the following standards of ethical conduct for practitioners of management accounting and financial management. Adherence to these standards internationally is integral to achieving objective of management accounting. Continue reading.

»The Certified Management Accountant (CMA): A management accountant who possesses the necessary qualification and who possesses a rigorous professional exam earns the right to be known as a certified Management Accountant (CMA). In addition to the prestige that accompanies a professional designation, CMAs are often given greater responsibilities and higher compensation than those who do not have such a designation. Information about becoming a CMA and CMA program can be accessed on the Institute of Management Accountants

To become a Certified Management Accountant, the following four steps must be completed:

1. File an application for admission and register for the CMA examination

2. Pass all four parts of the CMA examination within a three year period

3. Satisfy the experience requirement of two continuous years of professional experience in management and/or financial accounting prior to or within seven years of passing the CMA examination.

4. Comply with the standards of ethical conduct for practitioners of management accounting and financial management.

Sources:
Free Managerial Accounting Articles
Introduction to Managerial Accounting,
Ray H. Garrison Eric W. Noreen
Cost and Management Accounting, Adolph Matz Milton F. Usry
Advanced Financial Accounting
Managerial Accounting Help
Financial and Managerial Accounting
Accounting Management TD Gupta