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Chapter 1

Chapter 1. Nature of Management Accounting. NATURE OF MANAGEMENT ACCOUNTING. FINANCIAL ACCOUNTING. COST ACCOUNTING. MANAGEMENT ACCOUNTING. Accounting.

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Chapter 1

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  1. Chapter 1 Nature of Management Accounting

  2. NATURE OF MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT ACCOUNTING

  3. Accounting Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information. Business Accounting System Financial Accounting Cost Accounting Management Accounting

  4. Management Accounting Information Management accounting information is the accounting information specifically prepared to aid managers.

  5. Management accounting information is used in three managerial functions 1. Planning Planning is the process of deciding what action should be taken in the future. 2. Implementation Implementation involves specific actions planned in advance to fulfill the budgets. 3. Control Control comprises managerial action to correct conditions that cause deviation between the actual and planned performance.

  6. Functions of Controller Controller is the highest level management accountant. Management Accountants are responsible for the design and operation of the management accounting system.

  7. Planning for control Reporting and interpreting Evaluating and consulting Tax administration Government reporting Protection of assets Economic appraisal Provision of capital Investor relations Short-term financing Banking and custody Credits and collections Investments Risk management Distinction between Controller and Treasurer Controllership Treasureship

  8. Management Accounting vs. Financial Accounting Financial Accounting Dimension Management Accounting Varies according to use of the information Unified structure Information precision Generally accepted accounting principles Sources of principles Whatever is useful to Management Statutory Obligation Information precision Optional Historical Time-orientation Historical and estimates of the future

  9. Management Accounting vs. Financial Accounting Financial Accounting Dimension Management Accounting Overall organisation Report entity Responsibility centres External reporting/statements for outside users Purpose A means to the end of assisting management Relatively large Users Relatively small group: know identity Historical Time-orientation Historical and estimates of the future

  10. Management Accounting vs. Financial Accounting Financial Accounting Dimension Management Accounting Unified structure Information precision Varies according to use of the information Generally accepted accounting principles Sources of principles Whatever is useful to Management Statutory Obligation Information precision Optional Historical Time-orientation Historical and estimates of the future

  11. Important Similarities between Financial and Management Accounting Most elements of financial accounting are also found in management accounting. Basic data collected for both are in accordance with the generally accepted financial accounting principles to avoid duplication. Both are used in decision making.

  12. Relationship between Cost Accounting and Management Accounting Cost Accounting provides Data for Appraisal Information. Cost Accounting helps in Profit Planning. Cost Accounting is useful for the purpose of control.

  13. Cost Accounting Provides Data for Performance Appraisal Purpose of Control Profit Planning Management Accounting

  14. Management Accounting Information and Their Uses Management Accounting information is used for three distinct purposes.

  15. Measurement Purposes For the measurement purpose the management accounting system focuses on the measurement of full costs. Full Cost Accounting measures the resources used in performing some activity. It is the sum of direct and indirect costs. • Full costs are used in • Financial reporting, • Analysing economic performance and • Cost-plus contracts.

  16. Control Purposes For control purposes, management accounting measures costs by responsibility centres. Responsibility Centres is an organisation unit headed by a manager who is responsible for its operations and performances.

  17. Alternative Choice Decisions The alternative decisions use differential costs. Differential costs are costs which differ according to the alternatives. For short-run decisions only direct costs are relevant. For long-range decisions full costs are relevant.

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