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Introduction to Managerial Accounting

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Nature And Scope of Managerial Accounting

Managerial accounting involves the provision of information to people within the organisation (mainly managers) to help them in better decision making and improvement of the efficiency and effectiveness of the existing operations. It is for this reason that we can call managerial accounting internal reporting whereas financial accounting can be referred to as external reporting. In short managerial accounting helps managers to help them perform their functions of planning, controlling and decision making.

Function of Managers

1. Planning

Planning involves setting objectives, identifying alternative courses of action to achieve the objectives and choosing the best course(s) of action to achieve the objective(s).

2. Controlling

Controlling involves comparing actual results with planned results and taking corrective action to put the plans back on track.

3. Decision making

Decision making involves making various decisions. You must note that when managers are planning and controlling they are also making decisions. Examples of decisions that managers can make include shutting down a department, stopping production of a product, adding a new product line, etc.

Features of Good Management Information

The information that must be provided to managers need to have some features for it to be deemed essential. The following are some of the features/characteristics:

1. Accurate

The information must be free from error e.g. mathematical and grammatical errors.

2. Complete

All facts and figures must be made available and not be missing or concealed.

3. Cost Beneficial

This means that the cost of obtaining the information must not outweigh the benefits of using the information.

4. User targeted

The format, style and detail in which the information is communicated must suit the needs of the user. Some users like senior management need summarized information whereas others like operational management need information which is detailed to enable them make day to day decisions.

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5. Relevant

The recipient of the information must be the right person. The right person is the one who has control over the decisions to be made from using the information.

6. Authoritative

Reliability of the source of the information makes it authoritative. Factors such as the qualifications, experience and past performance of the person providing the information must be borne in mind.

7. Timely

The information must be provided in time such that it provides the basis on which the decision(s) is (are) made. The channel of communication may affect the time in which the intended user receives the information.

8. Easy to use

The ability of the user to understand the information must be considered when communicating information. It is important to explain the technical jargon if the intended user is new to the field

Sources of Managerial Accounting Information

The sources from which managerial accounting information can be obtained can either be within or outside the organisation.

1. Internal source

These include:
The underlying accounting records e.g. ledgers. These are the prime source of information. They contain the details about the entity’s past transactions which can be used as a basis for planning for the future.

  1. Employee suggestions, reports, etc
  2. Reports from the production department.

2.External sources

These include:

  1. Customers and suppliers suggestions, comments, etc
  2. Items in newspapers, journals, etc
  3. Financial statements of other businesses
  4. Government publications e.g. on monetary and fiscal policies.

Differences between financial accounting and management (managerial) accounting

Financial accounting must be distinguished from a branch of accounting called management or managerial accounting. The differences between the two branches are summarized below:

  1. Financial accounting focuses on the past while Management accounting Focuses on the future and past.
  2. Financial accounting Usually the reporting period is annually while Managerial accounting Reporting can be done daily, weekly, monthly, quarterly or annually depending on how management see it fit.
  3. Financial accounting reports monetary information while reports both monetary and non-monetary information.
  4. Financial accounting focuses on the entity as a whole while Managerial accounting It also looks at parts of the entity, for example, profitability of individual products.

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