Chapter 01

Introduction

Page | 1

INTRODUCTION
1.1 ORIGIN OF THE REPORT
Accounting can be defined as "the process of identifying, measuring and
communicating economic information to permit informed judgments and decisions by
users of the information" (Hogget and Edwards, 1987). The information in accounting
systems relates mainly to financial data about business transactions, which is
presented in monetary terms. In addition to presenting financial information about
past transactions, the accounting system enables to generate forecasts and predictions
as an aid to decision making.
Accounting is sometimes referred to as the language of business. It offers a medium
through which the marketing, production, human resources and other impacts of a
decision may be reflected in monetary terms. This indicates the way in which most
companies use accounting and finance as an integrative function to show the
combined consequences of a proposed course of action on the firm's financial
situation.
The American Accounting Association formulated the definition of Accounting as the
process of identifying, measuring, and communicating economic information to
permit informed judgments and decisions by users of the information. Accounting is a
language that communicates economic information to people who have an interest in
an organization- managers, shareholders, potential investors, creditors, government
and the employees. The accounting literature identifies quite a number of specialized
fields of accounting. Among them, financial accounting is the original field of
accounting. Its main purpose is to record transaction details in monetary terms and
Prepare financial statements and reports in accordance with GAAP. The other part of
accounting, Management accounting provides necessary information to assist
management in decisions making and management control.

Management accounting provides necessary information to assist management in

decisions making and management control. The Chartered Institute of Management
Accountants (2001) describes Management Accounting as: - the application of
professional information in such a way as to assist the management in the formation
of policies and in the planning and control of the operations of the undertaking.

Page | 2

Management accounting has been considered as an integral part of the management

process, and management accountants have been visualized as important strategic
partners in an organization's management team. Hilton (1999) states that the
management team seeks to create value for the organization by managing resources,
activities, and people to achieve organizational goals effectively. To this end,
managers require information which is utilized in the decision making process and in
controlling operations. Management accounting thus serve management in providing
the needed data and information, including advice and recommendations.

1.2 BACKGROUND OF THE REPORT

Globalization or Free market economy is now worlds major challenge to every
business industry. Demands immediate development of business technique, tools and
proper decision making policy.

1.3 OBJECTIVES OF THE REPORT

The main objectives of the study are to using management accounting technique in
order to assist the managers with information relevant to decision making and day-today operational activities and the extent or degree of such use.
In broader sense the objectives to be covered under the study are:
To find out the using status of Management Accounting Techniques;
To evaluate the conception of managers as to importance of use and problems,
if any, they face in using the techniques;
To identify the Management Accounting information structure; and
To highlight suggestive measures to the users of management accounting
information for its extensive use.

Page | 3

1.4 SCOPE OF THE REPORT

The scope of this study was strictly confined textbooks, journals, newspapers website.
To collect the information .All other data related to the financial analysis was
collected from web sites of those companies & other related.
Investigative study method is used in writing this report. This study method was
significant for me because before this study I have not enough understanding to
proceed with such type of research project also on this topic.
The study involves structured questionnaire, large sample and probability sampling
plans. Under the study once a new idea or insight is discovered, they may shift their
exploration in that direction. Observation method is used to complete this qualitative
research.
Finally the purpose of this study is to determine whether management accounting
technique is used by the Role of Management Accounting in Decision-Making the
technique apply the application process in their customer expectation, profit margin,
cost and price determination, cost reduction and management operations.

1.5 LIMITATIONS OF THE REPORT

On the way of my study, I have faced some problems that termed as the limitations of
the study. In all respect following limitation and weakness remain within which I
failed to escape by any means. These are follows:
Budgeted time limitation: - It was one of the main constraints that hindered to cover
all aspects of the study.
Confidentiality of data: - Because of some divisional and confidential problem, I
could not get enough information. Every organization has their own secrecy that is not
revealed to others. While collecting data some company personnel did not disclose
enough information for the sake of confidentiality of the organization.
Data Insufficiency: - Especially there is a lack of information about the determination
of the sufficient books, publications, fact and figure are not available. These
constrains narrowed the scope of accurate analysis. If these limitations had not been
there, the report would have been more useful and attractive.

Page | 4

Chapter 02

Literature Review

Page | 5

2.1 LITERATURE REVIEW

Decision making is a fundamental part of management. Before discussing what
decision-making is let us discuss what decision is, because decision-making is a
process of deciding. Collins (1999) defines decision as the act of making up ones
mind by collecting, sharing and gathering significant ideas from different sources.
Moreover, Longman (2000) defines that decision as a choice or judgment that you
make after a period of discussion or thought. Longmans definition is very clear but
it gives rise to a question on the definition of deciding or decision-making. In the end
decision-making is to make a choice or judgment about something, especially after a
period of not knowing what to do or in way that ends in disagreement(Alam,2008)
Moreover, Fullan (1982) asserts that decision-making is the process of identifying and
choosing alternative course of action in a manner appropriate to the demand of the
situation. The act of choosing implies that alternative courses of action must to
weighed and weeded by sharing. Fremount, et, al, .1970 defined decision-making as
the conscious and human process, involving both individual and social phenomenon
based upon factual and value premises, which concludes with a choice of one
behavioral activity from among one or more alternative with the intention of moving
toward some desired state of affairs. It represents a course of behavior or action
about what must or must not be done (Herbert, 1960). Decision- Making is the
selecting of action from among alternatives to achieve a specific objective or solve
specific problem (Donald, 1963). The art of decision-making provide us a variety of
approaches, method and techniques helpful and useful for making high quality of
decision.
A decision maker, as an individual, or as member of formal organization with his
own philosophy and perception of the organization, selects for optimizing values
within the constraints imposed by the organization (varshney, 1997). Decisionmaking and its role in organizations can viewed in a number of ways. Kretner (199)
believes good management can be defined in terms of good coordination of an
organizations employees. Mullins (2000), Moorhead and Griffin (2000 posit that
decision and its nature vary in terms of kinds and types. Decision-making is the
backbone of administrative functions. This is because decision direct actions (Marvin,
cited in lgwe, 1995). Good and effective decision can only be made when right
information is made availed at the right time to the right recipient. Johnson, Newell

Page | 6

and Vergin (1972) stated that information for decision-making is the dynamic,
therefore, it needs to be constantly up- dated. Decision- making, itself, is a dynamic
process (Harrison, 1995, Daft, 1983). Managers need continuous flow of managers
can therefore be greatly enhanced by the quality of information they are able to utilize
in decision-making. Right decision give direction for a right courses of action. Daft
(1983) stated that when an organization is designed to provide correct information to
managers, decision processes work extremely well and tasks will be accomplished.
However, when information is poorly designed, problem-solving and decision
processes will be ineffective and managers may not understand why. An individual or
multiple participant decision makers can be divided into unilateral an negotiated
decisions. In the first one, which is also called team decision, one of the participants
has the power to decide. The others although, can highly influence how the decision
will look like. In negotiated decision the participants share the authority of making a
decision. This type distinguishes between group decision where the participants have
nearly equal authorities and discuss their different viewpoints in various meeting and
organization decision.

Page | 7

Chapter 03

Methodology

Page | 8

3.1 METHODOLOGY
Type of Data Collected:
For smooth and accurate study everyone have to follow some rules& regulation. The
study impute were collected from two sources:
Primary sources:

Secondary sources:
Textbooks, journals, newspapers
Files & Folders
Various publications of companies,
Website
The details of the work plan are furnished below:
3.3 Data collection method: Relevant data for this report has been collected
Secondary by Some textbooks, journals, newspapers website etc.
3.4 Data sources: The secondary sources of information are article reports, websites
and different manuals. Some textbooks, journals, newspapers etc. have been consulted
in order to build up the framework of the study.
3.5 Data processing: Data collected from secondary sources have been processed
manually and qualitative approach in general and quantitative approach in some cases
has been used throughout the study.
3.6 Data analysis and interpretation: Qualitative approach has been adopted for
data analysis and interpretation taking the processed data as the base.
NOTE: This Report is based on Secondary Data, because I was in the thesis group.

Page | 9

Chapter 04

Overview of Management
Accounting

10 | P a g e

4.1 OVERVIEW OF MANAGEMENT ACCOUNTING

Management accounting is concerned with the provisions and use of accounting
information to managers within organizations, to provide them with the basis in making
informed business decisions that would allow them to be better equipped in their
management

and

control

functions.

Unlike financial

accountancy information,

management accounting information is used within an organization typically for

decision-making and is usually confidential and its access available only to a select few.
According to The Chartered Institute of Management Accountants (CIMA) Management Accounting is the process of identification, measurement, accumulation,
analysis, preparation, interpretation and communication of information used by
management to plan, evaluate and control within an entity and to assure appropriate use
of and accountability for its resources. Management accounting also comprises the
preparation of financial reports for non-management groups such as shareholders,
creditors, regulatory agencies and tax authorities.
The American Institute of Certified Public Accountants (AICPA) states that
management accounting practice extends to the following three areas:
Strategic Management advancing the role of the management accountant as a strategic
partner in the organization.
Performance Management developing the practice of business decision-making and
managing the performance of the organization.
Variable costing contributing to frameworks and practices for identifying, measuring,
managing and reporting risks to the achievement of the objectives of the organization.
The Institute of Certified Management Accountants (ICMA)

states -

"A

management accountant applies his or her professional knowledge and skill in the
preparation and presentation of financial and other decision oriented information in such
a way as to assist management in the formulation of policies and in the planning and
control of the operation of the undertaking."

11 | P a g e

Management Accountants therefore are seen as the - "value-creators" amongst the

accountants. Management accounting knowledge and experience can therefore be
obtained from varied fields and functions within an organization, such as information
management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc.

Formulating strategies;

Planning and constructing business activities;

Helps in making decision & Optimal use of resources;

Supporting financial reports preparation; and Safeguarding asset

Management accounting is concerned with the provisions and use of cost accounting
information to managers within organizations, to provide them with the basis to make
informed business decisions that will allow them to be better equipped in their
management and control functions. From different significance - management accounting
information is used within an organization, typically for decision-making. In contrast to
financial accountancy information, management accounting information is:

Designed and intended for use by managers within the organization, whereas
financial accounting information is designed for use by shareholders and
creditors.

Usually confidential and used by management, instead of publicly reported;

Forward-looking, instead of historical;

Computed by reference to the needs of managers, often using management

information systems, instead of by reference to financial accounting standards.

The distinction between traditional and innovative management accounting practices

can be illustrated by reference to cost control techniques. Cost accounting is a central
method in management accounting, and traditionally, management accountants
principal technique was variance analysis, which is a systematic approach to the
comparison of the actual and budgeted costs of the raw materials and labor used during a
production period. While some form of variance analysis is still used by most
manufacturing firms, it nowadays tends to be used in conjunction with innovative
techniques such as life cycle cost analysis and activity-based costing, which are designed

12 | P a g e

with specific aspects of the modern business environment in mind. Life-cycle costing
recognizes that managers ability to influence the cost of manufacturing a product is at its
greatest when the product is still at the design stage of its product life-cycle, since small
changes to the product design may lead to significant savings in the cost of
manufacturing the product. Activity-based costing recognizes that, in modern factories,
most manufacturing costs are determined by the amount of activities and that the key to
effective cost control is therefore optimizing the efficiency of these activities. Activitybased accounting is also known as Cause and Effect accounting.
Both lifecycle costing and activity-based costing recognize that, in the typical modern
factory, the avoidance of disruptive events reducing the costs of raw materials. Activitybased costing also deemphasizes direct labor as a cost driver and concentrates instead on
activities that drive costs, such as the provision of a service or the production of a product
component.

4.2 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. In contrast, managerial accounting was relatively
sophisticated and provided the essential information needed to manage the early
large scale production of textile, steel, and other products.
After the turn of the century, financial accounting requirements burgeoned because of
new pressures placed on companies by capital markets, creditors, regulatory bodies, and
federal taxation of income. Many firms needed to raise funds from increasingly
widespread and detached suppliers of capital.
To tap these vast reservoirs of outside capital, firms' managers had to supply audited
financial reports. And because outside suppliers of capital relied on audited financial

13 | P a g e

statements, independent accountants had a keen interest in establishing well defined

procedures for corporate financial reporting.
The inventory costing procedure adopted by public accountants after the turn of the
century had a profound effect on management accounting. As a consequence, for many
decades, management accountants increasingly focused their efforts on ensuring that
financial accounting requirements were met and financial reports were released on time.
The practice of management accounting stagnated.
In the early part of the century, as product line expanded operations became more
complex, forward looking companies saw a renewed need for management-oriented
reports that was separate from financial reports. But in most companies, management
accounting practices up through the mid-1980s were largely indistinguishable from
practices that were common prior to World War I.
In recent years, however, new economic forces have led to many important innovations
in management accounting.

4.3HISTORICAL DEVELOPMENT
Maher states: Management accounting has a short but exciting history: - While
management accounting concepts can be traced back at least to the beginning of the
Industrial Revolution, management accounting as a teaching discipline appears to have
got off the ground in the late1940s.
Parker concurs: - Management accounting has historical antecedents that stretch back
longer than we might expect and certainly accounting historians have not yet concluded
their investigations of its earliest genesis.
Congaing and Stencil believe:
Management accounting with its lack of generally accepted accounting practice has not
yet had the exposure afforded to financial accounting. The
accounting is one

history

of management

of innovation based on necessity. Innovation therefore continues

14 | P a g e

without constraints imposed by preconceived ideas of what constitutes proper

accounting.

4.4 MANAGEMENT ACCOUNTING PRINCIPAL

To achieve the above objectives Management Accounting employs three principal
devices from cost accounting Forward Looking Principle: Based on the past and all other available data, forecasting,
the future and recommending wherever appropriate the course of action for the future.
Target Setting Principle: Fixation of an optimum target which is variously known as
standard, budget etc. and through continuous review ensuring that the target is achieved.
The Principle of Exception: Instead of concentrating on voluminous masses of data
management accounting concentrates on deviations from targets and continuous and
prompt analysis of the causes of these deviations on which to base management action.

4.5 OBJECTIVES OF MANAGEMENT ACCOUNTING

THE BASE OBJECTIVE of management accounting is to assist the management in
carrying out its duties efficiently. The objectives of Management Accounting are: The computation of plans and budgets covering all aspects of the business. Example:
production, selling, distribution, research and finance.
The systematic allocation of responsibilities for implementation of plans and budgets.
The organization for providing opportunities and facilities for performing responsibilities.
The analysis of all transactions, financial and physical, to enable effective comparison to
be made between the forecasts and actual performance.
The presentations of up to date information, at frequent intervals, to management in the
form of operating statements.
15 | P a g e

The statistical interpretation of such statements in a manner which will be of utmost

assistance to management in planning future policy and operation.

4.6 THE FUNDAMENTAL OBJECTIVE

The Fundamental Objective of management accounting is to enable the management to
maximize profits or minimize losses. The evolution of management accounting has given
an approach to the function of accounting. The main objectives of management
accounting are as follows:
Planning and policy formulation:
Planning involves forecasting on the basis of available information, setting goals; framing
polices determining the alternative courses of action and deciding on the program of
activities. Management accounting can help greatly in this direction. It facilitates the
preparation of statements in the light of past results and gives estimation for the future.
Interpretation process:
Management accounting is to present financial information to the management. Financial
information is technical in nature. Therefore, it must be presented in such a way that it is
easily understood. It presents accounting information with the help of statistical devices
like charts, diagrams, graphs, etc.
Assists in Decision-making process:
With the help of various modern techniques management accounting makes decisionmaking process more scientific. Data relating to cost, price, profit and savings for each of
the available alternatives are collected and analyzed and provides a base for taking sound
decisions.
Controlling:
Management accounting is a useful for managerial control. Management accounting tools
like standard costing and budgetary control are helpful in controlling performance. Cost
control is affected through the use of standard costing and departmental control is made
possible through the use of budgets. Performance of each and every individual is
controlled with the help of management accounting.

16 | P a g e

Reporting:
Management accounting keeps the management fully informed about the latest position
of the concern through reporting. It helps management to take proper and quick
decisions. The performance of various departments is regularly reported to the top
management.

Facilitates Organizing:
Return on Capital Employed is one of the tools of management accounting. Since
management accounting stresses more on Responsibility Centers with a view to control
costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it is
helpful in setting up effective and efficiently organization framework.
Facilitates Coordination of Operations:
Management accounting provides tools for overall control and coordination of business
operations. Budgets are important means of coordination.

4.7 NATURE AND SCOPE OF MANAGEMENT ACCOUNTING

Management accounting involves furnishing of accounting data to the management for
basing its decisions. It helps in improving efficiency and achieving the organizational
goals. The following paragraphs discuss about the nature of management accounting.
Provides accounting information:
Management accounting is based on accounting information. Management accounting is
a service function and it provides necessary information to different levels of
management. Management accounting involves the presentation of information in a way
it suits managerial needs. The accounting data collected by accounting department is used
for reviewing various policy decisions.
Cause and effect analysis:
The role of financial accounting is limited to find out the ultimate result, i.e., profit and
loss; management accounting goes a step further. Management accounting discusses the
cause and effect relationship. The reasons for the loss are probed and the factors directly
influencing the profitability are also studied. Profits are compared to sales, different
expenditures, current assets, interest payables, share capital etc.

17 | P a g e

Use of special techniques and concepts:

Managementaccountingusesspecialtechniquesandconceptsaccordingtonecessitytomakeacc
ountingdatamoreuseful.Thetechnique usually used include financial planning and
analyses, standard costing, budgetary control, marginal costing, project appraisal Control,
Accounting, etc.
Taking important decisions:
It supplies necessary information to the management which may be useful for its
decisions. The historical data is studied to see its possible impact on future decisions. The
implications of various decisions are also taken in to account.
Achieving of objectives:
Management accounting uses the accounting information in such a way that it helps in
formatting plans and setting up objectives. Comparing actual performance with targeted
figures will give an idea to the management about the performance of various
departments. When there are deviations, corrective measures can be taken at once with
the help of budgetary control and standard costing.
No fixed norms:
No specific rules are followed in management accounting as that of financial accounting.
Though the tools are the same, their use differs from concern to concern. The deriving of
conclusions also depends upon the intelligence of the management accountant. The
presentation will be in the way which suits the concern most.
Increase in efficiency:
The purpose of using accounting information is to increase efficiency of the concern. The
performance appraisal will enable the management top in-point efficient and inefficient
spots. Effort is made to take corrective measures so that efficiency is improved. The
constant review will make the staff costconscious.
Supplies information and not decision:
Management accountant is only to guide and not to supply decisions. The data is to be
used by the management for taking various decisions. How is the data to be utilized will
depend upon the caliber and efficiency of the management.

18 | P a g e

Concerned with forecasting:

The management accounting is concerned with the future. It helps the management in
planning and forecasting. The historical information is used to plan future course of
action. The information is supplied with the object to guide management for taking future
decisions.

4.8 ADVANTAGES OF MANAGEMENT ACCOUNTING

One of the most significant steps to improve managerial performance is the development
of the new discipline. Management accounting it is still very much in a state of evolution.
However, the following advantages are claimed for it: The main contribution of management accounting is the elimination of initiative
management. With the help management accounting, the business activities are
regulated systematically by means of efficient planning and organization thereby
avoiding over working in busy periods and slackness in slump periods.
It enables the business to get the maximum return on capital by helping it in
planning, distribution and controlling activities.
It helps the management to improve its service to its customers by resorting to a
continuous method of comparing the results with the standards.
It helps in improving the relations between the management and labor by avoiding
unreasonable standard of work which is the main cause of labor unrest.

4.9 Limitations of Management Accounting

Management Accounting is in the process of development. Hence, it suffers from all the
limitations of a new discipline. Some of these limitations are:
Limitations of Accounting Records:
Management accounting derives its information from financial accounting, cost
accounting and other records. It is concerned with the rearrangement or modification of
data. The correctness or other wise of the management accounting depends upon the
correctness of these basic records. The limitations of these records are also the limitations
of management accounting.

19 | P a g e

It is only a Tool:
Management accounting is not an alternate or substitute for management. It is a mere tool
for management. Ultimate decisions are being taken by management and not by
management accounting.

Heavy Cost of Installation:

The installation of management accounting system needs a very elaborate organization.
This results in heavy investment which can be afforded only by big concerns.
Personal Bias:
The interpretation of financial information depends upon the capacity of interpreter as
one has to make a personal judgment. Personal prejudices and bias affect the objectivity
of decisions.
Psychological Resistance:
The installation of management accounting involves basic change in organization setup.
New rules and regulations are also required to be framed which affect a number of
personnel and hence there is a possibility of resistance form some or the other.
Evolutionary stage:
Management accounting is only in a developmental stage. Its concepts and conventions
are not as exact and established as that of other branches of accounting. Therefore, its
results depend to a very great extent upon the intelligent interpretation of the data of
managerial use.
Provide sonly Data:
Management accounting provides data and not decisions. It only informs, not prescribes.
This limitation should also be kept in mind while using the techniques of management
accounting.

Broad-based Scope:
The scope of management accounting is wide and this creates many difficulties in the
implementations process. Management requires information from both accounting as well
as non-accounting sources. It leads to in exactness and subjectivity in the conclusion
obtained through it.

20 | P a g e

4.10 MANAGEMENT ACCOUNTING TASKS

Management accounting may be said to include all activities connected with collecting,
processing, interpreting and presenting information to management. The management
accounting satisfies the various needs of management for arriving of appropriate business
decisions. They may be described as modification of data, analysis and interpretation of
data, facilitating management control, formulation of business budgets, use of qualitative
information, and satisfaction of informational needs of management.
Listed below are the primary tasks performed by management accountants generated by
different cost accounting tools. The degree of complexity relative to these activities is
dependent on the experience level and abilities

Variance Analysis
Rate & Volume Analysis
Product Profitability
Cost Analysis & Cost Benefit Analysis
Cost-Volume-Profit Analysis
Life cycle cost analysis
Capital Budgeting
Strategic Planning Strategic Management Advise
Internal Financial Presentation and Communication
Sales and Financial Forecasting & Annual Budgeting
Cost Allocation
Resource Allocation and Utilization

4.11 EMERGING THEMES OF MANAGEMENT ACCOUNTING

Customer Orientation
Cross-functional Perspective
Global Competition
Total Quality Management
Time as a Competitive Element
Advances in Information Technology
Advances in the Manufacturing Environment
Deregulation and Growth in the Service Industry
Activity-based Management

4.12 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
21 | P a g e

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.
Standards of Ethical Conduct for Management Accountants are:

Competence
Confidentiality
Integrity
Objectivity

Competence:

Practitioners of management

accounting and financial

management have

responsibility to:
Maintain an appropriate level of professional competence by ongoing
development of their knowledge and skills.
Perform their professional duties in accordance with relevant laws, regulations
and technical standards.
Prepare complete and clear reports and recommendations after appropriate
analysis of relevant and reliable information
Confidentiality:
Practitioners of management accounting and financial management have a
responsibility to:
Refrain from disclosing confidential information acquired in the course of their
work except when authorized, unless legally obligated to do so.
Inform subordinates as appropriate regarding the confidentiality of information
acquired in the course of their work and monitor their activities to assure the
maintenance of that confidentiality
Refrain from using or appearing to use confidential information acquired in the
course of their work for unethical or illegal advantage either personally or through
third parties.
Integrity:
Practitioners of management accounting and financial management have a
responsibility to:
Avoid actual or apparent conflicts of interest and advise all appropriate parties of
any potential conflict.
Refrain from engaging in any activity that would prejudice their ability to carry
out their duties ethically.

22 | P a g e

 Refuse any gift, favor, or hospitality that would influence or would appear to
influence their actions.
Refrain from either activity or passively subverting the attainment of the
organization's legitimate and ethical objectives.
Recognize and communicate professional limitations or other constraints that
would preclude responsible judgment or successful performance of an activity.
Communicate unfavorable as well as favorable information and professional
judgment or opinion.
Refrain from engaging or supporting any activity that would discredit the
profession.
Objectivity:
Practitioners of management
management have a responsibility to:

accounting and financial

Communicate information fairly and objectively

Disclose fully all relevant information that could reasonably be
expected to influence an intended user's understanding of the reports,
comments, and recommendations presented.

4.13 RESOLUTION OF ETHICAL CONFLICTS

In applying the standard of ethical conduct, practitioners of management accounting and
financial management may encounter problems in identifying unethical behavior or in
resolving an ethical conflict.
When faced with significant ethical issues practitioners of management accounting and
financial management should follow the established policies of the organization bearing
on the resolution of such conflict. If these policies do not resolve the ethical conflict, such
practitioner should consider the following course of action.
Discuss such problems with immediate superior except when it appears that
superior is involved, in which case the problem should be presented to the next
higher managerial level. If a satisfactory resolution cannot be achieved when the
problem is initially presented, submit the issue to the next higher managerial
level.
If the immediate superior is the chief executive officer or equivalent, the
acceptable reviewing authority may be a group such as the audit committee,
executive committee, board of directors, board of trustees, or owners. Contact
with a level above the immediate superior should be initiated only with the
superior's knowledge. Assuming the superior is not involved. Except where

23 | P a g e

legally prescribed, communication of such problems to authorities or individuals

not employed or engaged by the organization is not considered appropriate.

Clarify relevant ethical issues by confidential discussion with an objective adviser

to obtain a better understanding of possible course of action
Consult your own attorney as to legal obligations and rights concerning the ethical
conflict.
If the ethical conflict still exists after exhausting all levels of internal review, there
may be no other recourse on significant matters than to resign from the
organization and to submit an informative memorandum to an appropriate
representative of the organization. After resignation, depending on the nature of
the ethical conflict, it may also be appropriate to notify other parties.

4.14 ETHICS & THE MANAGEMENT ACCOUNTANT

When management accounting information is used for control, management accountants
may find themselves in complex situations, fraught with conflict.
Especially when it is used for performance evaluation
Pressure may be exerted to influence the numbers to make a favored product, customer,
or line of business appear more profitable than it actually is. Department managers may
distort information so that unfavorable factors are not revealed in a management
accounting report.
The cost of inefficient processes
The existence of substantial amounts of excess capacity
Senior executives whose incentive compensation is based on the reported financial
numbers may put pressure on accountants.
To recognize revenue from a customer early
To defer until subsequent periods the recognition of an expense
In some circumstances, to recognize certain expenses early so that much higher earnings
may be reported in future periods.
All of these behaviors were evident in the frauds dominating the financial news in recent
years. Organizational leadership plays a critical role in fostering a culture of high ethical
standards.

24 | P a g e

The way an individual responds to pressure derives from inner values and beliefs, but
individuals are strongly influenced by their view of organizational standards. If
individuals see unethical or illegal behavior practiced by the organizations leaders and
superiors or coworkers, they may feel that such behavior is accepted and sanctioned. An
individual without a strong set of personal beliefs and values may find it difficult to
withstand the pressure to go along with the flow and participate in this behavior when a
difficult or conflicting situation arises.
Such as being asked to misrepresent an organization units performance potential
when the unit is being offered for sale.
Beyond the example set by senior executives, companies may use two types of control
systems to foster high ethical standards among their employees.
Beliefs systems
Boundary systems
A beliefs system is the explicit set of statements, communicated to employees, of the
basic values, purpose, and direction of the organization:

Credos
Mission statements
Vision statements
Statements of purpose or values

The statements in a beliefs system are intended to inspire and promote commitment to the
organizations core values and its purpose for being in business.
When conflicting situations arise, however, the lofty rhetoric in the statements will only
have true meaning and serve as guides to actions if employees observe senior managers
acting according to the statements. In this way, employees learn that the companys
stated beliefs represent deeply rooted and actionable values. Articulate and actionable
beliefs systems may inspire people to higher values and aim at higher missions but they
may not communicate clearly what behavior and actions are unacceptable.
Companies also need boundary systems that communicate what actions must never be
taken. Boundary systems are stated in negative terms, or in minimal standards of
behavior

25 | P a g e

4.15 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.
Everywhere, mangers carry out three major activities-planning, directing and motivating,
and controlling.
Planning:
Planning involves selecting a course of action and specifying how the action will be
implemented. The first step in planning is to identify the alternatives and then to select
from among the alternatives the one that does the best job of furthering the organization's
objectives. While making choices, management must balance the opportunity against the
demands made on the companys resources.
The plans of management are often expressed formally in budgets, and the term
budgeting is applied to generally describe the planning process. Budgets are usually
prepared under the direction of controller, who is the manager in charge of the accounting
department. Typically, budgets are prepared annually and represent management's plans
in specific, quantitative terms.
Directing and Motivating:
In addition to planning for the future, managers must oversee day-to-day activities and
keep the organization functioning smoothly. This requires the ability to motivate and
affectively direct people. Managers assign tasks to employees, arbitrate disputes, answer
questions, solve on-the-spot problems, and make many small decisions that affect
customers and employees. In effect, directing is that part of the manager's work that deals
with the routine and the here and now. Managerial accounting data, such as daily
sales reports are often used in this type of day-to-day decision making.
Controlling:
In carrying out the control function, managers seek to ensure that the plan is being
followed. Feedback, which signals operations are on track, is the key to effective control.
In sophisticated organizations, this feedback is provided by detailed reports of various
types. One of these reports, which compares budgeted to actual results, is called a
performance report. Performance report suggests where operations are not proceeding as
planned and where some parts of the organization may require additional attention.
The Planning and Control Cycle:
The work of management can be summarized in a model. The model, which depicts the
planning and control cycle, illustrates the smooth flow of management activities from

26 | P a g e

planning through directing and motivating, controlling, and then back to planning again.
All of these activities involve decision making. So it is depicted as the hub around which
the activities revolve.
Tools for Management Support: A wide variety of accounting tools address that why and how of entity success or
failure. Many tools are proactive, helping us make sound decisions, and some are
predictive, peering into the future. When one develop an understanding of cost and
revenue structure, the interaction of encounters with revenue and expenses, and the
amount and rate of change from volume changes.
Cost-Volume-Profit:The single most important concept for management is cost-volume-profit. Understanding
the cost structure of an organization allows proper management decisions. Standard
financial statements do not provide the proper cost separation, that is - variable costs
versus fixed costs.
Variable cost: a cost that moves up or down as volume of service changes
Fixed cost: a cost that remains the same despite volume (within a relevant range)
A typical fixed cost is space rental. Whether five patients a day or 50 a day for lease is
probably the same amount. A typical variable cost is medical supplies. The more patients
cause the more supplies use. In real life some of these costs are considered mixed but
for most management purposes we consider only two cost behaviors.
Break-even point:Break-even point becomes a key benchmark; being defined as the point at which fixed
and variable costs equal revenue, or the point at which profit is zero. The break-even
formula is as follows:
(Revenue variable cost) = fixed costs
Contribution margin = fixed costs
As volume grows we get to leverage the fixed costs, revenue climbs but variable costs
climb little and fixed costs not at all.
CVP is critical for decision making, for example adding a new service. Usually the only
relevant numbers are the new revenue versus the new expenses, assuming adequate
capacity. Understanding which numbers are relevant is the key to a sound decision. With
a relatively low variable cost line, additional services require very little incremental
spending.

27 | P a g e

Cost-Benefit Issues:There are plenty of accounting tools at for ones disposal, but those tools should only use
when there is a positive cost-benefit relationship. Modern systems and ones own
creativity allow us plenty of information options, but not all options are worth the work
involved. The ideal is to create enough information to improve management, without
spending so much as to wipe out the benefit.
Cash Flows:Any business organization exists for one reason, to generate positive cash flow for the
owners. The devil of business is in the details. Effective cash flow management is a key
task for senior management, and anticipating cash flow ups and downs is critical.
Budgeting:A budget is a management plan expressed in numbers. Decisions are more important than
calculations. Spreadsheets have made budgeting much easier and more flexible. Once a
budget model is developed, numerous options can be calculated very quickly. Budgets
should be flexible rather than static. If one budget for 10,000 patient visits and you reach
15,000 patient visits, his static budget is worthless.

4.16 Role of Management Accounting (M.A)

1 Management Accounting facilitates planning by:

Setting the organizational objectives

Formulation of plans, policies and programs.
Adoption of strategies.

2. It helps in conducting analysis of alternative sources of resources, method of

Manufactures product or sales mix and situations like.
a)
b)
c)
d)

Accepting or rejecting an offer.

Make or buy a component
Add or delete a product line
Continue or discontinue an operation or a process or a department or a division or
a flight of an Airlines.
e) Sale or process a by product.
f) Permanent or temporary closure of a factory or a sales territory.

28 | P a g e

3. Evaluation of method of manufacture.

4. Fixation of selling price in normal and abnormal situations.
5. Evaluation of limiting factors or constrained resources.
6. Determination of optimum level of output or inventory
7. Controlling and evaluating business operations involves the following steps:
a) Implementation of plan, policies and programs.
b) Comparison of actual performance with budgeted or expected performance
c) Identification of variances between expected and actual and actual results along
with reasons thereof.
d) Taking remedial measures.
e) Feedback i.e., using past experience in future planning.
8. Giving direction to various operating divisions about their missions and visions and
indicating means to achieve organizational objectives.
9. Management Accounting contributes and facilitates coordination of departmental
activities
10. Management Accounting reports and motivates organization employees towards
Achievement of organizational goals by measuring their performance and rewarding for
better performance and punishing for shortfalls.
11. Management Accounting is an aid to the decision making process of an organization.
It contributes towards short term routine and non-routine decision and also long term
strategic decision
12. Management Accounting influences all strata of management in planning, control and
decision making.
13. Management Accounting reports& communicates the results of the organization
performance evaluation to individual employees and division along with a total analysis
of situation peculiar to any circumstance or event through its reports.
14. Management Accounting is a multidimensional approach to problem solution of an
enterprises by its proper identification analysis of alternative solution, selection of the

29 | P a g e

best solution its implementation leading to evaluation of its result and ultimately using
the experience as feedback
15. Management Accounting is the latest addition to the use of accounting information
for evaluation of success or failure of managerial policies and strategies.
16. Management Accounting is the driving force of modern civilization and is ear, eye
and brain of modern management.
17. Diversification of business, its globalization and complexity of management and
severe competition have increased the role of management accounting tremendously.

30 | P a g e

Chapter 05

Growth of Management
Accounting (MA)

31 | P a g e

5.1 Growth of Management Accounting (MA)

5.1.1 Use of Money as Medium of Exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a
pure barter system.
1.

Value common assets

2.

Constant utility

3.

Low cost of preservation

4.

Transportability

5.

Divisibility

6.

High market value in relation to volume and weight

7.

Resistance to counterfeiting.

5.1.2 Growth of Mercantilism

Building overseas colonies;

Forbidding colonies to trade with other nations;

Monopolizing markets with staple ports;

Banning the export of gold and silver, even for payments;

Forbidding trade to be carried in foreign ships;

Export subsidies;

Promoting manufacturing with research or direct subsidies;

Limiting wages;

Maximizing the use of domestic resources;

Restricting domestic consumption with non-tariff barriers to trade.

5.1.3 Industrial Revolution and Industrialization

The process in which a society or country (or world) transforms itself from a primarily
agricultural society into one based on the manufacturing of goods and services.
Individual manual labor is often replaced by mechanized mass production and craftsmen
are replaced by assembly lines. Characteristics of industrialization include the use of

32 | P a g e

technological innovation to solve problems as opposed to superstition or dependency

upon conditions outside human control such as the weather, as well as more efficient
division of labor and economic growth.

5.1.4 Growth of Domestic and International Trade.

International trade; Affordable products for the consumer. The exchange of goods also
affects the economy of the world as dictated by supply and demand, making goods and
services obtainable which may not otherwise be available to consumers globally.
Domestic trade: A domestic market, also referred to as an internal market or domestic
trading, is the supply and demand of goods, services, and securities within a single
country. In domestic trading, a firm faces only one set of competitive, economic, and
market issues and essentially must deal with only one set of customers, although the
company may have several segments in a market

5.1.5

Technology and the Management Accountant

Management accounting information provided to the management and executive teams

inside the organization are quite different from the financial accounting information
provided to groups outside the organization, such as investors, creditors, and regulators.
You may even ask how information and performance measures regarding quality and
time can be provided by a typical general ledger system that is limited to debits and
credits of dollar amounts. This is a good question! For most of the twentieth century,
management accountants have been able to successfully produce management accounting
information using the general ledger system of financial accounting

5.1.6 Emphasis of TQM

Total Quality Management (TQM) refers to management methods used to enhance
quality and productivity in business organizations. TQM is a comprehensive management
approach that works horizontally across an organization, involving all departments and

33 | P a g e

employees and extending backward and forward to include both suppliers and
clients/customers.
TQM is only one of many acronyms used to label management systems that focus on
quality. Other acronyms include CQI (continuous quality improvement), SQC (statistical
quality control), QFD (quality function deployment), QIDW (quality in daily work), TQC
(total quality control), etc. Like many of these other systems, TQM provides a framework
for implementing effective quality and productivity initiatives that can increase the
profitability and competitiveness of organizations.

5.1.7 Use of Just in Time Inventory System

Particularly in Just in time inventory management has helped a lot of companies to save
inventory carrying cost. Mechanical and electronic industry has benefited by this
management technique. Carrying a lot of inventory cost the Company money by way of
locked capital. Locked capital mean opportunity cost and the real cost of borrowing that
money. So the advantage is we don't have to spend this money. Disadvantage is that if the
chain get broken somewhere the line then production suffers. The chain can be broken by
logistics issue, problem at supplier side etc.
5.1.8 Introduction of Process Re-engineering
Business Process Reengineering (BPR) is the practice of rethinking and redesigning the
way work is done to better support an organization's mission and reduce costs.
Reengineering starts with a high-level assessment of the organization's mission, strategic
goals, and customer needs. Basic questions are asked, such as "Does our mission need to
be redefined? Are our strategic goals aligned with our mission? Who are our customers?"
An organization may find that it is operating on questionable assumptions, particularly in
terms of the wants and needs of its customers. Only after the organization rethinks what it
should be doing, does it go on to decide how best to do it, within the framework of this
basic assessment of mission and goals, re-engineering focus.

34 | P a g e

5.1.9 Growth of Government Accounting

Fund accounting is the most important principle of government accounting. Separate
funds are used to make it easier to account for all governmental costs.
5.1.10 Ever Increasing Complexity of Management
The pace of change and global interconnections in business have resulted in increasing
complexity, creating significant risk management challenges for companies to
address. KPMG commissioned Lighthouse Global to conduct research related to the
causes and impact of complexity among large companies across a range of industry
sectors and countries. The study determined that managing complexity is a critical issue
facing businesses, with more than 94% of senior decision makers agreeing that managing
complexity is essential for their organization to be successful.
The leading causes of complexity that became apparent from the study include:
Regulation and government oversight,
Information management,
Speed of innovation, and
The variability of complexity.
5.1.11 Rapid Growth of Banking Sector
Bangladesh is a third world country with an under developed banking system,
particularly in terms of the services and customer care provided by the government run
banks. Recently the private banks are trying to imitate the banking structure of the more
developed countries, but this attempt is often foiled by inexpert or politically motivated
government policies executed by the central bank of Bangladesh, Bangladesh Bank. The
outcome

is

banking

system

fostering

corruption

and

illegal

monetary

activities/laundering etc. by the politically powerful and criminals, while at the same time
making the attainment of services or the performance of international transactions
difficult for the ordinary citizens, students studying abroad or through distance learning,
general customers etc.
5.1.12 Development of Capital Market
It is expected that the program will feature a wide range of policy discussions in areas of
accounting, auditing, macroeconomics, monetary economics, and applied finance.
Distinguished individuals who worked as regulators in the past will also feature
35 | P a g e

prominently in the DSS program to make discussions about financial sector regulations
and macroeconomic management in Bangladesh. The program is intended to stimulate
public policy dialogue for a sustained development of Bangladesh stock markets.
5.1.13Development of Financial Literature Theories and Methodology
Functional requirements are observable tasks or processes that must be performed by
the system under development. For example, a functional requirement of a stock trading
system is "must update and remember stock prices;" for a web search engine, "must
accurately parse Boolean queries;" for an automated teller machine, "must process
withdrawals and dispense cash to the customer."
5.1.14Development of Financial and cost Accounting System
Functioning financial markets, such as the bond market, stock market, and foreign
exchange market, are key factors in producing high economic growth. The increased
availability of financial instruments reduces transaction and information costs and helps
to achieve economic growth.
5.1.15Need for Accounting Information for Planning Control and Decision Making
The purpose of management accounting in the organization is to support competitive
decision making by collecting, processing, and communicating information that helps
management plan, control, and evaluate business processes and company strategy. The
interesting thing about management accounting is that it is rare to find an individual
within a company with the title of management accountant. Often many individuals
function as accountants within the organization, but these individuals typically operate as
financial accountants, costs accountants, tax accountants, or internal auditors. However,
the ability to develop and use good management accounting (which covers a lot more
ground than the product costing done by cost accountants) is actually an important ability
for many individuals, including finance professionals, operational and marketing
managers, top-level executives, and information technologists.

36 | P a g e

5.1.16 Increasing Size of Business

A stagnant business is one that has a limited future. While increasing the size of a small
business can lead to growing pains along the way, it is a necessary step if you want your
company to succeed and stay competitive. Without growth and change, a company can
languish and never reach its full potential. Growing a business takes time, especially if
you are bogged down with day-to-day operations, but taking the time to increase
company growth benefits you in the long run.

5.1.17

Growth

of

Transportation

and

Communication

System

Including

Information Technology
Many people use the terms management information systems and information technology
interchangeably and think they mean the same. Although both are required to run a
business infrastructure and other processes, the two also have separate functions.
Management Information System, or simply MIS, is the process of providing support to
organizations with the use of daily reports, schedules, plans and/or budgets. Information
Systems or Technologies (IT) is the combination of people, hardware and software that
stores, transform and retrieves information in an organization. Management Information
Systems is also an applied science of information technology which is responsible for
securing both internal and external data that managers use to make operational decisions.
Through the use of this support system, a firm can also determine whether or not it is
performing adequately. However, changes in the business field happen very frequently
and therefore, it is essential for technology to be on the same, if not faster, pace.

5.1.18 Globalization of Business and Growth of MNC, s

Globalization has facilitated a vast shift in economic activity among various regions and
countries. Production and consumption activities have become highly dispersed around
the world.

37 | P a g e

5.1.19 Separation of Ownership from Management and Agency Problem

In large business separation of ownership and management is a practical necessity major
corporation may have hundreds of thousands of shareholders. There is no way for all of
them to be actively involved in management. Authority has to be delegated to managers.
The Agency issue
The control of the modern corporation is frequently placed in the hands of professional
non owner managers. We have seen that the goal of the financial manager should be to
maximize the wealth of the owners of the firm and given them decision making authority
to manage the firm. Technically. Any manager who owns less than 1000 percent of the
firm is to some degree an agent of other owners.
5.1.20 Use of Theory of Constraints (TOC) as Tool of Modern Management
One approach is to use the Theory of Constraints (TOC). This helps you identify the most
important bottleneck in your processes and systems, so that you can deal with it and
improve performance.
5.1.21 Need for Accounting Information for Planning Control and Decision Making
Accounting information is a part and parcel of Todays life which is necessary to
understand the accurate financial situation of the organization and Used as the basis of
making any decisions. Since Strategic decisions have long-term effect on the Business
and therefore it is important to analyze Accounting information for making strategic
decisions. Accounting information helps managers understanding their tasks more clearly
and reducing uncertainty before making their decisions.
5.1.22 Use of Computer in Industries Computer Integration Manufacture and
Information Technology
1. Continuous process industries these industries are easily controlled and automated and
computers are widely used for process monitoring, control and optimization.
2. Mass production industries Industries manufacturing fasteners, integrated chips,
automobiles etc. are all mass produced and are therefore specially designed and
optimized to ensure automatic and cost effectiveness.

38 | P a g e

3. Batch production large % of manufacturing industries are classified as batch

production industries. The distinguishing feature of this type of manufacture are small to
medium size of batch.
3. A) Benefits of CIM
1. Mistake-proofing
2. Information Gathering
3. Increased Capacity
4. Flexibility
5. Reduced manufacturing lead time
6. Improved quality
7. Lower total cost
3. B) what is a Database?

5.1.23 Handling of International Financial Transaction with SWIFT (Society for

World Wide Interbank Financial Telecommunication).
SWIFT is the society for worldwide interbank financial Telecommunication, a memberowned cooperative through which the financial world conduct its business operations
with speed, certainty and corporate customers in 215 countries trust us every days to
exchange millions of standardized financial message.
5.1.24 Increasing Rate of Inflation and Complication in Exchanger rate Fixation
and Fluctuation
5.1.25 Formation of economic/trade blocs like NAFTA, ASEAN, EU etc. and
introduction of open market. Economy is cost and use of resource becomes a need of
the day due to severe competition in domestic and international market.

5.1.26 Development of Technology

The most general definition of technology is the application of science or knowledge to
commerce and industry. Many fields of science have benefited from technology, as well
as commerce and industry over the many centuries of human history. Perhaps the earliest
known use of technology was in the Stone Age when the first knife or shovel was made

39 | P a g e

from a piece of stone or obsidian Technology has obviously come a long way since then.
The development and technology has become a very important part of peoples lives.
During the past few years, technology has grown in many ways and is probably better
than ever before. People are always trying to find something new that will improve their
lives dramatically.
5.1.27 Tendency toward Merger, Amalgamation and Takeover.
Amalgamation: When two or more separate companies join together to form one
company so that their pooled resources generate greater common prosperity than if they
remain separate.
Mergers and Acquisitions (M&A): are both aspects of strategic management, corporate
finance and management dealing with the buying, selling, dividing and combining of
different companies and similar entities that can help an enterprise grow rapidly in its
sector or location of origin, or a new field or new location, without creating a subsidiary,
other child entity or using.
Takeover: In business, a takeover is the purchase of one company (the target) by another
(the acquirer, or bidder). In UK, the term refers to the acquisition of a public company
whose shares are listed on a stock exchange, in contrast to the acquisition of a private
company.
28. Stiffness of local and international competition.

29. Increase in size of the market with growth in population and purchasing power
resulting into growth of consumerism.

30. Economic growth of country of the world and increasing purchasing power of
the people.

40 | P a g e

5.1.31

Emergence

of

Company/Corporation

Type

of

Business

Including

Introduction of Company Law.

5.1.32. Growth of Domestic and International Trade.

Domestic trade is traded in a graphical area of a country on the other hand International
trade is traded outside of a graphical area.

5.1.33 Growth of Service Sector Bank, Insurance, Legal Service, Consulting

Service, Transport, Communication etc.

5.1.34 Increasing Information Need of Business

Such managerial controls need attention and understanding such as effective
understanding of buyers requirements by vendors, higher customer awareness, grid
compliance, cost and reliability, workforce skills requirements, consistent message from
all levels of management, contingency planning for any unfavorable conditions, Smart
grid investments, engagements with the developers of the systems, education on the
benefits of the Smart Grid .
5.1.35 Need for Cost Management and Cost Reduction
In broad sense, both the terms have the same meaning. Yet cost management seems to
connote broader perspective. Cost control to an un-initiated may mean cutting down the
incurrence of cost or expenditure every time or in every situation. In reality it is not
always so. In many specific situations, many times, one has to spend or incur cost in
order to gain or make more money. It is in fact like an investment. Cost management
sounds better then.

41 | P a g e

Chapter 06

Management Accounting
and Decision-Making

42 | P a g e

6.1 Management Accounting and Decision-Making

Management accounting writers tend to present management accounting as a loosely
connected set of decision making tools. Although the various textbooks on management
accounting make no attempt to develop an integrated theory, there is a high degree of
consistency and standardization in methodology of presentation. In this chapter, the
concepts and assumptions which form the basis of management accounting will be
formulated in a comprehensive management accounting decision model. The formulation
of theory in terms of conceptual models is a common practice. Virtually all textbooks in
business administration use some type of conceptual framework or model to integrate the
fundamentals being presented. In economic theory, there are conceptual models of the
firm, markets, and the economy. In management courses, there are models of
organizational structure and managerial functions. In marketing, there are models of
marketing decisionmaking and channels of distribution. Even in financial accounting,
models of financial statements are used as a framework for teaching the fundamentals of
basic financial accounting. The model, A = L + C, is very effective in conveying an
understanding of accounting. Management accounting texts are based on a very specific
model of the business enterprise. For example, all texts assume that the business which is
likely to use management accounting is a manufacturing business. Also, there is
unanimity in assuming that the behavior of variable costs within a relevant range tends to
be linear. The consequence of assuming that variable costs vary directly with volume is
a classification of cost into fixed and variable. A description of the managerial
accounting perspective of management and the business enterprise will help put in focus
the subject matter to be presented in later chapter.

6.2 The Management Accounting Perspective of the Business Enterprise

The management accounting view of business may be divided into two broad
categories: (1) basic features and (2) basic assumptions.

43 | P a g e

6.2.1 Basic Features

The business firm or enterprise is an organizational structure in which the basic activities
are departmentalized as line and staff. There are three primary line functions: marketing,
production, and finance. The organization is run or controlled by individuals collectively
called management. The staff or advisory functions include accounting, personnel, and
purchasing and receiving. The organization has a communication or reporting system
(e.g. budgeting) to coordinate the interaction of the various staff and line departmental
functions. The environment in which the organization operates includes investors,
suppliers, governments (state and federal), bankers, accountants, lawyers, competitors,
etc.) The organizational aspect of the business firm is illustrated in Figure 2.1. This
descriptive model shows that there are different levels of management. A commonly used
approach is to classify management into three levels: Top management, middle
management, and lower level management. The significance of a hierarchy of
management is that decisionmaking occurs at three levels.

6.2.2 Basic Assumptions in Management Accounting

The framework of management accounting is based on a number of implied assumptions.
Although no single work has attempted to identify all of the assumptions, the major
assumptions will be detailed below. Five categories of assumptions will be presented:
1. Basic goals
2. Role of management
3. Nature of Decisionmaking
4. Role of the accounting department
5. Nature of accounting information

44 | P a g e

Basic Goal Assumptions- The basic goals or objectives the business enterprise may
be multiple. For example, the goal may be to maximize net income. Other goals could be
to maximize sales, ROI, or earnings per share. Management accounting does not require a
specific of type of goal. However, whatever form the goal takes, management will at all
times try to achieve a satisfactory level of profit. A less than satisfactory level of profit
may portend a change in management.

Role of Management Assumptions - The success of the business depends

primarily upon the skill and abilities of managementwhich skills can vary widely among
different managers. The business is not completely at the mercy of market forces.
Management can through its actions (decisions) influence and control events within
limits. In order to achieve desired results, management makes use of specific planning
and control concepts and techniques. Planning and control techniques which management
may use include business budgeting, costvolumeprofit analysis, incremental analysis,
flexible budgeting, segmental contribution reporting, inventory models, and capital
budgeting models. Management, in order to improve decisionmaking and operating
results, will evaluate performance through the use of flexible budgets and variance
analysis.

Decision-making Assumptions - A critical managerial function is decision

making. Decisions which management must make may be classified as marketing,
production, and financial. Decisions may also be classified as strategic and tactical and
longrun and shortrun. A primary objective of decisionmaking is to achieve optimum
utilization of the businesss capital or resources. Effective decisionmaking requires
relevant information and special analysis of data.

Accounting Department Assumptions - The accounting department is a primary

source of information necessary in makingdecisions. The accounting department is
expected to provide information to all levels of management. Management will consider

45 | P a g e

the accounting department capable of providing data useful in making marketing,

production, and financial decisions.

Nature of Accounting Information - In order for the accounting department to

make meaningful analysis of data, it is necessary to distinguish between fixed and
variable costs and other types of costs that are not important in the recording of business
transactions. Some but not all of the information needed by management can be provided
from financial statements and historical accounting records. In addition to historical data,
management will expect the management accountant to provide other types of data, such
as estimates, forecasts, future data, and standards. Each specific.
Managerial technique requires an identifiable type of information. The accounting
department will be expected to provide the information required by a specific tool. In
order for the accounting department to make many types of analysis, a separation of costs
into fixed and variable will be required. The management accountant need not provide
information beyond the relevant range of activity.

6.3 Implications of the Basic Assumptions

The assumption that there are three types of decisions,( marketing, production, and
financial) requires that management identify the specific decisions under each category.
The identification of specific decisions is critical because only then can the appropriate
managerial accounting technique be properly used.

Some typical management decisions of a manufacturing business

include:

Marketing

Pricing
Sales forecast
Number of sales people

Production

Units of equipment
Factory workers wages
Overtime, second shift

Financial

Issue of bonds
Issue of stock
Bank loan
46 | P a g e

Sales people compensation

Number of products
Advertising
Credit

Replacement
Inventory levels
equipment
Order size
Suppliers

of Retirement of bonds
Dividends
Investment
in
securities

An understanding of financial statements is critical to the ability of management to make

good decisions. Financial statements, although prepared by accountants, are actually
created by management through the implementation of decisions. The historical data
from which accountants prepare financial statements result from actual management
decisions. The reader and user of financial statements is not primarily the accountant but
management. From a management accounting point of view, it is management rather than
accountants that needs to have the greater understanding of financial statements.
The income statement and the balance sheet can be viewed as a descriptive model for
decisionmaking. Financial statements reflect success or lack of success in making
decisions. Management can be deemed successful when the desired income has been
attained and financial position is considered sound. To achieve managerial success
management must manage successfully the assets, liabilities, capital, revenue and
expenses. Financial statements, then, serve as a ready and convenient check list of
decisionmaking areas.
The basic balance sheet equation, of course, is A = L + C. A management accounting
interpretation is that the assets or resources come from the creditors (liabilities) and the
owners (capital). It is management responsibilities to manage both sides of the equation.
That is, management must make decisions about both the resources (assets) and the
sources of the assets (liabilities and capital). Each item on the balance sheet is an area of
management. Stated differently each item on financial statements represents a critical
area sensitive to mismanagement.
Cash, accounts receivable, inventory, fixed assets, accounts payable, etc. can be too large
or too small. Given this fact, then, for each item there must be the right amount or
optimum. It is managements responsibility to make the best decision possible regarding

47 | P a g e

each item on the financial statements. Gross mismanagement of any single item could
either result in the failure of the business or the downfall of management.

Following are Some Examples of Decisions Associated with Specific

Financial Statement Items:

Balance Sheet Items

Decision

Cash

Minimum level

Accounts receivable

Credit terms

Inventory

Order size

Fixed asset

Capacity size

Bonds payable

Amount and interest rate

Income Statement Items

Sales
of sales people
Salesmen compensation
Advertising

Price, number of products, number

Salaries and commission rate

Media, advertising budget

The statement that the management accountant will be required to furnish information
not of a historical nature means that the accountant will have to deal with planned
and estimated or future data. Furthermore, much of this data will be not be found in the
historical data bank from which the accountant prepares financial statements. The
management accountant may be required to do analysis requiring data of an economic
nature. For example, analysis of pricing may require data about the companys
demand curve. Labor cost analysis may require estimating the productivity of labor
relative to various wage rates.

48 | P a g e

6.4 Decision-Making in Management Accounting

In management accounting, decisionmaking may be simply defined as choosing a course
of action from among alternatives. If there are no alternatives, then no decision is
required. A basis assumption is that the best decision is the one that involves the most
revenue or the least amount of cost. The task of management with the help of the
management accountant is to find the best alternative.
The process of making decisions is generally considered to involve the following steps:
1 Identify the various alternatives for a given type of decision.
2. Obtain the necessary data necessary to evaluate the various alternatives.
3. Analyze and determine the consequences of each alternative.
4. Select the alternative that appears to best achieve the desired goals or
objectives.
5. Implement the chosen alternative.
6. At an appropriate time, evaluate the results of the decisions against
standards or other desired
Results. From the descriptive model of the basic features and assumptions of the
management accounting perspective of business, it is easy to recognize that
decisionmaking is the focal point of management accounting. The concept of
decisionmaking is a complex subject with a vast amount of management
literature behind it. How businessmen make decisions has been intensively
studied. In management accounting, it is useful to classify decisions as:
1. Strategic and tactical
2. Shortrun and longrun

6.5 Strategic and Tactical Decisions

In management accounting, the objective is not necessarily to make the best decision but
to make a good decision. Because of complex interacting relationships, it is very difficult,
even if possible, to determine the best decision. Management decisionmaking is highly

49 | P a g e

subjective. Whether a decision is good or acceptable depends on the goals and objectives
of management. Consequently, a prerequisite to decisionmaking is that management
have set the organizations goals and objectives. For example, management must decide
strategic objectives such as the companys product line, pricing strategy, quality of
product, willingness to assume risk, and profit objective.
In setting goals and objectives, it is useful to distinguish between strategic and tactical
decisions. Strategic decisions are broadbased, qualitative type of decisions which
include or reflect goals and objectives. Strategic decisions are non-quantitative in nature.
Strategic decisions are based on the subjective thinking of management concerning goals
and objectives.
Tactical decisions are quantitative executable decisions which result directly from the
strategic decisions. The distinction between strategic and tactical is important in
management accounting because the techniques of management accounting pertain
primarily to tactical decisions. Management accounting does not typically provide
techniques for assisting in making strategic decisions.

Examples of Strategic Decisions and Tactical Decisions From a

Management Accounting Point of View Include:
Decision items

Strategic Decisions

Tactical Decisions

Cash

Maintain minimum level

Accounts receivable
Inventory

without
excessive risk
Sell
on credit
Maintain safety stock

Specific
cash
Specific level
creditofterms
Specific level of inventory

Price

Be volume dealer by

Specific price

Setting price lower than competition

Once a strategic decision has been made, then a specific management tool can be used to aid
in making the tactical decision. For example, if the strategic decision has been made to
avoid stock outs, then a safety stock model may be used to determine the desired level of
inventory.

50 | P a g e

The classification of decisions as strategic and tactical logically results in thinking about
decisions as qualitative and quantitative. In management accounting, the approach to
decisionmaking is basically quantitative. Management accounting deals with those
decisions that require quantitative data. In a technical sense, management accounting
consists of mathematical techniques or decision models that assist management in
making quantitative type decisions.

Examples of Quantitative Decisions Include:

Decision
Quantitative Criterion
Price

Maximum income

Inventory order size

Minimum total inventory cost

Purchase of new equipment

lowest operating costs

Credit terms

Maximum net income/sales

Sales people compensation

Minimum total compensation

6.6 ShortRun versus Long-Run Decision Making

The decisionmaking process is complicated somewhat by the fact that the horizon for
making decisions may be for the shortrun or longrun. The choice between the shortrun
or the longrun is particularly critical concerning the setting of profitability objectives. A
fact of the real business world is that not all companies pursue the same measures of
success. Profitability objectives which management might choose to maximize include:
1. Net income
2. Sales
3. Return on total assets
4. Return on total equity

51 | P a g e

5. Earnings per share

The decisionmaking process is, consequently, affected by the profitability objective and
the choice of the longrun versus the shortrun. If the objective is to maximize sales, then
the method of financing a new plant is not immediately important. However, if the objective
is to maximize shortrun net income, then management might decide to issue stock rather
than bonds to avoid interest expense. In the shortrun, profits might suffer from
expenditures for preventive maintenance or research and development. In the long run,
the companys profit might be greater because of preventive maintenance or research and
development.
Although the interests of management and the organization may be presumed to
coincide, the possibility of making decisions for the shortrun may cause a conflict in
interests. An individual manager planning to make a career or job change might have a
tendency to make decisions that maximize profitability in the shortrun. The motivation
for pursuing shortrun profits may be to create a favorable resume.

The tools in management accounting such as CVP analysis, variance analysis,

budgeting, and incremental analysis are not designed to deal with long range
objectives and decision. The only tools that looks forward to more than one year are
the capital budgeting models discussed in chapter 12. Consequently, the results obtained
from using management accounting tools should be interpreted as benefits for the
shortrun, and not necessarily the longrun. Hopefully, decisions which clearly benefit the
shortrun will also benefit the longrun. Nevertheless, it is important for the management
accountant, as well as management, to beware of possible conflicts between shortrun and
longrun planning and decisionmaking.

52 | P a g e

6.7 Management Accounting Decision Models

Management accounting consists of a set of tools that have been proven to be useful in
making decisions involving revenue and cost data. Even though many of the techniques
appear to be simplistic in nature, they have proven to be of consider able value. A
comprehensive list of the tools and their mathematical nature which constitute
management accounting appears in Appendix C of this book.
The techniques which are also listed in Figure 2.2 are all based on mathematical
equations or mathematical relationships. All of the techniques may be regarded as
mathematical decisionmaking models. For example, the foundation of CVP analysis is
the equation: I = P (Q) - V (Q) - F. The mathematical models which form the foundation
of every tool are summarized in Appendix C to this book.
The approach described above concerning the use of financial statements as a check list to
identify decisionmaking areas may also be used to identify the appropriate management
accounting technique. For every item on financial statements, there is one or more
appropriate management accounting technique.

53 | P a g e

The following illustrates the association of management accounting

tools with specific financial statement items.
Financial Statement Items

Management Accounting Tools

Balance Sheet:
Cash

Cash budget
Capital budgeting models

Accounts receivable

Incremental analysis

Inventory

EOQ models, Safety stock model

Fixed assets

Incremental Analysis, Capital budgeting

Income Statement:
Sales

CVP analysis, Segmental reporting

Incremental analysis

Expenses
Net income

CVP analysis, Incremental analysis

direct costing

54 | P a g e

Figure 6.8.1 Management

Accounting Tools

1. Comprehensive business budgeting

2. Flexible budgeting and variance analysis
3. Variance analysis
4. Capital budgeting
5. Incremental analysis
Keep or replace
Additional volume of business
Credit analysis
Demand analysis
Sales people compensation analysis
Capacity analysis
6. Costvolumeprofit analysis
7. Cost behavior analysis
8. Return on investment analysis
9. Economic order quantity analysis
10. Safety stock/lead
time analysis
11.
Segmental
reporting analysis

6.8Decision-making and Required Information

The assumption that management will use management accounting tools in making
decisions places a burden on the management accountant. Each tool requires special
55 | P a g e

information. The management accountant will be asked to provide the specialized

information needed. Management accounting texts have traditionally emphasized the
mechanics of techniques with little emphasis on how to obtain the necessary data. In
many cases, the inability to obtain the required information has rendered a particular
technique useless.

6.9Comprehensive Management Accounting Decision Model

As the above discussion should make clear, decisionmaking is a complex network of
interrelated decision variables. Management can face an overwhelming task if it tries to
identify every variable and minute decision relationship. One approach to dealing with
complexity is the development of models, both mathematical and descriptive for the
purpose of simulating only the relevant or more important variables. Management
accounting is, therefore, one approach to simplifying complex relationships by dealing with
key variables and models based on restricting assumptions.
The decisionmaking process discussed in this chapter leads to the conclusion from a
management accounting perspective that there is a connecting link between the
following:
1. Financial statement items
2. Strategic and tactical decisions
3. Management accounting techniques
4. Decisionmaking information

56 | P a g e

Management Accounting Decision Making Model Balance Sheet

Model

Strategic

Tactical

Decisions

Decisions

Management
Accounting Tool

Assets
Cash

Risk

Cash budget

Minimum
balance

Accounts
receivable

Credit

Credit terms

Incremental analysis

Inventory

Risk
Qualit
y Risk

Order size, no. of

orders

EOQ model

Fixed Assets

Supplier
Safety stock

Finished Goods
Capacity
Purchase
/ lease

Safety models
Capital budgeting

Depreciation
methods

Informatio
n
Cash inflows
Cash
outflows

Amount needed

Materials

Required

Rate of return

Addition
al sales
Addition
al
Purchasin
gexpenses
cost
Carrying
cost
Demand
Probabilit
y
Cash
distributi
inflows/out
ons
flows
Present value

Investments

Risk/
diversification

Number
shares

of

Capital budgeting

tables
Potential
dividends
/ earnings

Liabilities
Accounts pay
Able

Leverage

Amount to pay/
not pay

Cost analysis

Interest rate
Terms
credit

57 | P a g e

of

Notes payable

Leverage
Shortterm
vs.
longterm

Amount borrow/
repay

ROI analysis

Interest rate

Incremental analysis

Cost
capital

ROI
Incremental
Cost
of
analysis

analysis
analysis
capital

Interest
rate
Cost of
capital
ROI
data

ROI
Incremental
Cost
of
analysis

analysis
analysis
capital

Incremental
Cost
of
analysis

analysis
capital

Cost of
capital
Cost of
issuing
ROI data
ROI data

Interest rate/

of

Lender
Bonds payable

Leverage
Shortter
m versus

Shares to issue
Shares to retire

longterm
Stockholder
s Equity

Common stock

Retained
earnings

Leverage
risk

Internal
financin
g Risk

/ Shares to issue
Amount needed

Amount
dividend

of

Type of dividend

Cost
capital

58 | P a g e

of

Income Statement Model

Sales

Strategic

Tactical

Decisions

Decisions

Cost of goods sold

Beginning
inventory
Cost profit
of goods mfd.
Gross
Ending inventory

(See exhibit
3) Risk

Expenses
Selling

Motivation/turn
over
Motivation/turn
over
Risk/volume

Salespeople salaries
Commissions
Sales people training
Travel

Accounting

Market share
Growth

Ris
k

Management

Price
Number of
territories
Credit
Additional
volume

Tool
Incremental
analysis

Amount
of
safety stock

EOQ model
Safety stock
model

Salary Number
of sales people
Commission
rate

Incremental
analysis

CVAnalysis
Cost behavior

CVP Analysis

Number of new
people

Advertising
Packaging
General
Bad debtsand Admin.
Executive
salaries
Sales
office
rentals
Secretaries
Office
operating
Supplies
Depreciation
Home office
Travel
Net income

Effective service
Turnover

Amount
of
Amounts
advertisingof
salaries
Bad
debt
estimate

CVAnalysis

Requir
ed
Inform
Deman
ation
d curve
Fixed
&
variabl
e costs
Probabil
ity of
stock
out
Purchas
ing
costs
Price
Carryin
of
g costs
produc
t Calls
per
month
Fixed
and
vari
Fixed
and
able
variabl
costs
e
Sales
cost
forecas
t
Market
potenti
al Bad
debt
prob
59ability
|Page

Cost of Goods Manufactured Model

Strategic

Tactical

Management

Required

Decisions

Decisions

Accounting Tool

Information

Safety stock model

Lead time

Materials Used
Materials(BI)

Demand
Material

Quality

Budgeted

Purchases

Standards

prodiction

Budgeted
production
Incremental analysis EOQ
model

Suppliers
Order size

Suppliers
Numberoforder Incremental analysis
s

Freight-in

Quantity
discount
schedule

Sales forecast
Direct labor

Variable
manufacture

Productivit
y
Motivation
Capacity
Industry
reputation

Wage rate
Number of
workers
Second
shift/
overtime

Incremental
Business

analysis
budgeting

Capacity

New
Keep
or
equipment
replace

Increment analysis

CVAnalysis

Carrying
cost
Purchasing
cost
Demand

List
Fixedpricesand
variable
costs
Relevant
costs Wage
rates
Productivit
Variable
ycost
rates rates
Cost
factors
Physical
factors

Fixed direct labor

Capacity

Utilities

Capacity

Keep
replace
Keep
replace

or Incremental
analysis
or Incremental
CVPanalysis
analysis

Fixed and variable

product cost
Fixed and variable
product cost

60 | P a g e

Production
Planning
Purchasing &
Receiving
Factory
Insurance
Depreciation,
equipment
Depreciation,
Building
Factory supplies

Capacity
Capacity
Capacity
Capacity
Capacity
Capacity

Keep
replace

Incremental
analysis
Incremental
analysis
Incremental
analysis
or Incremental
analysis
Incremental
analysis
Incremental
analysis

Fixed and
product cost
Fixed and
product cost
Fixed and
product cost
Fixed and
product cost
Fixed and
product cost
Fixed and
product cost

variable
variable
variable
variable
variable
variable

61 | P a g e

Chapter 07

Analysis of Management
Accounting Technique

62

7.1 Challenges of Managerial Accounting in the Global Context:7.1.1 Trend in Management Accounting:The usefulness of the management accounting information system has been challenged
by a changing economic environment coupled with increased global competition and the
emergence of new manufacturing technologies. Management accounting contribution is
going to lose the competitiveness of Bangladesh in the global economy. It has been said
about the management accounting practices utilized in some of the developing
economies of the Asian-Pacific region. At present the challenge for management
accounting techniques and practices by globally situated manufacturing firms faced
critically.

Over the last decade, critics of management accounting have questioned the relevancy
of many traditional techniques and practices. Traditional accounting techniques may no
longer be valid as the production process changes. These techniques fail to provide
relevant, useful, and

timely information about processing activities that management

needs for planning and control purposes. Traditional management accounting systems
are often considered incompatible with modem production. Also, traditional systems
have typically used direct labor as an allocation base, often inappropriately.

Nowadays managerial accounting analysis is considered so crucial in managing an

enterprise that in most cases, far from playing a passive role as information providers,
managerial accountants take a proactive role in both the strategic and day-to-day
decisions that confront an enterprise. Although much of the information they provide is
financial, there is a strong trend toward the presentation of substantial non-financial data
as well. Moreover, the business environment is changing rapidly. For managerial
accounting to be as useful a tool in the future as it has been in the recent past,
managerial accounting has to be studied and improved.
In the 21st century the business environment is changing very rapidly. These changes
are reflected in global competition, rapidly advancing technology, and improved
communication systems, such as the Internet. The activities that make an enterprise
63

successful today may no longer be sufficient next year. A crucial role of managerial
accounting is to continually assess how an organization stacks up against the
competition, with an eye towards continuously improving. In fact, moving away from a
historical cost accounting perspective and towards a proactive cost management is the
challenge that an enterprise has to face. Assigning the costs to a larger number of cost
pools that better represent those activities that are responsible for their birth, portrays the
general idea upon which future managerial accounting will evolve.
One result of the changing economic environment has been the emergence in the
literature of cost management technique. Cost management as an integrative area &
combines elements from three other fields: management accounting, production, and
strategic planning. This broadening of the

traditional

management accounting

environment involves emphasis on activity based costing, cost management systems,

advanced manufacturing

technologies, cost planning

and control, quality costs,

performance measurement, and strategic cost management.

7.1.2 Challenges for Managerial Accounting System:The new challenges facing management accounting systems have been a subject of
vivid debate in recent years. Much of the literature seems unfortunately to have ignored
such noteworthy issues as the specific domestic competitive settings or economic
conditions like recessions, which may ultimately prove to be nation specific in their
consequences. Moreover, these studies have largely tended to discuss market changes
and competition in a new environment
Another concern raised here is the interaction occurring between corporate cultural
changes and accounting. Cultural change is actually a phenomenon which might be
assumed to occur more commonly than is generally assumed, for instance, when
companies strive for a true customer-orientation. How to successfully implement
corporate cultural change, or of how to respond to exceptionally aggressive market
attacks by domestic competitors may prove fatal. Modern Management Ideas like TQM,
BPR, and ABM have been proposed as feasible solutions to these new challenges.

64

Especially in conditions of large scale changes, these ideas may indeed possibly provide
potential parts for new manuscripts to be used in a novel situation. As regards
corresponding information needs, it seems to be justifiable to argue that under these
conditions management accounting information plays an even more important role than
usual.
The new challenges and requirements for management accounting and control systems
are actually experienced by the organizational actors in a complex multidimensional
change setting. Another major issue examined was the role of management accounting
and control systems, particularly in a cultural-ideological change process.

7.1.3 Challenge for Merging Management Accounting Tools with Different

Discipline:With the competitiveness of todays business world, several of new model going to
developed for using many useful management accounting tools with human resource
management, that create the challenges for management accounting tools as selfgoverning technique . For some insufficiency of management accounting technique,
merging developed by following process:Step 1: Identifying relevant product profitability models. Product profitability models
come in all shapes and sizes. The relevant product profitability models to use in human
resource management should involve sales productivity as a key element in determining
total profitability.
Step 2: Applying marginal profitability to actual sales results. Product profitability
models that break down the product's profitability on per unit of sales basis can then be
applied to actual sales production.
Step 3: Using regression techniques to analyze trends and predict future sales.
Historical sales and profitability information provide a basis for careful examination of
trend. Regression analysis, especially represented in a graphical format, enables
management to quickly grasp the true trend direction of sales production and
efficiencies

65

Step 4: Comparing regression forecasts to management objectives. If the forecasted

sales production developed by the regression analysis falls short of management
objectives, then management needs to take pro-active steps to meet revenue objectives
or revise their projections downward.
Step 5: Working with human resources to resolve projected revenue variances.
Recognizing revenue variances using management accounting tools is one thing;
identifying the cause of the variances is quite another.
Carefully analyzing the characteristics surrounding sales production trends could
suggest reasons behind the variances. Different management accounting tools is used to
help better understand business, but we shouldn't limit using our tools to just
management accounting. Many techniques used to other functional areas, but certainly
not limited at one root, in fact, the applications are limitless. Taking the initiative to use
these tools outside of the accounting and finance area can have a profoundly positive
impact on the value of the management accounting profession.

7.1.4 Challenges for Managerial Accounting Research: With the continuing development of business processes, whether the change in various
manufacturing processes, or the automation of most business activities, the cost
accounting procedures that companies use to calculate for the cost of an individual
product, service or activity have also become outdated.
From a managerial accounting perspective, the changes in the economy, in industries
and individual firms alike, must be supported by the firm's accounting and control
infrastructure. Accounting is a financial model of business. When changes occur in the
business, accounting should change to reflect them. Managers of companies that fail to
make appropriate modifications in their accounting systems will find they have
inaccurate product/service/activity cost figures and lack data for making decisions. They
may lose their competitive edge because they do not have the necessary information for
operating in the constantly changing business environment.
Systems for accounting for costs date back several centuries. Accounting for
management - accounting done for management to meet its information needs. One
66

basic difficulty in costing is that an individual product, service or activity does not drive
all the company expenses. Even within a factory, there are many questionable costs, not
directly driven by the type, number or volume of products. In addition, there are costs
that are driven by substantial material vendors and customers. How to go about
calculating the cost of an individual product, service or activity, in par with the marked
changes in the field of management accounting to maximize the benefits that effective
costing has to offer.
New Challenges for Managerial Accounting Research:- The traditional cost accounting
model developed for mass production of standardized products needs to be updated to
support new operating concepts such as just-in-time, zero defects, zero inventory, a
cooperative workforce, flexible manufacturing systems, computer aided design and
manufacturing, and computer - integrated manufacturing.
Management accounting must serve the strategic objectives of the company &
emphasizes on financial measurements, needs to include an explicit recognition of the
need for information and measurements in such soft areas as product quality,
productivity, product innovation, employee morale, and customer satisfaction. If
management accounting research is to progress, information needs to be collected from
company various updated sources.

7.1.5 Challenges in Organizational Performance:Under the discipline of management accounting - how budgets, cost models,
management control panel and continuous improvement are used today and what needs
to change:The challenges in organizational performance related to budgets, cost models,
management control panel and continuous improvement experienced at present by a
variety of firm & how effective the management accounting techniques contribute to
organizational performance management.
The rationale for the management accounting techniques tended to hold the objectives
of organization by the four techniques

67

Budgets were frequently used solely to project financial results; their

contribution to the implementation of corporate strategy was very weak.

The cost models were reduced to simple pricing systems intended to evaluate

inventories, rather than true models representing the organization's activities.

Indicators found in management dashboards are identified and developed by the

company functions and are in no way integrated in financial management.

The same is true of continuous improvement projects or Kaizen projects, which

are implemented completely outside the finance function.

The challenge in this regard was to encourage organizations to use budgets to apply
corporate strategy. Two major roles associated with budgets: monitoring financial
projections and managing strategy, it involve - in forecasts and plans. The budget also
has an impact on manager motivation in that budget targets are often used to establish
compensation.
Budgets are used to monitor financial results in nearly all companies. Only when the
anticipated results are stable and easily predictable were, this would not change
anything. The budget thus contributes to managing financial resources by tracking
financial projections. One such practice that was evaluated favorably is that of the
continuous budget, whereby at the end of each month, not only are the projections of the
following months adjusted but the budget of the twelfth following month is added.
However, the data we gathered shows that, for the majority of companies, costs are
calculated as part of financial accounting, and companies haven't developed or
implemented a system of management accounting distinct from financial accounting. In
addition, in the context of an innovation and growth strategy that centers on
acquisitions, executives aren't aware of the potential benefits of a cost model that goes
beyond associating direct production costs with products. In addition, executives at
companies that have implemented an integrated management information system don't
feel the need for other cost-related information.

68

7.2 Problem Foundations in Management Accounting:Fundamental objective of management accounting is to facilitate and support all the
aspects of an organization's decision making. To accomplish this objective, management
accountants should be aware of the kinds and levels of problems and decisions involved
in order to identify those particular areas where management accounting techniques and
information would be most relevant and useful. For this purpose, different conceptual
frameworks for viewing problems, decisions, and decision systems have been proposed
in the management, accounting, and information systems literature. They provide a good
basis for viewing the types of problems, decisions and decision systems, the types of
information needed, and the useful role of management accounting.
It is a fact that accounting executives spend a great proportion of their time defining,
formulating, classifying, and solving problems The concept of a problem in business, management accounting, or any other context
lends itself to three major phases - Problem definition, Problem formulation, and
Problem classification, which precede the problem solving. The way executives
approach each of these phases can substantially affect information processing, decision
making, and behavior. A moderating effect on this impact is management accounting
playing a crucial role of facilitator by providing the right information needed for the
execution of each of the three stages. Without the right execution of three phases
management accounting facing challenges to exist their acceptance.

Faced with new wealth creation standard, triggered by technology and relentless
globalization of markets, increasing number of companies are becoming knowledgebased enterprises. Internet and e-commerce have changed forever the way companies
conduct their businesses. Virtual enterprise and efficient supply chain management
systems will shape the future of these enterprises. Organizations are trying to become
agile enterprises with the help of strategic alliances of firms and integration using
information technologies.

69

Five challenges are identified for management accounting, and in particular for planning
and control

The first is to foster multiple perspectives

The second is the coordination of complexity

The third concerns competitor analysis and

The fourth concerns resource allocation

The fifth is to overcome centrifugal tendencies, developing a clarity of strategic

intent, binding managers together worldwide and rewarding behavior in the corporate,
as opposed to local interest.
Traditional performance and cost measures are no longer suitable for developing and
managing enterprises in the so-called new environment. In order to remain relevant and
to add value, cost and performance measures must be designed and systematically
evaluated to reduce the often-unnoticed mismatch between strategic goals and
operational tactics. Managerial accounting researchers and practitioners should develop
new costing and Performance Measurement Systems (PMS) taking into account the new
enterprise environment.

7.3 Pushing the Art of Management Accounting: Management accounting practice has developed substantially over the past century, but
it suggests that the practice is no longer making the strides that it once did. Unless
management accountants take a hard look at the effectiveness of current practice, this
situation isnt likely to improve. In some companies, radical changes are needed to the
structure of the finance function, the nature of the interactions management accountants
have with other managers and the performance metrics used to guide the function itself.
Todays management accounting information, driven by the procedures and the cycle of
the organizations financial reporting system, is too late, too aggregated and too
distorted to be relevant for managers planning and control decisions. Management
accounting reports are of little help to operating managers as they attempt to reduce
costs and improve productivity.

70

Strategic cost management techniques, such as

attribute

costing,

seem

little

known outside academia. The majority of firms measures apparently dont

use them significantly. Balanced Scorecard researchers have concluded that
most users make little attempt to link their non-financial performance to strategy and
that only a small minority attempt to validate the cause and effect linkages included in
their models. Moreover, Balanced Scorecard practice seems to have developed an
independent

momentum, excluding the

finance

function altogether in

some

organizations. There is even pressure for management accountants to do less.

These indications of a slowing pace of management accounting change may be due to a
range of factors. In some cases, new management accounting tools arent adapted to
organizational strategy or structure and cant be used. And in some cases, innovation
has failed due to implementation-related factors. However, the main problems arent
technical or structural;

they

lie in the need

for a

better

management of the

management accounting process itself.

Last the management accounting process requires new metrics. Most accounting
functions measure timeliness, in terms of the delay between the end of the
reporting cycle and the issuing of the report, and many measure the cost of the
finance function relative to revenues. Few organizations measure the

use

or

the

usefulness of the management accounting information provided. The absence

of such measures guarantees that things will remain the same.

7.4 Application of Inefficient Techniques in Decision Making: As time went on, standard cost lost its usefulness for management decision making due
to a variety of reasons:The practice of paying workers on a set-piece basis changed in favor of paying on an
hourly rate. Modern companies tend to have relatively low truly variable costs and very
high fixed costs. Equipment has become more complex and specialized and may be a
very significant proportion of total costs. Changes in the level of full cost inventory
create swings in profitability that is difficult to explain or understand.

71

An increase in inventory can "absorb" costs of production and increase profits, while a
decrease in inventory level will decrease profits. Organizations with a wide range of
products or services have processes which are common to several finished items,
making cost allocation irrelevant or misleading.
As a result of the above, using standard cost accounting to analyze management
decisions can distort the unit cost figures in ways that can lead managers to make
decisions that do not reduce costs or maximize profits.
Weaknesses of Management Accounting: -Management accounting discipline is still
very much in a state of evolution. It comes across the same obstacle as a relatively new
discipline has to face sharpening of analytical tools and improvements of techniques
creating uncertainty about their application.
1. There is always a temptation to make an easy course of arriving at decisions by
intuition rather than taking the difficulty of scientific decision making.
2. It derives its information from financial accounting, cost accounting and other
records. Therefore strength and weakness of management accounting depends upon the
strength and weakness of basic records.
3. It is one thing to record, interpret and evaluate an objective historical event converted
into money figures, while it is something quite different to perform the same function in
respect of past possibilities, future opportunities and unquantifiable situation. Execution
of the conclusions drawn by the management accountant will not occur automatically.
Therefore, a continuous effort to achieve the goal must be made at all levels of
management.
4. Management Accounting will not replace the management and administration. It is
only a tool of management. Of course, it will save the management from being
immersed in accounting routine and process the data and put before the management the
facts deviating from the standard in order to enable the management to take decision by
the rule of exception.
An alternative view of management accounting: - A very rarely expressed alternative
view of management accounting is that it is neither a neutral or benevolent influence in
organizations, rather a mechanism for management control through observation. This
72

view locates management accounting specifically in the context of management control

theory. Stated differently Management Accounting information is the mechanism which
can be used by managers as a vehicle for the overview of the whole internal structure of
the organization to facilitate their control functions within an organization.
Throughput Accounting: -The most significant, recent direction in managerial
accounting is throughput accounting; which recognizes the interdependencies of modern
production processes. For any given product, customer or supplier, it is a tool to
measure the contribution per unit of constrained resource.
Transfer pricing: -Management accounting is an applied discipline used in various
industries. The specific functions and principles followed can vary based on the
industry. Management accounting principles in banking are specialized but do have
some common fundamental concepts used whether the industry is manufacturing based
or service oriented.
For example, transfer pricing is a concept used in manufacturing but is also applied in
banking. It is a fundamental principle used in assigning value and revenue attribution to
the various business units. Essentially, transfer pricing in banking is the method of
assigning the interest rate risk of the bank to the various funding sources and uses of the
enterprise.

73

Chapter 08

Findings of the Study

74

8.1 Findings:Management decisions are basically based on some measures/techniques traditionally

designed based on quantitative data. However, in recent past to cope with global
business environment, change in business, increase in competition and complexity of
decision making some advanced quantitative techniques like Activity based Costing
and Target Costing and some improved programs like (JIT)Just- in- time , Total Quality
Management (TQM), Process Reengineering and Theory of Constraints (TOC) have
been introduced for application. Now both traditional and advanced management
accounting techniques are shown in the following chart:-

Traditional Techniques

Advanced Techniques

Activity-Based Costing

Analysis

Target Costing

Fund Flow Analysis

Just-in-Time (JIT)

Cash Flow Analysis

Total

Marginal Costing

(TQM)

Absorption Costing

Process Reengineering

Differential Costing

The

Standard Costing

Constraints(TOC)

Opportunity Costing

Budgetary Control

Inter-firm Comparison

Cost-Volume-Profit

Financial

Statement

Quality

Management

Theory

of

Analysis

Management Reporting
Chart Showing the Management Accounting Techniques

8.2 Extent of Use of Management Accounting Techniques

Against the background of identification of generally used management accounting
techniques the following table shows the use of management accounting techniques in
the sample manufacturing business firms in Bangladesh. A list of techniques was
75

provided to the respondents and they were asked to point the techniques they use and
which they do not use. The responses have been tabulated and the summarized picture is
shown in the table.
The table shows the extent of use of different management accounting techniques in
sample firms. It is seen that the traditional techniques like financial statement analysis,
cash flow analysis, budgetary control and management reporting are being widely used
(100%) by all types of firms followed by standard costing and absorption costing (80%
in public, 90% in private and 100% in MNC). Marginal costing and cost-volume-profit
analysis are used to some extent by the 50% in public sector enterprises, 60% by private
sector and 70% by multinational corporations (MNC). Some enterprises of public (30%)
and private (20%) sectors use fund flow statement analysis though it has now been
almost replaced by cash flow statement analysis. Modern techniques yet to be
introduced by Bangladeshi firm both in public and private sector. Few MNC uses JIT
(40%) and TQM (20%). None of public or private Bangladeshi enterprises or MNC
found to use some traditional technique like differential costing, opportunity costing and
inter-firm comparison as well as the modern techniques like activity-based costing,
target costing, process reengineering and the TOC. Thus it is seen that management
accounting techniques yet to get a firm footing in Bangladeshi firms and thus depriving
these firms in better decision making.

76

Techniques

PB (N = 15)

PV (N = 15)

MNC (N = 5)

100%

100%

100%

Analysis

100%

100%

100%

Cash Flow Analysis

100%

100%

100%

Budgetary Control

100%

100%

100%

Management Reporting

80%

80%

80%

Standard Costing

80%

80%

80%

Absorption Costing

50%

50%

50%

Marginal Costing

50%

50%

50%

Cost-

30%

30%

30%

Analysis

---

---

---

Fund Flow Analysis

---

---

---

Just-in-Time (JIT)

---

---

---

Total Quality Management

---

---

---

(TQM)

---

---

---

Differential Costing

---

---

---

Opportunity Costing

---

---

---

Inter-firm Comparison

---

---

---

Activity-Based Costing

---

---

---

Financial

Statement

Volume-Profit

Target Costing
Process Reengineering
The Theory of Constraints
(TOC)
No sample (PL = Public enterprises, PV= Private enterprises, MNC = Multinational Enterprise)

77

Table Showing the Summarized Picture of Management Accounting Techniques Used

by the Sample Enterprises
Now a discussion about the techniques in brief and extent of the use of the same is being
examined below:

8.2.i) Financial Statement Analysis

Financial statement is essentially historical document which provides organized data
according to logical and consistent accounting procedure and conveys an understanding
of some financial aspects of a business firm. Careful analysis of financial statements can
help decision makers to evaluate an organizations past performance and predict its
future financial health. Financial statement therefore, refers to such a treatment of the
information contained in the Income Statement and the Balance Sheet so as to afford
full diagnosis of the profitability and financial soundness of the business. This analysis
is accomplished by examining trends in key financial data, comparing financial data
across companies, and analyzing key financial ratios. All the sample firms use it.

8.2.ii) Fund Flow Analysis

Fund flow analysis does not carry any extra meaning basically after the implementation
of International Accounting Standards (IAS)7 in revised form. Nevertheless, some
business organizations are still considering this as an important tool for managerial and
financial decision making. Working capital being life-blood of the business, analysis of
fund flow is thus extremely useful. Financial analysts also have an understanding of
changes in the distribution of resources between two balance sheet dates by analyzing
the fund flow statements. Few sample firms (30% in public and 20% in private sector)
still use this statement.

8.2.iii) Cash Flow Analysis

Until recently, many decision makers focused primarily on the income statement and the
balance sheet. But in the IAS-7 (revised), FASB has prescribed for compulsory
reporting of another important statement, the statement of cash flows. A statement of
cash flows reports the cash receipts and cash payments of an organization during a
particular period. It is widely used as a tool for assessing the financial health of an
organization. Other important purposes of maintaining this statement are to predict
78

future cash flows, to evaluate managements generation and use of cash and to
determine a companys ability to pay interest, dividends, and to pay debts when they are
due. All the sample enterprises found to use it.

8.2. iv) Marginal Costing

Marginal costing is a technique where only the variable costs are considered while
computing a cost of a product. The fixed costs are met against the total fund arising out
of excess of selling price over total variable cost. This fund is known as contribution in
marginal costing. Marginal costing system is however not a system of cost finding such
as job, process or operating costing, but it is a special technique concerned particularly
with the effect of fixed overheads on running the business. It is an important decision
making tool. However, it is found not being widely used in sample enterprises. Over
50% of public and 60% of private sector enterprises and 70% of MNC found to use it.

8.2. v) Absorption Costing

Though absorption costing is a traditional approach for costing products for the
purposes of valuing inventories and cost of goods sold, the vast majority of companies
throughout the world use this technique for managerial accounting purposes. Absorption
costing, which is also known as Total, or Full costing, treats all costs of production as
product costs, regardless of whether they are variable or fixed. It allocates a portion of
fixed manufacturing overhead cost to each unit of product, along with the variable
manufacturing costs. It is found widely used in sample firms (80% in public, 90% in
private and all MNC) followed by some traditional techniques like financial statement
analysis, cash flow analysis etc.

8.2. vi) Differential Costing

In decision-making, the management always compares two or more alternative courses
of action. Making or buying decision, accepting or rejecting certain orders, deciding
whether to discontinue an existing product or launce new one, expanding the existing
business etc. are the decisions required to be taken by the management. In such a case
the best alternative that will maximize profit or minimize loss can be obtained by
determining the differential costs and revenues. Differential cost (revenue) is the

79

difference in total cost (revenue) between two alternatives. The use of this technique
found absent in sample enterprises.

8.2. vii) Standard Costing

A standard is a benchmark or norm for measuring performance. Standards are found
everywhere and are also widely used in managerial accounting where they relate to the
quantity and cost of inputs used in manufacturing goods or providing services. Standard
costing is a budgetary control technique with three components: a standard, or
predetermined, performance level; a measure of actual performance; and a measure of
the difference, or variance, between the standard and the actual. All sample MNCs, 90%
of private sector enterprises and 80% of public sector enterprises reported to use it.

8.2. viii) Opportunity Costing

Sometimes a proposed investment project may use the existing resources of the firm for
which explicit, or adequate, cash outlays may not exist. The opportunity costs of such
projects should be considered. Opportunity costs are the expected benefits which the
company would have derived from those resources if they were not committed to the
proposed project. In addition to the accounting costs that are explicit as labor, raw
materials, supplies, rent, interest and utilities, some implicit costs are also required for
managerial decision making purpose. The objective in such case is to determine the
present and future costs of resources associated with various alternative courses of
action. Such an objective requires that one considers the opportunities foregone/
sacrificed whenever a resource is used in a given course of action. The implicit costs,
however, consist of the opportunity costs of time and capital that the owner-manager has
invested in producing the given quantity of output. But none of sample enterprises use
it.

8.2. ix) Budgetary Control

Budgetary control is the system of management control in which all the operations, as
sales, purchase, production etc. are forecasted in advance and the results, when known,
are compared with the planned targets. The difference between the planned targets and
actual results are analyzed and corrective steps are taken according to the original
causes. By budgetary control attempts are made to make the best uses of resources
80

under the circumstances and all efforts are coordinated by pin-pointing responsibility.
The Budget Performance and Variation Reports act as communication in between top
management and financial management as also in between functional management and
sub-ordinate management. The system makes everyone conscious and responsible, and
thus it is also termed as Responsibility Accounting. All the sample enterprises reported
to use it. But some research report indicated that this technique is not rigorously
followed and thereby the enterprises are deprived of its benefit.

8.2. x) Inter-firm Comparison (IFC)

IFC is another technique of Management Accounting which is made by some inter-firm
comparison ratios based on the financial and other records of the business. Top
management can make decision by applying this technique and comparing the
performance of two or more similar types of industry. The idea of inter-firm comparison
was felt in the year 1889 when the National Association of stove manufacturer in U.S.A
introduced first the scheme of Uniform Costing. In order to know whether one
business/firm is making sufficient profit or not; whether it is efficient in purchase, sales
and production, it is required to compare its own performance with the performances of
other similar concerns and it is easily possible by applying the technique IFC. But this
technique is found not in use by the sample enterprises.

8.2. xi) Cost-Volume-Profit Analysis

The relationship between cost-volume-profit is ascertained by the technique CostVolume- Profit Analysis. This technique attempts to find out the impact of change in
price, cost, and volume on the profitability of the business. It aids management to take
its decision on planning and control. The CVP analysis is also termed as Break-even
Analysis which determines the equilibrium point of cost and revenue. The equilibrium
point indicates no profit no loss stage. 50% of sample public sector enterprises, 60%
of private sector enterprises and 70% of MNC reportedly use the technique.

8.2. xii) Management Reporting

Management reporting acts as a media which helps the management to take its
decision accordingly. It is an organized method of providing each manager with all the

81

data which he needs for his decisions. A good management reporting will include six
factors:

a)

Evaluation of each managers area of responsibility,

b)

Proper flow of information,

c)

Proper form & Proper time,

d)

Cost benefit analysis, and

e)

Flexibility. Large concerns found to have a separate Management Information

Division.
This division may be headed by the Accountant himself or the Management / Cost
Accountant or Information Manager, depending on the size of the business. All the
samples reported to use it in the form of performance report. But the contents found to
vary and in many cases one report includes a variety of information like production,
procurement, sales, financial aspects i.e. these are not segregated and thus pin point
reporting for specific responsible persons is being hampered. This adversely affects
intent of the reporting.

8.2. xiii) Activity-Based Costing

Activity-based costing (ABC) developed to provide more accurate ways of assigning the
costs of indirect and support resources to activities, business processes, products,
services, and customers (Kaplan and Atkinson, 2001:97). Activity-based costing is a
method of assigning costs that calculates a more accurate product cost by identifying all
of an organizations major operating activities. The goal of ABC is not to allocate
common costs to products but to measure and then price out all the resources used for
activities that support the production and delivery of products and services to customers.
For this why, ABC is important to activity-based management. Since its introduction as
a viable cost allocation technique, organizations in the United States and throughout the
world have adopted ABC. This modern technique is found not in use by sample
enterprises.

82

8.2. xiv) Target Costing

Target costing is a costing tool for decision making. Stratton defined target costing as a
cost management tool for making reduction a key focus throughout the life of a product.
They added that the target cost is based on the products predicted price and the
companys desired profit. Managers must then try to reduce and control costs so that the
products cost does not exceed its target cost. Target costing is most effective at
reducing costs during the product design phase when the vast majority of costs are
committed. None of the sample firms use this modern technique.

8.2. xv) Just-in-Time (JIT)

One of the management-forged operating philosophies for the new manufacturing
environment is JIT. The JIT approach can also be used in merchandising companies.
The JIT operating philosophy requires that all resources, including materials, personnel,
and facilities, be acquired and used only as needed. It has most profound effects on the
operations of manufacturing companies, which maintain three classes of inventories
raw materials, work-in-process, and finished goods. That means according to JIT
concept raw materials are received just in time to go into production, manufactured parts
are completed just in time to be assembled into products, and products are completed
just in time to be shipped to customers. Only 40% of sample MNCs use it and none of
Bangladeshi sample firms found to use it.

8.2. xvi) Total Quality Management (TQM)

The most popular approach to continuous improvement is known as total quality
management. There are two major characteristics of total quality management (TQM):
(I) a focus on serving customers and (ii) systematic problem solving using teams made
up of front-line workers. TQM is an approach to improving the competitiveness,
effectiveness and flexibility of a whole organization. It is essentially a way of planning,
organizing and understanding each activity, and depends on each individual at each
level. TQM is also a way of ridding peoples lives of wasted effort by bringing everyone
into the process of improvement, so that results are achieved in less time. The methods
and techniques used in TQM can be applied throughout any organization. They are
equally useful in the manufacturing, public service, health care, education and
83

hospitality industries. Only 20% of sample MNCs reported to use it but none of
Bangladeshi sample firms use it.

8.2. xvii) Process Reengineering

Process reengineering focuses on simplification and elimination of wasted effort. A
central idea of process reengineering is that all activities that do not add value to a
product or service should be eliminated. Basically, in process reengineering a business
process is diagrammed in detail, questioned, and then completely redesigned in order to
eliminate unnecessary steps, to reduce opportunities for errors, and to reduce costs
(Garrison and Noreen, 2004-2005:20). None of sample enterprises use it.

8.2. xviii) The Theory of Constraints (TOC)

A constraint is anything that prevents one from getting more of what he/she wants.
Every individual and every organization faces at least one constraint. The Theory of
Constraint (TOC) maintains that effectively managing the constraint is a key to success
(Garrison and Noreen, 2004-2005:22). In TOC, an analogy is often drawn between a
business processes the weakest option is always identified first and then improvement
efforts are shifted over to that option in order to bring the biggest benefit. This simple
sequential process provides a powerful strategy for continuous improvement. None of
sample enterprises reported to use it.
The above findings reveal that some traditional techniques are being used by sample
enterprises. Modern techniques are yet to be introduced. In the use of management
techniques MNCs rank high followed by private sector and public sector enterprises.
Due to utmost importance of use of modern techniques, concerned authorities need to
pay attention to this. Against the backdrop of the extent of use of management
accounting techniques, means status of management accounting practice in Bangladesh,
now an attempt is made below to show the attitude of concerned management personnel,
the reasons for low use and prospect of improving the situation in the following:

Extent of Use of Management Accounting Information by the Sample

Enterprises for Various Decision Making
Decision areas

MAI (%)

FAI (%)
84

OI (%)

Production

10

30

60

Purchase

30

65

Sales

10

25

65

Control

30

20

50

Direction

20

10

70

Motivation

10

15

75

(MAI=Management accounting Information, FAI=Financial accounting Information, OI=

Other Information)

8.3 The Respondents as to Use Status of Management Accounting

Information Techniques in Sample Firms
It was desired to know from the respondents as to whether management accounting
information systems are satisfactorily used in Bangladesh, what are the problem of
optimum use and suggestions they can offer for adequate use of the techniques. The
summarized version of their opinion is tabulated below.

Quite

Satisfactory

Moderate

Unsatisfactory

Satisfactory
-

Not

at

all

satisfactory
15(14.28%)

30(28.57%)

45(42.85%)

15(14.28%

The table above clearly depicts that the respondents consider the use of management
accounting techniques in our manufacturing business firms as very much unsatisfactory.
Only 14.28% of them consider it satisfactory and 28.57% considers it moderately
satisfactory and seemingly most of them belong to MNC group. The majority (42.85%)
considers it unsatisfactory and 14.28% considers the position as precarious/worse. They
put forwarded some reasons for low use of management accounting techniques.
Reasons for Low Use of Management Accounting Techniques
Respondents recognize the importance of the use of management accounting techniques
in the factories. But they pointed out some reasons that act as barriers to this. The
reasons pointed out by them are shown in the following table.
85

Reasons

Historical Information is given more importance

20

26.67

Lack of awareness, understanding the benefit of its use

25

33.33

Consider involvement of extra cost

20

26.66

Lack of trained and experienced personnel

15

20

Reluctant to use it and base decision on personal

35

46.67

experience

22

29.33

Lack of skilled personnel

(N=Frequency of the respondents) (%to total respondents)

The above table indicates that reluctance of use is the main cause. This contradicts the
opinion as to considering the importance of management accounting as an important
tool of decision- making. This indicates that actually our business firms do really not
feel the importance of management accounting information for decision-making. Only
lip service is given to it.

8.4Suggestions to Overcome the Problem of Low Use

The respondents also offered some suggestions in the way to overcome the flaws and
improvement of the positions. These are now shown in the following table.
Suggestions

Organizing seminar, symposium of professional bodies

70

93.33

Creating awareness

40

53.33

Association

40

53.33

Ensuring training and skill development

30

40

Introducing management audit more extensively

30

40

by respective Manufacturing

Creating awareness among top management

(N = Frequency) (%= To total respondents)

86

Way towards a sustained progress in the international business and finance environment.
The low cost and the efficiency as well as the attractiveness of conducting and entering
any business venture local or international in nature were made available by these
technological advances which characterize the global marketplace. Today, greater
challenges are faced by accountants as opportunities for growth as well as possibilities
of risks increase in the current and more attractive business world.
Management accounting generates the proper flow of accounting information that are
accumulated, analyzed, and presented in the organization. Furthermore, this information
are used in making imperative decisions, served as basis for predicting and solving
specific problems, and utilized in the daily operations in business management.
Management accounting is more oriented toward internal decision making and
purposively channels relevant and timely information to internal managers. As to its
relationship with financial management, both are production processes of different
accounting data for different problem-solving situations.
Management accounting, however, reflects the use of techniques from different
disciplines, including accounting, for internal problem solving. Therefore, management
accounting techniques may differ from Generally Accepted Accounting Principles
techniques and from one firm to another. They do not conform to any set of prescribed
rules, and much may be left to the decision-maker's philosophies.

87

Chapter 09

CONCLUSION

88

9.1 CONCLUSION

This Report has provided in depth insights into role of management accountant in
decision- making. The role of an accountant is diverse and critical. They can affect the
decisions that the business leaders are going to create. They can also keep their eyes
tracked in any changes that might happen while the decision has been in the process of
assimilation. Accountants job is broad and complex but still, those individuals can
handle the presence of the pressure. The change of their role in a management is another
type of approach where they can manage the challenges brought by the globalization and
the change in the world of business.
It has been established that the role of the management accountant in an organization is
to support the information needs of management. The type, size, structure and form of
ownership of the organization will influence the management role, and thus, determine
the complexity of the management accounts role. Such differences in size do not change
the basic role of the management accountant, nor the basic work which he or she does.
However, the size of the organization may change the degree of formality or
sophistication with which the function is carried out, or the level of resources devoted to
management accounting. But, the management accounting function remains essentially
the same.

89

REFERENCES

1) Managerial Accounting, Garrison/Noreen/Brewer (Thirteenth Edition)

2) Boer, G.B., Management accounting education: Yesterday, today, and tomorrow.
Issuesin Accounting Education, 15, (2), 313-333, (2000)
3) Kohl, C.A. What is wrong with most profit and loss statements?,N. A. C. A.
Bulletin, July, pp. 1207-1219, (1937). [11] Smith, M.,Management Accounting
for
Competitive Advantage (First Edition ). Sydney: LBC Information Services, (1999
4) Johnson, H. T., & Kaplan, R. S., Relevance lost, Harvard Business School Press,
Harvard, USA (1987
5) Ashton, D., Hopper, T. and Scapens, R.W., Issues in Management Accounting,
Prentice-Hall, Hemel Hempstead, (1991
6) Government of Bangladesh, President's Order No.27. The Bangladesh Industrial
Enterprises (Nationalization Order), The Bangladesh
Gazette
Extraordinary,
Ministry of Law and Parliamentary Affairs, (Govt. of Bangladesh, 26 March, 1972).
7) Jones, C. S. &Sefiane, C. S., The Use of Accounting Data in Operational Decision
Making in Algeria, Accounting Auditing and Accountability Journal, Vol.5, No.4,
pp.71-83, 1992.
8) Drury, C. (2000). Management and Cost Accounting. (5th edition). London: Thomson
Learning. Friedman, A.L., and Lyne, S.R. (2001) The bean counter stereotype: Towards
ageneral model of stereotype generation. Critical Perspectives on Accounting, 12,
pp.423-451
9). Harrison, F.E. (1995). The managerial decision-making process (4th Ed.) Boston:
Houghton Mifflin Co. pp 1-39, 86-97, 186, 193-197, 283-284
10) Hilton R.W. (1999), Managerial Accounting, Fourth edition, Irwin McGraw -Hill,
USA.
11) Hoggett J. and Edwards L. (1987) Accounting in Australia. John Wiley and Sons,
Brisbane.
90

12) Johnson, R.A., Newell, W.T. &Vergin, R.C. (1972). Operations management a
system concept. Boston: Houghton Miffin Co., pp. 6-10, 208
13) ,New Roles for Management Accountants, Journal of Cost Management Fall, p. 6
14.
14) Kariyawasam, U., 2009. Changing Role of the Management Accountant. 28. Kreitner
R (1999). Management (7th Edition and 1st Indian edition). Delhi: AITB.
15) Le e, J. C.,Managerial Accounting: A Planning-Operating-Control Framework,
New York: Wiley 1991
16) Moorhead G, Griffin WR (2000). Organizational Behavior: Managing people and
organization (5th Edition). Delhi: AITB
17) Mullins JL (2000). Management and organizational Behavior (5th Edition). London:
Pearson Education. Murdick RG, Ross JE (1971).
18) . Ronald W Hilton, G Ramesh, M Jayadev, (2008), Managerial Accounting, Creating
Value in a Daynamic Business Environment, 7th edition
19) CIMA Management Accounting Official Terminology, Lodo: Cha ted
Institute of Management accountants
20) IBM Business Consulting Services, 2004,CFO survey: Current state and future
direction,IBMCorporation,somers,Ny.
Internet:

www.accountingweb.co.uk
www.icmab.org.bd
www.cimaglobal.com
www.focusmag.com.au
www.scribd.com
www.allbusiness.com

91