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Introduction
tools drawn from financial and management theory and practice. A basic premise is
that the primary task of management is to make decisions and that this task is greatly
This book is based on the assumption that the accountant in the role of advisor
the data and special analyzes that will enable management to make consistently
good decisions. Conversely, this book assumes that management must understand
accounting and the type of information that the accountant can provide. Without
request information or seek help at a critical time. Therefore, this book is written for
are expected to acquire a higher degree of proficiency in the use of the planning and
What is accounting? A very old but frequently used definition states: “Accounting is
the art of recording, classifying, and summarizing in a significant manner and in terms
of money, transactions, and events, which are, in part at least of a financial character,
and interpreting the results thereof.” (AIA Bulletin No. 1 ‑ Review and Resume)
choices among alternative courses of action.” (APB Statement No. 4) This latter
decision-making.
theorists and writers agree that the following concepts and tools represent the
13. Organization
From the above listing, it is apparent that the subject matter of management
accounting has little to do with transactions analysis and the preparation of statements
accounting and a study of financial accounting must precede the study of management
accounting. The basic carryover from the study of financial accounting is a solid
record the effects of individual transactions of assets, liabilities, capital, and revenue
The term management accounting obviously consists of two words each of which
Management Accounting | 3
analytical techniques that result from the combining of accounting fundamentals with
Management, not accountants, has the need and responsibility to read and understand
how well management has performed (made decisions) for a given period of time.
accounting. The following concepts will be employed throughout this text as important
Planning
Organization
Standards
Decision-making
Feedback
Strategy
These terms will be explained in the chapters where they can be logically
etc. all can benefit from the use of management accounting. Management accounting
When a business reaches a certain size, then the accounting activity is of such a
volume that the accounting activity must be organized and managed. Consequently,
appearing on the organization chart as a staff function. While the term management
and accounting, the term can also be applied to the accounting department as a whole.
A simple model of the accounting function is shown in Figure 1.1. The management
techniques presented in this book would primarily be used in the budgeting and
President
Board of
Directors
Marketing
Department
Production
Department
Finance
Department
Accounting
Department
The accounting department exists to serve the financial data needs of management.
artificial. The controller, the chief executive officer of the accounting department, is
to management accounting.
The study of accounting is normally divided into two broad categories: financial
and managerial. This division is somewhat arbitrary in that the study of managerial
and external. In management accounting, the focal point is the role of management
within the organizational structure. Both the financial accountant and the managerial
the internal information needs of management. Figure 1.2 illustrates the environment
in which management and the management accountant operate.
Management Accounting | 5
serves all types of users. Management accounting, on the other hand, is intended
of various disciplines. Many of the techniques such as capital budgeting models and
EOQ models have been borrowed from other disciplines. The conceptual framework
has greatly accelerated as more complex financial transactions have been developed
and regulatory agencies, both private and non private, have come into existence.
have been written and put into practice. Also, the rapid development of personal
computers and very powerful accounting and systems software has had its impact
serve both in public accounting and private accounting. As of 2006, there were
business and organizations including state and federal governments, banks, not-forprofit businesses,
manufacturing and retail businesses of all types, and labor unions.
the financial and economic environment has an impact on business. Also, an acute
awareness of the many different types of organizations that a business interacts with
illustrated by using (1) an input and output approach and (2) a financial statement
accounting, nevertheless, is broader in scope in the type of data used in the models
through which data is processed and analyzed. The input and output diagrams
illustrated in Figures 1.3 and 1.4 reveal the differences in the nature of inputs and the
The input/output diagram shown in Figure 1.4 reveal that management accounting
deals with a wider range of inputs and outputs. Also, the methodology of processing
data involves numerous types of mathematical model. The inputting, processing, and
rules dealing only with historical data as is the case in financial accounting.
Both financial accounting and management accounting are concerned with financial
statements. The financial accountant is concerned with analyzing and recording the
financial accountant is to fairly present financial statements based on past events (see
Figure 1.3). The management accountant is primarily concerned with desired future
ORGANIZATIONS
Governments
Financial
Professions
Financial Accounting
Balance
Sheet
Income
Statement
Cash Flow
Statement
President
Marketing