UNIVERSITY OF PORT HARCOURT

FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING

ASSIGNMENT QUESTION:
Management Accounting is said to be the processing of information for
internal use. Critically examine this statement with particular emphasis
on the types and roles of Accounting Information in Management
decision making.

BY

AKPA MIEMA
(G2022/MSC/ACT/FT/025)

MSC ACCOUNTING

COURSE TITLE:
MANAGEMENT ACCOUNTING THEORY

COURSE CODE: ACT 801.1

LECTURER: DR. SOLOMON EGBE

0
INTRODUCTION

Management accounting does indeed involve the processing of information for internal use
within an organization. Its primary goal is to provide relevant and timely financial and non-
financial information to the management to facilitate decision-making, planning, and
control.

Management accounting is a branch of accounting that involves the process of identifying,

measuring, analyzing, interpreting, and communicating financial information to support
internal decision-making within an organization. The primary objective of management
accounting is to provide relevant and timely information to managers and other decision-
makers, helping them make informed choices that contribute to the organization's goals
and objectives.

The key aspects of Management Accounting includes:Internal Focus, Decision Support,

Cost Accounting, Budgeting and Planning, Performance Measurement, Strategic Decision
Support, Internal Reporting, Forecasting, Risk Management and Continuous Improvement.

Management accounting contributes to continuous improvement initiatives by analyzing

processes, identifying inefficiencies, and suggesting improvements to enhance
organizational performance.

Overall, Management Accounting is a dynamic and evolving field that plays a vital role in
helping organizations make sound financial decisions, achieve their objectives, and adapt
to changing business environments.

DISTINCTION BETWEEN FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING

Financial Accounting is primarily concerned with external reporting and providing a

standardized view of an organization's financial health for external stakeholders. External
stakeholders such as investors, creditors, regulatory bodies, and the general public.

This is to ensure standardized and accurate representation of an organization's financial

performance and position to external parties. This is done in line with the Generally
Accepted Accounting Principles (GAAP) or International Financial Reporting Standards
(IFRS).

The primary focus is usually on historical financial data that are typically reported on a
quarterly/ annual basis. This process must be subject to various regulatory requirements
and accounting standards.

Financial Statements are often audited by External Auditors to ensure compliance and
reliability. This includes reports such as the income statement, balance sheet, and cash flow
statement, which provide a comprehensive overview of the organization's financial
performance.

1
The Users are External Decision-Making i.e. Investors, Creditors, Analysts, Government
Agencies, and other external parties for investment, credit, and regulatory decisions.

On the other hand, Management Accounting is focused on providing tailored information

for internal decision-making and supporting the day-to-day operations and strategic
initiatives of theorganization by making relevant information available to the intended
Stakeholders i.e. Managers, Executives and Operational Teams.

This helps in proving the necessary information for internal decision-making, planning,
control, and performance evaluation. This usually includes both historical and forward-
looking information that are more frequent and tailored to the needs of management in a
flexible manner.

Regulatory Complianceis not a primary focus and such Management Reports includes
reports such as Budgets, Variance Analysis, Cost Reports and Performance Metrics that
help Management in the day-to-day decision-making with respect to resource allocation,
pricing, product profitability, and strategic planning.

This entails involves detailed analysis of costs that is associated with production,
distribution and other operational activities. It helps in cost control, pricing decisions,
monitoring and controlling internal processes to ensure efficiency and effectiveness.

It enhances strategic decision-making by providing financial analysis and insights into the
potential outcomes of different strategic choices.

When it comes to the types of accounting information in management decision-making,

there are several key categories:

* Information: This includes data on the organization's financial performance, such as

revenues, costs, profits, and cash flows. Financial ratios and reports help managers assess
the financial health of the business and make informed decisions regarding investments,
pricing strategies, and resource allocations.

* Non-Financial Information: This type of information includes operational data,

customer feedback, employee performance metrics, and market trends. Non-financial
information provides a broader context for decision-making, helping managers understand
the factors influencing the organization's performance beyond just financial numbers.

* Cost Information: Cost accounting plays a crucial role in management decision-making

by providing insights into the cost structure of the organization. Managers use cost
information to analyze the profitability of products or services, identify cost-saving
opportunities, and make pricing decisions.

* Budgets and Forecasts: Budgeting and forecasting are essential tools in management
accounting. By setting financial targets and projecting future performance, managers can

2
establish goals, allocate resources efficiently, and monitor actual performance against
planned targets.

* Performance Reports: Regular performance reports compare actual results to budgeted

or expected outcomes. These reports help managers track progress, identify variances, and
take corrective actions to achieve organizational objectives.

In terms of the roles of accounting information in management decision-making, here are

some critical functions:

1. Planning: Management accountants assist in the planning process by providing data and
analysis to support the development of business strategies, setting goals, and creating
budgets. They help managers make informed decisions based on projected financial and
operational outcomes.

Management accountants play a crucial role in long-term strategic planning by providing

insights into the financial implications of different strategic choices.

2. Decision Making: Accounting information is fundamental to decision-making processes,

providing managers with the necessary data to evaluate alternatives, assess risks, and
choose the most profitable course of action. Cost-benefit analysis, financial modeling, and
scenario planning are common tools used in decision-making.

3. Performance Evaluation: Accounting information enables managers to evaluate the

organization's performance against established goals and benchmarks. By comparing
actual results to budgeted figures or industry standards, managers can assess efficiency,
identify areas for improvement, and take corrective actions as needed.

4. Resource Allocation: Management accountants help managers allocate resources

effectively by providing insights into the costs and benefits of different alternatives. By
analyzing cost structures, profitability, and return on investment, managers can prioritize
projects, investments, and expenditures. Managers use accounting information to allocate
resources efficiently. This includes decisions related to capital investments, staffing levels,
and production capacities.

5. Control: Accounting information facilitates control mechanisms within an organization

by monitoring performance, detecting deviations from plans, and implementing corrective
measures. Managers use variance analysis, key performance indicators, and balanced
scorecards to ensure that the organization is on track to achieve its objectives.

3
CONCLUSION

Conclusively, below are the relevant types of Accounting Information that are available to
Management of organisations in the decision making process,

 Cost Accounting:

Cost Accounting is a branch of accounting that deals with the identification, measurement,
analysis, and allocation of costs associated with the production of goods or services within
an organization. The primary objective of cost accounting is to provide management with
relevant information for decision-making, cost control, and performance evaluation. This
information is crucial for strategic planning, setting prices, budgeting, and improving
overall operational efficiency.

 Cost Measurement:

This entails Actual vs. Standard Costs.It is important to note that Cost Accountants often
compare Actual Costs incurred with Standard Costs which are predetermined costs based
on factors such as historical data, industry standards and efficiency expectations.

 Budgeting and Forecasting:

Budgeting and forecasting are two essential components of the financial planning process
within an organization. While they are related, they serve different purposes and are used
at different stages of planning.

Budgeting: Budgeting is the process of creating a detailed financial plan for a specific
period, typically a fiscal year. It involves estimating and allocating resources to various
activities and departments within an organization.

 Performance Management:

Performance measurement is the process of evaluating how well an organization, business

unit, department, or individual is achieving its objectives and goals. It involves the use of
various metrics and key performance indicators (KPIs) to assess and quantify performance
in different areas. Performance measurement is a crucial aspect of management and is used
to monitor progress, identify areas for improvement, and make informed decisions to
enhance overall effectiveness.

The key aspects of performance measurement include:

Establishing Objectives: Before performance can be measured, clear and specific

objectives must be established. These objectives should align with the organization's
overall mission and strategy.

4
Key Performance Indicators (KPIs):KPIs are specific metrics that are used to measure
performance in critical areas. They provide a quantifiable way to assess progress toward
organizational goals.

Quantifiable Metrics: Performance measurement involves the use of quantifiable metrics

and benchmarks to evaluate performance. These metrics can be financial (e.g., revenue
growth, profit margins), operational (e.g., production efficiency, customer satisfaction), or
strategic (e.g., market share, brand recognition).

Balanced Scorecard: The balanced scorecard is a popular framework for performance

measurement that incorporates financial and non-financial indicators. It typically includes
perspectives such as financial, customer, internal processes, and learning and growth.

Continuous Monitoring: Performance measurement is an ongoing process that involves

continuous monitoring of key indicators. Regular updates and reviews allow organizations
to respond to changes and make timely adjustments.

Benchmarking: Benchmarking involves comparing an organization's performance against

industry standards or the performance of similar organizations. It helps identify areas
where the organization is excelling or falling behind.

Strategic Alignment: Effective performance measurement aligns with the organization's

strategic goals. Metrics should be chosen based on their relevance to the overall strategy
and objectives.

Feedback and Improvement: Performance measurement provides valuable feedback to

management and employees. It helps identify strengths and weaknesses, allowing for
targeted efforts to improve performance.

Employee Performance: Performance measurement is not limited to organizational

performance; it is also applied at the individual level to assess employee performance.
Employee evaluations often include performance metrics related to job responsibilities and
goals.

Performance Appraisal: Performance measurement contributes to the performance

appraisal process. Evaluating employee performance against established metrics helps in
determining compensation, promotions, and development needs.

Transparency and Accountability: Performance measurement promotes transparency

within an organization by providing a clear picture of how resources are being utilized and
whether goals are being achieved. It also enhances accountability as individuals and
departments are held responsible for their performance.

5
Adaptability: Organizations use performance measurement to adapt to changing
circumstances. By identifying areas of underperformance or opportunities for
improvement, organizations can make strategic adjustments to stay competitive.

In conclusion, management accounting plays a vital role in processing information for

internal use within organizations. By providing various types of accounting information
and supporting key functions such as planning, decision-making, performance evaluation,
resource allocation, and control, management accountants help managers make informed
decisions that drive the success and sustainability of the business.