Question

Case Study 1

The evolution of management accounting coincides with the importance of financial information in organization’s decision making. The evolution of financial accounting can be traced to ancient times, where merchants began keeping an account of their cash and complex business transactions. The post-industrial revolution saw the emergence of cost accounting and highlighted the importance of standard practices in cost ascertainment and cost control. Standard costing, marginal costing, budgeting etc., evolved as part of the emphasis given to the cost and financial data in organization’s survival and growth. To a great extent, all these developments is the result of increased competitive pressure in the post-industrialization era.

Management accountant plays a strategic role in the corporate organization, and often use ‘past’ data to predict ‘future’. Management accountant, as the name shows, support the management in providing necessary data that are useful for their decision making. Firms became larger and more decentralized, and this increased the need for management accounting. Management accounting/costing was a necessary tool of the new industrial capitalism of the late nineteenth century, developing to ‘evaluate a company’s internal processes’ measuring efficiency in mainly single activity firms.

Although some of the management accounting’s key techniques and approaches were admittedly quite well established (i.e. old and taken from financial accounting and cost accounting), more tools and techniques emerged that highlight the significance of management accounting over the years.

Based on the above, answer the following questions

Question No. 1

What are the major differences, evidenced in the above case, between management accounting, cost accounting and financial accounting? Do you think that management accounting is essential for all types of organization? Briefly explain. [5 Marks]

Question No.2

1. It is mentioned in the case that management accounting is ‘future’ oriented. Do you agree to this statement? Justify your answer. [2 Marks]

2. A management accountant plays a major role in today’s organization. What are the major functions of a management accountant in an organization? Explain your answer by citing the information provided in the case. [3 Marks]

Answer 1

1. Financial accounting is used to record the transactions of the business. Cost accounting is used to set the standards for ascertaining cost so that cost control can be done. Management accounting is used to help the management to make decisions with the available financial & cost informations.
   • Financial Accounting records the transactions and tells about the financial position of the business. It emphasizes on the historical qualitative data and it is governed by GAAP.
   • Cost accounting helps in ascertainment of costs, allocating the same to the respective cost centres
   • Management accouting is strategic in nature and helps the management to take decisions
2. Management Accouting:
   1. Management accounting is future oriented because it enables the organization in decision making by preparing budgets and forecasts of the organization. It analyzes the available financial & cost information of an organization and helps in making better decisions for the future.
   2. Following are the main functions of a management accountant
      • Helping in forecasting the future
      • Facilitate Make or Buy decisions
      • Projecting future cash flows required to run the operations of the company
      • Analytics.: Analyzing all the possible data of the organization and helping the management to make informed decisions
      • Helps in capital budgeting decisions
      • Performance analysis: analysing how the company performs agains the budget
      • Protecting the assets of the company by doing good treasury management
      • Helping in cost reduction strategies for the organization in order to keep the cost under control.