Managerial accounting is concerned with providing information to managers-that is, people

inside an organization who direct and control its operation. In contrast, financial accounting
is concerned with providing information to stockholders, creditors, and others who are
outside an organization.

Managerial accounting provides the essential data with which the organizations are actually
run. Managerial accounting is also termed as management accounting or cost accounting.
Financial accounting provides the scorecard by which a company's overall past performance
is judged by outsiders. Managerial accountants prepare a variety of reports. Some reports
focus on how well managers or business units have performed-comparing actual results to
plans and to benchmarks. Some reports provide timely, frequent updates on key indicators
such as orders received, order backlog, capacity utilization, and sales. Other analytical
reports are prepared as needed to investigate specific problems such as a decline in the
profitability of a product line. And yet other reports analyze a developing business situation
or opportunity. In contrast, financial accounting is oriented toward producing a limited set of
specific prescribed annual and quarterly financial statements in accordance with Generally
Accepted Accounting Principles (GAAP).

Financial accounting vs. Managerial accounting

Managerial accounting differs from financial accounting in a number of ways that are briefly
discussed below.

Financial Accounting Managerial Accounting

 Reports to those outside the organization  Reports to those inside the

owners, lenders, tax authorities and organization for planning, directing
regulators. and motivating, controlling and
performance evaluation.

 Emphasis is on summaries of  Emphasis is on decisions affecting

financial consequences of past activities. the future.

 Objectivity and verifiability of data are  Relevance of items relating to

emphasized. decision making is emphasized.

 Precision of information is required.  Timeliness of information is

required.

 Only summarized data for the entire  Detailed segment reports about
organization is prepared. departments, products, customers,
and employees are prepared.

 Must follow generally accepted accounting  Need not follow generally accepted
principles (GAAP). accounting principles (GAAP).

 Mandatory for external reports.  Not mandatory.

Managerial accounting is managers oriented therefore its study must be preceded by some
understanding of what managers do, the information managers need, and the general
business environment. Accordingly we shall briefly examine these subjects.

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. Every where 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 companies 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 suggest 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 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

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. Johnson and Kaplan state that "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 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. These new practices are discussed in other chapters.

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
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.

The Certified Management Accountant (CMA):

A management accountant who possesses the necessary qualification and who possesses a
rigorous professional exam earns the right to be known as a certified Management
Accountant (CMA). In addition to the prestige that accompanies a professional
designation, CMAs are often given greater responsibilities and higher compensation than
those who do not have such a designation. Information about becoming a CMA and CMA
program can be accessed on the Institute of Management Accountants

To become a Certified Management Accountant, the following four steps must be

completed:

1. File an application for admission and register for the CMA examination
2. Pass all four parts of the CMA examination within a three year period
3. Satisfy the experience requirement of two continuous years of professional
experience in management and/or financial accounting prior to or within seven years
of passing the CMA examination.
4. Comply with the standards of ethical conduct for practitioners of management
accounting and financial management.