Management Accounting

awaisaftab · 08-29-2009, 05:30 PM

In our country management accounting is considered as the part or cost accounting or we can say that the word management accounts is spoke as synonym to cost accounting. It is totally wrong Management Accounting is a totally different field. Although it has a deep relation with cost accounting but the cost data is used by the Management Accountants for the purpose of management accounting reports.

Official publications of CIMA-UK define Management Accounting in the following words

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 Resource (economics)resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology).

While CIMA defines Cost Accounting in the following words,

"The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes presentation of information derived therefrom for the purpose of managerial decisions.

Cost Accounting is mainly concerned with the costing and provision of more accurate cost data to the management. The main focus of cost accounting is costing, cost assignment, cost variance analysis, costing reports, budgeting, and designing of costing standards. It is mainly concerned with the planning and control of cost.

While management accounting is mainly concerned with the provision of help to the managers to asses them in the process of decision making and design business strategies.

Management accounting uses cost data for provision of information for strategic management decisions. For instance a firm wants to adopt cost leadership strategy then the historical cost data, desired cost of production and other relating data will be used by a Management Accounting to asses management and to provide help to draw a strategy to become Cost Leader of Market. On the basis of cost data capital budgeting, cost behaviour, profit analysis and investment decisions will be suggested by management accounting for the purpose to achieve strategic organizational goals.

It is very unfortunate situation that many qualified accountants use cost accouting and management accounting synonymously. In fact cost accounting and management accounting are two different fields of accountants.

kamranACA · 08-30-2009, 12:46 AM

Dear,

Can you please explain what does "cost accounting" entail in practical meanings; say, with respect to any of the following

-textile;
-power;
-sugar; or
-edible oil.

It's simply a question and no criticism is meant.

Regards,

Kamran.

awaisaftab · 08-31-2009, 01:37 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by kamranACA
 Dear,

Can you please explain what does "cost accounting" entail in practical meanings; say, with respect to any of the following

-textile;
-power;
-sugar; or
-edible oil.

It's simply a question and no criticism is meant.

Regards,

Kamran.
<hr height="1" noshade id="quote"></blockquote id="quote">

I am discussing here scope, definition and evolution of management accounting. Cost Accounting is not subject rather I want to show that cost accounting and management accounting are two different types of accounting. But unfortunately many of us are unable to realize this difference.

One fellow member of ICMAP Islamabad says only one sentence to describe the difference between cost accounting and management accounting. He says "cost accounting is subordinate to management accounting".

Another thing that is much teasing for me is miscoception that the cost accounting can only be used in manufacturing and industrial sector and it has hothing to do with service sector it is again fabulous. In Europe, America, UK and Canada cost accounting is used also widely used in service sectors such as banks, airlines, hotels, telcom industry, insurace companies etc. But unfortunately in Pakistan cost accountant are not appointed in these sectors. I think not a single bank of Pakistan has a cost and management accountant or even a cost accountant. In the changing global business environment and in the competitive world of business cost is the most important and very luckily it is manageable but revenues are never manageable.

There are many reasons of theses undesirable and fabulous things. The most important reason is that the professions of cost accounting and management accounting are under developed and no efforts has been made to realize the importance of these professions.

It is simple discussion and no criticism is meant

with warm regards,

Awais Aftab

kamranACA · 08-31-2009, 09:19 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by awaisaftab
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by kamranACA
 Dear,

Can you please explain what does "cost accounting" entail in practical meanings; say, with respect to any of the following

-textile;
-power;
-sugar; or
-edible oil.

It's simply a question and no criticism is meant.

Regards,

Kamran.
<hr height="1" noshade id="quote"></blockquote id="quote">

I am discussing here scope, definition and evolution of management accounting. Cost Accounting is not subject rather I want to show that cost accounting and management accounting are two different types of accounting. But unfortunately many of us are unable to realize this difference.

One fellow member of ICMAP Islamabad says only one sentence to describe the difference between cost accounting and management accounting. He says "cost accounting is subordinate to management accounting".

Another thing that is much teasing for me is miscoception that the cost accounting can only be used in manufacturing and industrial sector and it has hothing to do with service sector it is again fabulous. In Europe, America, UK and Canada cost accounting is used also widely used in service sectors such as banks, airlines, hotels, telcom industry, insurace companies etc. But unfortunately in Pakistan cost accountant are not appointed in these sectors. I think not a single bank of Pakistan has a cost and management accountant or even a cost accountant. In the changing global business environment and in the competitive world of business cost is the most important and very luckily it is manageable but revenues are never manageable.

There are many reasons of theses undesirable and fabulous things. The most important reason is that the professions of cost accounting and management accounting are under developed and no efforts has been made to realize the importance of these professions.

It is simple discussion and no criticism is meant

with warm regards,

Awais Aftab

<hr height="1" noshade id="quote"></blockquote id="quote">

I could not understand the relevance of "fabulous" here.

Can you explain, being in pursuance of your career as a cost and management accountant, what specific services you feel cost/management accountants can offer to banking sector in Pakistan?

This question is specific and I hope to have a specific reply.

Regards,

KAMRAN.

awaisaftab · 09-02-2009, 06:15 PM

Soon I will right a detailed topic on the role that a cost and mangaemnt accountant can play in bainking industry. I take it as a case study so I will require some time to right in detail after indepth anylysis.

Regards,

Awais Aftab

kamranACA · 09-02-2009, 06:33 PM

I hope it would be different than the role of a financial accountant. I look forward to your research findings.

Regards,

tariq aziz · 09-03-2009, 04:38 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by awaisaftab
 In our country management accounting is considered as the part or cost accounting or we can say that the word management accounts is spoke as synonym to cost accounting. It is totally wrong Management Accounting is a totally different field. Although it has a deep relation with cost accounting but the cost data is used by the Management Accountants for the purpose of management accounting reports.

Official publications of CIMA-UK define Management Accounting in the following words

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 Resource (economics)resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology).

While CIMA defines Cost Accounting in the following words,

"The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes presentation of information derived therefrom for the purpose of managerial decisions.

Cost Accounting is mainly concerned with the costing and provision of more accurate cost data to the management. The main focus of cost accounting is costing, cost assignment, cost variance analysis, costing reports, budgeting, and designing of costing standards. It is mainly concerned with the planning and control of cost.

While management accounting is mainly concerned with the provision of help to the managers to asses them in the process of decision making and design business strategies.

Management accounting uses cost data for provision of information for strategic management decisions. For instance a firm wants to adopt cost leadership strategy then the historical cost data, desired cost of production and other relating data will be used by a Management Accounting to asses management and to provide help to draw a strategy to become Cost Leader of Market. On the basis of cost data capital budgeting, cost behaviour, profit analysis and investment decisions will be suggested by management accounting for the purpose to achieve strategic organizational goals.

It is very unfortunate situation that many qualified accountants use cost accouting and management accounting synonymously. In fact cost accounting and management accounting are two different fields of accountants.

<hr height="1" noshade id="quote"></blockquote id="quote">

good mr.awais.. it really enhanced my knowledge....i am student of MBA.finance...we also study managerial accounting..

my question is that
Are we competitors to acma. icma degree holdes?

awaisaftab · 09-03-2009, 05:14 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by tariq aziz
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by awaisaftab
 In our country management accounting is considered as the part or cost accounting or we can say that the word management accounts is spoke as synonym to cost accounting. It is totally wrong Management Accounting is a totally different field. Although it has a deep relation with cost accounting but the cost data is used by the Management Accountants for the purpose of management accounting reports.

Official publications of CIMA-UK define Management Accounting in the following words

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 Resource (economics)resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology).

While CIMA defines Cost Accounting in the following words,

"The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes presentation of information derived therefrom for the purpose of managerial decisions.

Cost Accounting is mainly concerned with the costing and provision of more accurate cost data to the management. The main focus of cost accounting is costing, cost assignment, cost variance analysis, costing reports, budgeting, and designing of costing standards. It is mainly concerned with the planning and control of cost.

While management accounting is mainly concerned with the provision of help to the managers to asses them in the process of decision making and design business strategies.

Management accounting uses cost data for provision of information for strategic management decisions. For instance a firm wants to adopt cost leadership strategy then the historical cost data, desired cost of production and other relating data will be used by a Management Accounting to asses management and to provide help to draw a strategy to become Cost Leader of Market. On the basis of cost data capital budgeting, cost behaviour, profit analysis and investment decisions will be suggested by management accounting for the purpose to achieve strategic organizational goals.

It is very unfortunate situation that many qualified accountants use cost accouting and management accounting synonymously. In fact cost accounting and management accounting are two different fields of accountants.

<hr height="1" noshade id="quote"></blockquote id="quote">

good mr.awais.. it really enhanced my knowledge....i am student of MBA.finance...we also study managerial accounting..

my question is that
Are we competitors to acma. icma degree holdes?
<hr height="1" noshade id="quote"></blockquote id="quote">

Dear Tariq

Thanks for appreciation. If the students of MBA get guidance from my topic it is a mater of pleasure for me.

You are competitors of ACMA's. But ACMA's are not competitor of MBA's . They are competitors of CA's and ACCA's. But competitor donât means enemy as the behavior of some professional accountant shows.

Regards

Awais

shahid amin · 09-09-2009, 04:43 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by awaisaftab
 In our country management accounting is considered as the part or cost accounting or we can say that the word management accounts is spoke as synonym to cost accounting. It is totally wrong Management Accounting is a totally different field. Although it has a deep relation with cost accounting but the cost data is used by the Management Accountants for the purpose of management accounting reports.

Official publications of CIMA-UK define Management Accounting in the following words

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 Resource (economics)resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology).

While CIMA defines Cost Accounting in the following words,

"The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes presentation of information derived therefrom for the purpose of managerial decisions.

Cost Accounting is mainly concerned with the costing and provision of more accurate cost data to the management. The main focus of cost accounting is costing, cost assignment, cost variance analysis, costing reports, budgeting, and designing of costing standards. It is mainly concerned with the planning and control of cost.

While management accounting is mainly concerned with the provision of help to the managers to asses them in the process of decision making and design business strategies.

Management accounting uses cost data for provision of information for strategic management decisions. For instance a firm wants to adopt cost leadership strategy then the historical cost data, desired cost of production and other relating data will be used by a Management Accounting to asses management and to provide help to draw a strategy to become Cost Leader of Market. On the basis of cost data capital budgeting, cost behaviour, profit analysis and investment decisions will be suggested by management accounting for the purpose to achieve strategic organizational goals.

It is very unfortunate situation that many qualified accountants use cost accouting and management accounting synonymously. In fact cost accounting and management accounting are two different fields of accountants.

<hr height="1" noshade id="quote"></blockquote id="quote">

Dear sir that's really great, I also agree with you.

I think 1stly I reply this post but may be Moderator remove my post so I again thanks because it is very helpful for me. As you know I take a lot of interest in Management accounting and Cost accounting.

awaisaftab · 09-09-2009, 05:33 PM

You most welcome sir

awaisaftab · 09-17-2009, 01:17 PM

Mr. Kamran 

What is your view about the role of CMA's in banking sector ? Do you think that CMA's can play any role in the bainking sector ? Do the presence of a CMA will cause any value addition in a bank ? Please reply precisely.

kamranACA · 09-17-2009, 06:28 PM

Awais,

I am waiting your post on this topic. Let it be available then I will give you the facts on ground.

No body can say that professionals of whatever field have no worth. Here we have to see the specific areas where CMAs can serve better.

This is your topic so let us know your views.

Regards,

Kamran.

awaisaftab · 09-17-2009, 06:59 PM

I want to know about your view. Anyhow its OK.

Regards,

Awais Aftab

Astute Accountant · 09-18-2009, 04:20 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by kamranACA
 Can you explain, being in pursuance of your career as a cost and management accountant, what specific services you feel cost/management accountants can offer to banking sector in Pakistan?

This question is specific and I hope to have a specific reply.

Regards,

KAMRAN.

<hr height="1" noshade id="quote"></blockquote id="quote">

Historically, management accounting in banking institutions was introduced considerably later in comparison with companies in other sectors. There are a number of reasons for this limited development. This was due, on the one hand, to external causes. For example, it was not until the 80's that competitive conditions in the banking sector fostered the development of accounting management planning and control systems. On the other hand, there were also internal conditions that had to do with the nature of the banking business and the operations that these companies carry out, which differ significantly to those of other sectors. This hindered the transfer of models that had basically been developed for industrial companies to the financial sector. As regards internal factors, the accounting regulations set down by regulating bodies of the banking system have traditionally been the starting point from which banking institutions have drawn up their accounting information.

On an internal level, Waden-Berghe, Rouach and Naulleau and Carmona point out that the characteristic features of the products and the production process of banks hinder the application of management accounting techniques the intermediation function they carry out, the permanence on the balance sheet of the main sources of income and expenses, the problematic definition of outputs and input, given that there is no difference between the nature of the raw material obtained via financial markets or deposit taking and the final product (loans), the fixed cost and marginal revenue syndrome, the difficulty in allocating indirect costs to cost objects or the diffuse figure of the customer-supplier.

However, the deep transformation of the banking system, and, more specifically, deregulation, disintermediation and innovation processes, have ushered in changes to the competitive behavior and the information needs of banking institutions. We can therefore assume that the accounting systems of these companies have most probably also evolved and established new conceptual frameworks. As a consequence of growing competition in the banking sector and the reduction of financial margins, banking institutions have had to give increasingly greater importance to the planning and control of their non financial costs, which has opened up the debate around the adequacy of the costs systems currently in use in these companies.

The Production Process in Banking Institutions
The models that explain the productive process of banking institutions can be grouped into three groups partial decision models, portfolio theory and services production.

Partial Decision Models
Partial models focus either on the assets and investment decisions (loans versus the treasury) or on the composition of the liability structure (capital versus deposits), considering the other part of the balance sheet as an external or exogenous variable. In these models, the banking institution's balance sheet is viewed as the key element, because each of its components is modeled individually. When loans are regarded as outputs of the banking institution, it is assumed that, given a certain level of exogenously determined deposits, which are not subject to optimization, the company's management decision is focused on determining what proportion of deposited funds will be allocated to the provision of loans and what proportion will be kept in the treasury. This is due to the fact that the banking institution needs to maintain a certain level of liquid reserves in order to address possible withdrawals of deposits. Obviously, maintenance of this treasury will generate an opportunity cost, so banking institutions will have to minimize this opportunity cost by maintaining the treasury at a minimum level. However, if the treasury that is kept is insufficient, the company exposes itself to a high liquidity risk when deposits are regarded as outputs; the problem focuses on determining the optimum balance between deposits and equity. According to this approach, a situation of insolvency could be brought on not only by the mass withdrawal of customer deposits, but also if the value of assets drops below that of liabilities. This scenario is less and less likely the fewer the deposits. It can therefore be minimized by increasing the volume of equity. However, given that the opportunity cost of equity is greater than the financial cost generated by deposits, in order to maximize profitability the bank need to minimize the bank's own funds, which increases the possibility of an insolvency scenario and of meeting the ensuing costs associated with it.

Portfolio Theory Based Models
The previous models seek to address the structure of assets or liability management whilst considering the other part of the balance sheet as exogenous. A comprehensive theory of the productive process of banking institutions needs to simultaneously account for the structure of assets and liabilities. The efficient portfolios selection model for banking institutions put forward by Markowitz and developed by concomitantly looks at decisions concerning assets as well as liabilities and gives us a more comprehensive view of the interrelations between assets and liabilities. Having said this, it must be acknowledged that although portfolio theory overcomes the limitations of partial models by determining optimum treasury, loans and deposits levels together, it still has its drawbacks. The most relevant to this study has to do with the fact that both partial models and portfolio selection theory regard non-financial costs as irrelevant when it comes to estimating the output level and composition of banking institutions.

Models Based on the Production of Services and Real Resources
The provision of financial services entails transformation costs which are not contemplated in the abovementioned models. The services production model advocates that the production processes of banking institutions cannot be properly analyzed by simply looking at the management of its optimal assets and liabilities structure, but that we also need to take into account the fact that both financial intermediation and the provision of other banking services generate transformation costs, which entail the use of real resources both human and technological. The models developed by Pesek; Saving and Sealey and Lindley are approaches based on production and cost functions, and enable us to study the banking institution's behavior from the point of view of profit maximization. According to the above models, the activity of banking institutions consists of providing a range of different financial services (both intermediation and other kinds of services), the production of which can be expressed in accordance with a production function. The inputs of this production function are a combination of different types of factors consisting of real resources whereas the outputs are different possible combinations of assets, liabilities and services. Hence the production function, along with the balancing of the accounts between assets, liquidity and liabilities, interest rates that are externally set by the market and legally established coefficients, make up the restrictions under which banking institutions must operate and try to maximize their profits. These profits will ultimately depend on the difference between revenue generated from the sale of their services on the one hand and the total costs of their inputs both financial and non financial on the other.

The Cost Structure of Banking Institutions
The characteristic features of the banking business can be summed up as follows
â¢ High fixed costs resources are usually allocated to covering "peaks" of activity. However, the cost of these resources does not vary with the volume of transactions, because they have a large fixed component.
â¢ Predictability of the activity although the demand for services tends to be highly variable, it is relatively easy to predict, because it follows a cyclic behavior pattern, which offers the possibility of turning part of fixed costs into variable ones by means of outsourcing.
â¢ Mass services production activities a comparison can be drawn between the high volumes of repetitive operations in banking institutions and traditional industrial mass commodity manufacturing, which facilitates the use of methodologies that originated in industry and the setting up of a standard costing system.
â¢ Joint production and an undefined product the banking product is physically indefinable which makes it more complex to identify. For example, when a banking institution issues a loan to a customer, the latter must open up a current account to meet the loan payments. If on top of this the customer orders a cheque book on his current account and takes out a life insurance policy, we have four interrelated products.
â¢ Low cost traceability given that we are dealing with joint production activities with elevated fixed and indirect costs there are many resources that are shared by activities, customers, products and centres of responsibility.
As far as we see it, the most significant factors that influence the applicability of different cost systems in banking institutions are on the one hand, the significant weight of indirect costs in relation to cost objects, which makes it difficult to trace them in relation to cost objects. Similarly, given that a large part of the operations carried out by banking institutions are of a repetitive nature and susceptible to standardization, this makes it feasible to consider calculating the costs of these operations and allocating them to cost objects, and to introduce the use of standard costs as a planning and control instrument.

Costs Classification in Banking Institutions
â¢ Determining which costs will be incorporated in the accounting analysis.
â¢ Proceeding to locate costs in responsibility centres.
â¢ Proceeding to allocate the costs of general services centres into operational and profit centres.
â¢ Calculating the cost of service provision operations in the operational service centres, which
can then be allocated to the cost objects that consume them,
â¢ calculating the repercussions that the costs of operations have on cost objects. The costs that are allocated to each cost object are equal to the number of operations carried out multiplied by the unit cost of each type of operation.

The ABC System in Banking Companies
During the nineties traditional costing systems came under minute scrutiny loss of relevance, lack of reliability, inability to provide valid information for decision making as well as obsolete methods or systems that were un-adapted to the realities of companies are some of the criticisms that were directed at traditional cost accounting systems.

The ABC system enables us to draw up a model of the following chain of sequences
â¢ customers consume products and services via a distribution channel (branches, internet, telephone...),
â¢ the product-service/ distribution channel combination involves the performance of a series of activities,
â¢ these activities use up the company's resources".

Kimball and Hankes suggest that the ABC system enables banks to reduce the number of costs that are regarded as indirect costs in relation to cost objects. In this way, a larger proportion of costs that were initially regarded as indirect costs can be directly allocated to products, customers or centres of responsibility that are directly responsible for their existence due to activities' consumption of resources.

Another cost object that management accounting focuses its attention on are products. Product portfolio management involves estimating the profit and loss of different products and services with a certain degree of reliability. In order to do so, the savings banks have two alternative options; in the first place they can deduct only the direct costs of products from the financial margin generated by these products. The second alternative, apart from taking into account direct costs also enables them to allocate to products a part of the indirect transformation costs that contribute to their maintenance. The transformation costs of savings banks are easily traceable to the branches, which explain why the full costs system is so widespread at this level. In contrast, the possibility of establishing a correlation between these costs and products is much more limited. Hence, the direct costing system is more likely to predominate at the level of products.

Though it got a bit detailed but I had to throw light on as much role of M.Accounting as was possible...

Enough??? )

Odyssee · 09-18-2009, 08:24 PM

I would like to thank Astute Accountant for quoting from a study conducted by Jordi Carenys and Xavier Sales, "Costing the Banking Services A Management Accounting Approach" which was published in the Journal of Money, Investment and Banking. The complete study can be viewed on the following link
http//www.eurojournals.com/jmib_6_04.pdf