Financial Decision Making 1 Introduction to management accounting

Introduction to management accounting

Financial Decision Making 1 Introduction to management accounting

What is management accounting?

• Providing information to managers

• Aim to support decision making

• Financial and non-financial information

• Reading: Drury chapter 1

Financial Decision Making 1 Introduction to management accounting

What is information?

• Questions:

• Is there a difference between data and information?

• What makes information useful (or not)?

Financial Decision Making 1 Introduction to management accounting

Data and information

• Data– Facts which have been recorded but not

converted into a form suitable for use

• Information– Data which has been processed in such a

way that it is meaningful and useful to the recipient

Financial Decision Making 1 Introduction to management accounting

Characteristics of good information

• Accurate• Complete• Cost-effective• Understandable• Relevant• Accessible• Timely• Easy to use

Financial Decision Making 1 Introduction to management accounting

Information for management decisions

• Questions:

• What do managers need information for?

• What decisions do they need to make?

• What kind of information do they need?

Financial Decision Making 1 Introduction to management accounting

The main functions of management

• Planning– The first part of the decision-making process

• Decision making

• Control– The final part of the decision making process

Financial Decision Making 1 Introduction to management accounting

Different levels of planning and decision making

• Strategic– Long–term objectives and plans

• Tactical– Short-term objectives and plans

• Operational– Day-to-day

Financial Decision Making 1 Introduction to management accounting

Decisions to be made

• Long-term– Build a new factory– Expand into new markets

• Short-term– Should we increase the size of our workforce

to improve sales?– Should we make this product on-site or buy it

in?

Financial Decision Making 1 Introduction to management accounting

What information do managers need?

• Key issue – what are the objectives of the business

• Historic information

• Forecasts

• Performance reports

• Analyses of different options

• Financial and non-financial information

Financial Decision Making 1 Introduction to management accounting

Management accounting

• Provision of information for use within the business

• Uses historic information but also looks forward• Format and content determined by the needs of

the business – not legal requirements• Aims to aid planning, decision making and

performance management• Differs in a number of ways from financial

accounting

Financial Decision Making 1 Introduction to management accounting

Development of management accounting

• Origins in the industrial revolution (19th century)• Largely about accounting for product costs• Little development until 1980s• Challenges to traditional approach such as:

– Changes in technology– Development of service sector– Criticism of narrow focus

• 1980s onwards: new management accounting approaches

• Development of ‘strategic management accounting’ • Recent years - emphasis on creating value through

better use of resources