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Chapter 1 Management Accounting And the Business Organization. Objective 1 Describe the major users of accounting information. Purposes of Accounting. Accounting was considered a process of recording, classifying, and summarizing business transactions.

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Purposes of Accounting

Accounting was considered a process of recording,

classifying, and summarizing business transactions.

The function of accounting information as an aid to managers in planning and control was not widely recognized until 1940s.

In 1966 , the American Accounting Association (AAA)

Published an important theoretical work ,

A Statement of Basic Accounting Theory (ASOBAT ),

that asserts that:

the objectives of accounting are to provide information for the following purposes
The objectives of accounting are to provide information for the following purposes:
  • To make decisions concerning the use of limited resources, including the identification of crucial decision areas , and determination of objectives and goals
  • To effectively direct and control an organization's human and material resources .
  • To maintain and report on the custodianship of resources , and
  • To facilitate social functions and controls .

The traditional record–keeping function of accounting has been transformed into providing information for decision making.

users of accounting information
Users of Accounting Information

In general, users of accounting information

fall into two categories:

External parties

such as investors,

government authorities,

who use the information

for making decisions about

the company.

Internal managers

who use the information

for planning, controlling

operations and making



Financial Accounting

is the field of accounting that develops

information for external decision makers

such as stockholders, suppliers, banks,

and government regulatory agencies.

Management Accounting

is the field of accounting that develops

information to managers at various levels

of organization, who use this information

for planning, controlling operations and

decision making.


The major distinctions between management

accounting and financial accounting are:


Objective 3Name the types of questions an accounting system helps to answer . ( types of acc. information


The Need for Accounting systems

Accounting system

A formal mechanism for gathering ,

organizing and communicating information

about an organization's activities .

A good accounting system helps an organization

achieve its goals and objectives by helping

to answer three types of questions :

scorekeeping am i doing well or poorly
Scorekeeping: Am I doing well or poorly?
  • Scorekeeping is the accumulation and classification of data .
  • This aspect of accounting enables both internal and external parties to evaluate organizational performance.

factory servicedepartment costs to

production departments


Dailyrecording of material purchase vouchers

Posting daily cash collections to

customer's accounts

Allocating factory service department costs to production departments

Recording overtime hours of the Product finishing department.

Recording overtime hours of the

Product finishing department.

attention directing which problems should i look into
Attention directing: Which problems should I Look into?

Attention directing means reporting and interpreting information that helps managers to focus on operating problem, imperfections, inefficiencies and opportunities.

This aspect of accounting helps managers to concentrate on important areas of operations promptly enough for effective action.


Preparing a report of overtime labor costs by production departments.

Interpreting increases in nursing costs per patient-day in a hospital

Analyzing deviations from the budget of the factory maintenance department

Compiling data for a report showing the ratio of advertising expenses to sales for each branch store .

Investigating reasons for increased returns and allowances for purchases

problem solving of the several ways of doing a job which is the best
Problem solving: Of the several ways of doing a job, which is the best?

The problem solving aspect of accounting quantifies the likely results of possible courses of action and often recommends the best course to follow.

Problem solving is commonly associated with nonrecurring, nonroutine decisions, situations that require special accounting reports.


Analyzing the costs of acquiring

and using each of two alternate types

of equipment.

Estimating the costs of moving corporate

head-quarters to another city.

Assisting in a study to determine

whether to buy or make certain parts

for manufacturing products

  • The scorekeeping and attention- directive uses of information that closely relate the same information may serve as a scorekeeping function for a manage and an attention-directing function for the manager's superior. (e.g. performance reports)
  • Sometimes all three facets of accounting overlap, making it difficult to classify a particular accounting task as a scorekeeping, attention directing, a problem-solving task.

Nevertheless, attempts to make these distinctions provide insight into the objectives and tasks of both accountants and managers

internal versus external accounting systems
Internal versus External Accounting systems
  • Using one accounting system for both financial and management purposes sometimes creates problems.
  • Annual financial statements must adhere to a set of standards known as GAAP. Internal accounting reports need not be restricted by GAAP. For instance, GAAP requires accounting for assets according to historical cost. For internal purposes, an organization can account for its assets (economic resources) on the basis of their current values.
  • External forces (for example tax authorities) often limit management choices of accounting methods for external reports.
Many organizations develop systems primarily to satisfy legal requirements imposed by external parties. These systems often neglect the needs of internal users.
  • Organizations can create whatever kind of internal accounting system they want-provided they are willing to pay the cost of developing and operating the system.
Objective 4Explain the role of management

accounting in planning and control

the management process and accounting
The Management process and accounting

The management process

is a series of activities in a cycle of planning and control. Decision making is the core of the management process.






: is the purposeful choice from among a set of alternative courses of action designed to achieve some objectives. Decisions within an organization are often divided into two types (1) planning decisions and (2) control decisions.

Decision making

:refers to setting objectives and outlining how they will be attained. Thus planning provides the answers to two questions:

  • What is desired?
  • When and how is it to be accomplished?



Accounting formalizes plans by expressing them as budgets. Budget is a quantitative expression of a plan of action ; it is also an aid to coordinating and implementing the plan.

: refers to implementing plans and using feedback to attain objectives. Feedback is crucial to the cycle of planning and control. Planning determines action, action generates feedback, and feedback influences further planning. Timely, systematic reports provided by the internal accounting system are the main sources of useful feedback.


Accounting formalizes control as performance reports, which provide feedback by comparing actual results with plans and by highlighting variances, which are deviations from plans.

The accounting system records, measures, and classifies actions in order to produce performance reports. Performance reports are used to judge decisions and the productivity of organizational units and managers.

Refer to Exhibits (1.4) and (1.5) for illustration of budgets and performance reports.


Management by exception

Performance reports stimulate investigation of exception- items for which actual amounts differ significantly from budgeted amounts. Operations are then brought into conformity with the plans, or the plans are revised this is often called management by exception.

Management by exception means concentrating on areas that deviate from the plan and ignoring areas that presumed to be running smoothly. Thus the management-by- exception approach frees managers from needless concern with those phases of operations that are adhering to plans.

Notice that although budgets aid planning and performance reports aid control, it is not accountants but other managers and their subordinates who actually plan and control operations. Accounting assists the managerial planning and control function by providing prompt measurements of actions and by systematically pinpointing trouble spots.