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 resources. Management accounting also comprises the preparation of financial reports for
non management groups such as shareholders, creditors, regulatory agencies and tax authorities.

The core activities of management accounting include;

a) Participation in the planning process at both strategic and operational levels. This
involves the establishment of policies and the formulation of plans and budgets which will
subsequently be expressed in the financial terms.

b) The initiation of and the provision of guidance for management decisions. This involves the
generation, analysis, presentation and interpretation of appropriate information.
Contributing to the monitoring and control performance through the provision of reports on
organisational performance, including comparisons of actual with planned or budgeted
performance, and their analysis and interpretation.

c) Financial accounting is the periodic reporting of accounting as required by statue for

shareholders, government agencies and other parties external to the business. As such, various
conventions and rules are necessary to ensure consistency between the sets of accounts.

The following table summarises the main differences between management accounting and
financial accounting.
Management accounting Financial accounting
A financial accounting system produces
A management accounting system produces
information that is used by parties external
information that is used within an
to the organization, such as shareholders,
organization, by managers and employees
bank and creditors.
Financial accounting provides a record of the
Management accounting helps management to
performance of an organization over a defined
record, plan and control activities and aids
period and the state of affairs at the end of
the decision making process.
that period.
There are no legal requirements for an Limited companies must, by law prepare
organization to use management accounting. financial accounts.
Management accounting can focus on specific Financial accounting concentrates on the
areas of an organisation’s activities. organization as a whole, aggregating revenues
Information may aid a decision making rather and costs from different operation. Financial
than be an end product of a decision. accounts are an end themselves.
Management accounting information may be Most financial accounting information is of a
monetary or alternatively non monetary. monetary nature.
Management accounting provides both an
Financial accounting presents an essentially
historical record of the immediate past and a
historical picture of past operation.
future planning tool
Financial statements are required to be
No time span for producing financial statements
produced for the period of 12 months.
Financial accounting must operate within a
No strict rules govern the way in which
framework determined by law
management accounting operates. The management
and IASs. In principle the financial accounts
accounts and information are prepared in a
of different organizations can be easily
format that is of use to managers
compared.
Management accounting has no specified format. Financial accounts are supposed to be produced
There are no specific statements which should in accordance with a specified format by IAS
be produced. or law.
Feature of useful management accounting
 It should be relevant for its purpose.
 It should be complete for its purpose.
 It should be sufficiently accurate for its purpose.
 It should be clear to the manager using it.
 The manager using it should have confidence in it.
 It should be communicated to the appropriate manager.
 Its volume should be manageable.
 It should be timely.
 It should be communicated through appropriate channel of communication.
 It should be provided at a cost which is less than the value of the benefits it
provides.

The Role of Management Accountant

Assistance in planning
The management accountant assists planning by providing information. This information may be
about pricing, capital expenditure projects, product costs or competition. In the short-term
planning process of budgeting, the management accountant provides information on past costs and
revenues which may be used as guidance. The management accountant is also involved in the
budgeting process itself.

Assistance in controlling
The management accountant supplies performance reports which compare actual performance with
the planned performance and which therefore highlight those activities which are not conforming
to plan.

Assistance in organising
By ensuring that the accounting system is tailored to the organisational structure, the
management accountant reinforces the objectives of the organisational framework.

Assistance in motivating
Budgets prepared by the prepared by the management accountant serve to motivate managers and
subordinates to attempt to achieve the organisation’s objectives. Formalized targets are more
likely to motivate than vague comments.
Performance reports produced by the management accountant for the control process also motivate
by communicating performance information in relation to the targets which have been set.

Assistance in decision making

The management accountant is a vital cog in the organisation’s decision making process. He or
she collects and analyses data, and presents information to managers to help in the decision
making.