Dated: February 4th, 2012

Abdul Ghaffar Bhatti Managerial Accounting Assignment 1

CHARACTERISTICS OF USEFUL MANAGEMENT ACCOUNTING INFORMATION: There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria: Understandability This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities Relevance This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?) Consistency This implies consistent treatment of similar items and application of accounting policies Comparability This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability. Reliability This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor). Objectivity This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest.1

http://tutor2u.net/business/accounts/accounting_information_characteristics.htm

LIST OF MANAGERIAL ACCOUNTING INFORMATION NEEDED: Information consisting cost concepts and definitions. Information about the cost of buying and selling inventory as well as performing services. Information identifying an efficient amount of resources needed to operate the business. Information measuring how well costs are being controlled in each department. Information defining a profit plan acceptable to management. Information about why planned profits are not achieved. Information showing how effectively managers are achieving the goals of their segments of the business as they relate to hose of the firm as a whole. 8. Information about sales demand for the products and services at different selling prices. 9. Information concerning the relationship of sales demand and marketing effort. 10. Information regarding the total costs needed to operate specific segments of the business when all costs incurred by and for the segments are considered. 11. Information communicated among the various managers to coordinate efforts towards common goals. 12. Information providing the basis for a reliable income statement that can be used to predict the future financial performance and evaluate actual operating results. 13. Information about how costs change as the volume of business fluctuates and what effect this will have on profits. 14. Information with which managers can evaluate alternative courses of action. 15. Information concerning the evaluation of future capital expenditures and the assignment of scarce resources within the firm. 16. Information about the sources and uses of funds needed to support operations. 17. Information regarding the pricing of all interdepartmental transfers of products or services. 18. Information that will monitor the financial and operating progress of the company over time, including statistics measuring profitability, liquidity and solvency. 19. Information about payroll costs, indicating not only how much each employee was paid but also the persons work performance. 20. Information about current economic trends and how they affect the relationship of the firms capacity to do business and the demand for its products and services.2 1. 2. 3. 4. 5. 6. 7.

Helmkamp, John G., Managerial Accounting 2nd ed.

DIFFERCENCE BETWEEN FINANCIAL AND MANAGERIAL ACCOUNTING:

Financial Accounting
y

Managerial Accounting
y

Reports to those outside the organization owners, lenders, tax authorities and regulators. Emphasis is on summaries of financial consequences of past activities. Objectivity and verifiability of data are emphasized. Precision of information is required. Only summarized data for the entire organization is prepared.

Reports to those inside the organization for planning, directing and motivating, controlling and performance evaluation. Emphasis is on decisions affecting the future.

Relevance of items relating to decision making is emphasized. Timeliness of information is required. Detailed segment reports about departments, products, customers, and employees are prepared. Need not follow Generally Accepted Accounting Principles (GAAP). Not mandatory.3

y y

y y

Must follow Generally Accepted Accounting Principles (GAAP). Mandatory for external reports.

http://www.accountingformanagement.com/financial_accounting_vs_managerial_accounting.htm