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Cost Management

Cost Management



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Published by Sophia Ali

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Published by: Sophia Ali on May 21, 2009
Copyright:Attribution Non-commercial


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Accounting may be broadly classified into two categories – accounting which is meant toserve all parties external to the operating responsibility of the firms and the accounting which isdesigned to serve internal parties who take care of the operational needs of the firm. The firstcategory which is conventionally referred to as financial accounting, looks to the interest of thosewho have primarily a financial stake in the organizations affairs creditors, investors,employees etc. On the other hand the second category of accounting is primarily concerned with providing information relating to the conduct of the various aspects of a business like cost or  profit associated with some portions of business operations to the internal parties viz.,management. This category of accounting is called as Management accounting.In order to perform the primary task of decision making managers of business enterprisesneed information about the past, present and future in the functional areas of management suchas personnel, finance, marketing and production. Right decision making has to be based onquantitative and qualitative information. The management thus constantly needs accountinginformation to base its decisions upon. Thus management accounting provides the informationneeded by management personnel.
The Institute of Chartered Accountants of England has defined management accountingas: “Any form of accounting which enables a business to be conducted more efficiently can beregarded as Management Accounting”.As per American Accounting Association, “Management Accounting includes themethods and concepts necessary for effective planning, for choosing among alternative businessactions and for control through the evaluation and interpretation of performances.As per Institute of Chartered Accountants of India, “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting”.The Chartered Institute of Management Accounts (UK) defines management accountingas under:“Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for:1.Formulating strategy2.Planning and controlling activities3.Decision making4.Optimizing the use of resources5.Disclosures to shareholders and others external to the entity6.Disclosure to employees7.Safeguarding assets.”
Nature of management accounting:
Managerial personnel are entrusted with authority and responsibility of operating businessactivities. Management accounting provides information to the personnel are entrusted withauthority and responsibility of operating business activities. Management accounting providesinformation to the managerial personnel at three levels of management viz., top, middle andlower levels of management. It provides the management with the tools for an analysis of itsadministrative action that can lay suitable emphasis on the possible alternatives in terms of costs, prices and profits. The decisions made by management are based on quantitative information andcommon sense, foresight, knowledge and experience. Management accounting includes financialaccounting information and raw material from several other disciplines such as costing, statistics,mathematics, political science, sociology, psychology, management economics, law etc. With allthese data he can ensure optimum utilization of all the resources including employees bymaintaining sound morale of the employees, maximization of output and minimization of inputs,analyze the managerial questions in terms of costs, revenues, profits and growth. It is thus ahighly personalized service with the help of which management can explore and exploit businessopportunities and take sound and correct decisions. It is not a precise science as it uses its ownconventions rather than standardized principles. Therefore the inferences drawn from the facts provided, depends on the skill, judgment and common sense of different managementaccountants. Thus it is said that management accounting serves as a management informationsystem which enables the effective management of an enterprise.
Scope of management accounting:
Management accounting is a wide and diverse subject. As stated earlier it includes various branches of knowledge such as psychology, sociology, economics, laws, political science,mathematics, statistics, finanacial accounting, cost accounting etc. It is thus very difficult to
define its scope, as it is a dynamic and ever growing discipline of knowledge. The importanttechniques and systems used by management accounting are briefly stated below.a.Historical cost accounting: Maintenance of books of cost accounting enables to knowthe actual costs incurred by the firm. b.Standard costing: The standard costs laid down by experts are compared with thenatural costs in order to know the deviationsc.Marginal costing: The costs are divided into fixed and variable costs which help ismaking vital decisions.d.Decision accounting: Decisions are made after studying the impact of decisions interms of costs, resource, profits, growth etc.e.Budgetary control: It is a system of controlling the cost with the help of budgets.f.Control accounting: It includes the techniques such as standard costing, budgetarycontrol, control reports, internal check, internal audit and reports.g.Revaluation accounting: It is based on current costs to ensure that the investment isintact and profits from investment are kept in mind.h.Financial planning & policies: It consists of raising the long term and short termfinance and invest it on optimum basis and enhance the profitability of the firm.i.Capital expenditure: The large amounts of future capital expenditure and future profits are analysed to take important decisions. j.Break even analysis: This is an important technique which is used to analyse the behavior of costs viz., fixed and marginal costs, indicating the level of activity atwhich the total costs would equal the total revenue and also the margin of safety.k.Inter-period comparison: It is a technique of comparing the present performance withthe past performance.l.Techniques of forecasting: Some techniques like decision tree, probability andsensitivity analysis are used by management accountants for forecasting which formsa base for planning.m.Operations research: It consists of statistical and mathematical techniques that areincreasingly used in decision making process.n.Statistics: The statistical techniques used by management accountant are correlation,regression, probability, time series, standard deviation, linear programming, controlcharts etc.o.Other techniques: Other techniques employed are: Financial reporting, data processing, project management and appraisal, management audit, efficiency audit,cost audit, performance budgeting, tax planning, social accounting & audit, humanresource accounting, responsibility accounting and divisional performance.
Functions of management accounting:
1.Modification of data: The management accounting system modifies the data furnished byfinancial accounting to serve the managerial needs in such a way that the process of classification and combination which enables to retain similarities without eliminatingdissimilarities.2.Validating the data: To make reliable decisions valid data should be made available tomanagers. The effectiveness of managerial function depends too much upon the accuracyand adequacy of the data. It is the function of management accounting to present beforethe management the required data with some sort of reasonable accuracy and it need not be with perfect accuracy.

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