MANAGEMENT ACCOUNTING

UNIT 1: INTERODUCTION

MEANING – NATURE AND SCOPE OF MANAGEMENT ACCOUNTING – DIFFERENCE

BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING –
MANAGEMENT ACCOUNTING AND COST ACCOUNTING – ROLE OF
MANAMGEMENT ACCOUNTANT

MEANING:

The term mana genet accounting is of a recent origin. This term was first used
in 1950 by a team of accountants visiting USA under the auspices of Anglo - American
council on productivity.
Management accounting is comprised of two words ‘management’ and
‘accounting’. It is the study of managerial aspects of accounting. His emphasis of
management accounting in such a way that it is helpful to the management
information of policy, control of execution and appreciation of effectiveness. It is that
system of accounting which helps management in carrying out its function more
effectively.
DEFINATION OF MANAGEMENT ACCOUNTING:

The following are the definitions given by the some of the accounting professionals
and accounting bodies:-

1) Anglo – American council on productivity:

“Management accounting is the presentation of accounting information in the
creation of policy and the day to day operation of an undertaking.”
2) Robert n. Anthony:
“Management accounting is concerned with accounting information that is
useful to management.”
The financial information should be collected, complied and presented to management
in such a way that it is helpful in solving various problems.
3) T. g. rose:
“Management accounting is the adaptation and analysis of accounting
information and its diagnosis and explanations in such a way as to assist
management.”
4) The 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.”
5) The American accounting association:
“Management accounting includes the method and concepts necessary for
effective planning, for choosing among alternative business action and for control
through the evaluation and interpretation of performance.”
6) The international federation of accountants:
They have issued a very comprehensive definition of management accounting in
1987. In their words, management accounting is the process of identification &
measurement, accumulation, analysation and preparation & interpretation.
From the various definitions discussed above the management accounting is
nothing but the financial data is recorded, analysed and presented to the management
in such a way that it is useful and helpful in planning and running business operations
in a systematic way.

 NATURE OF MANAGEMENT ACCOUNTING:

1) Providing accounting information:

Management accounting is based on accounting information. The primary
function of accounting department is to collect and classify the data to the
management for taking policy decision. Management accounting is a service function
and it provides necessary information to different levels of management.
2) Causes and effect analysis:
Management accounting is a step further to financial accounting. As financial
accounting prepares the profit and loss account and finds the ultimate result i.e., profit
or loss. The relationship of ‘cause and effect’ is discussed in management accounting.
If there is a loss, the reason for the loss is probed. If there is a profit, the factors
directly influencing the profitability are also studied.
3) Use of special techniques and concepts:
The special techniques and concepts are used by management accounting to
make accounting data more useful. The special techniques are like financial planning
& analysis, budgetary control, control accounting, marginal costing, project appraisal,
standard costing etc.
4) Taking important decision:
Management accounting plays a major role in making various important
decisions. The implications of various alternative decisions are also taken into account
while taking important decisions.
5) Achieving of objectives:
The accounting information is used in such a way that it helps in achieving
those organisational objectives. The performance of the various departments is
acquired by comparing the actual recorded performance and targeted figures of the
management.
6) No fixed norms followed:
Management accounting does not follow any specific rules compared with the
financial management. Though the tools of management accounting are same but their
use differs from concern to concern. So every concern has its own rules and rules of
analysing the data.
7) Increase in efficiency:
The accounting information is used to increase efficiency of the concern. The
performance appraisal will enable the management to pin point efficiency and
inefficiency spots. An effort made to take corrective measures so that efficiency is
improved.
8) Supplies information and not decision:
The information is supplied to the management by management accounting and
it also classifies & guides the information in a manner in which the management
requires.
9) Concerned with forecasting:
Management accounting is concerned with future planning and forecasting the
historical information. It supplies information with the object to guide management
for taking future decisions.

 SCOPE OF MANAGEMENT ACCOUNTING:

The main aim of management accounting is to help management in its function

of planning, directing and controlling. It is new realistic approach to accounting which
helps in future course of action. The following facts of management accounting are of a
great significance and form the scope:-

1) Financial accounting:
Financial accounting deals with the recorded historical data which is useful for
planning the future course of action which should be based on past and present data.
The control aspects and performance appraisal is also based on recorded facts and
figures of financial data. So management accounting is closely related to financial
accounting.
2) Cost accounting:
The cost of manufacturing products or cost providing services is determined by
the various techniques provided by cost accounting. Cost accounting is also helpful in
economic & non economic fields of production and the efficiency of the different
departments. So cost accounting is an essential part of management accounting.
3) Financial management:
Financial management is concerned with the planning and controlling of the
financial resources of the firm. Its main aim is to raise the funds and their utilisation in
such a way that earnings are maximised. Although financial management has emerged
as a separate subject, management accounting includes and extends to its operation.
4) Budgeting and forecasting:
Budgeting means expressing the plans, policies and goals of the enterprise
for a definite period in future. The comparison of actual performance with budgeted
figures will give an idea to the management about the performance of different
departments. Forecasting is a prediction of what will happen as a result of a given set
of circumstances. Forecasting is a judgement whereas budgeting is an organisational
object
5) Inventory control:
Inventory is used to denote stock of raw materials, goods in the process of
manufacture and finished products. Inventory control is significant as it involves large
sums. The management should determine different levels of stocks, i.e., minimum
level, maximum level, re- ordering level for inventory control. The control of inventory
will help in controlling costs of products.
6) Reporting to management:
Management accounting send interim reports to the management and these
reports may be monthly, quarterly and half- yearly. The reports are presented in the
form of graphs, diagrams, index numbers etc., and may covers profit and loss
statement, cash & fund flow statement, stock report, etc. These reports are helpful in
giving a constant review of the working business.
7) Interpretation of date:
Management accounting interprets various financial statements to
management in a simple language which gives an idea about the financial and earning
position. Interpretation is important as compiling the financial statement as improper
interpret may lead to wrong conclusion.
8) Control procedures and methods:
Control procedures and methods are needed to use various factors of
production in a most economic way. The studies about cost, relationship of cost and
profits are useful for using economic resources efficiently and economically.
9) Internal audit:
The performance of every department is judged through periodic internal
auditing. The actual performance of every department and individual is compared
with the pre-determined standards. Internal audit helps management in fixing
responsibility of different individuals.
10) Tax accounting:
Tax system, tax planning is an important part of management accounting.
Income statements are prepared and tax liabilities are calculated. Various tax returns
are to be field with different departments and tax payments are to be made in time by
the management accounting.
11) Office services:
Management accounting may be required to control an office. He will be
reporting about the utility of different office machines and deals with data processing,
filing, copying, duplicating, communicating, etc.

 RELATIONSHIP OF MANAGEMENT ACCOUNTING WITH FINANCIAL

ACCOUNTING:

The system of accounting information in business enterprises has two branches

which are financial management and management accounting. Financial management
is concerned with day to day recording of transactions of the business. These are
classified according to their nature and are concern to find out profit & loss for a
particular period and financial position. Management accounting uses financial
accounts in planning and forecasting various policies in a management. Both financial
and management accounting are complementary and are necessary to running the
concern efficiently. The main points of distinctions between financial accounting and
management accounting are as follows:
1) Object: Financial accounting records various transactions with the aim of
maintaining accounts and to know the financial position and to find out profit &
loss at the end of financial year. Management accounting is essential to help
management in formulating policies and plans.
2) Nature: Financial accounting is mainly concerned with historical data & actual
figures and which records only those transactions which are already taken place.
 Management accounting deals with projected or estimated figures and uses
historical data only for taking future decisions.

3) Subject –matter: Financial accounting is concerned with assessing the result of the
whole business to judge the overall performance while management accounting
deals separately with different units, department and cost centres to evaluate their
performance.
4) Compulsion: The preparation of financial accounting is compulsory in certain
undertakings while these are a necessity in others under following certain laws.
Management accounting is not compulsory and is helpful only to the management
in administration of the business.
5) PRECISION: In management accounting considers only approximate figures than
the actual figures. Where as in financial accounting only actual figures are
considered and there is no room for approximate figures. The transactions are
recorded only when they have taken place so exact figures are used.
6) REPOTING: Financial accounting are prepared to find out the profitability and the
financial position of the concern which is useful for the outsiders like bankers,
investors, shareholders, government agencies etc., Management accounting are
prepared for the benefits of different levels of management and meant for the
internal use only. Financial reports are prepared for a specific period and on a
particular date. But Management accounting does not have bindings of such.
7) DESCRIPTION: Financial accounting records only those transactions which are
measured in monetary terms. Anything which cannot be recorded in figures is
outside the scope of financial accounting. But Management accounting records both
the monetary and non- monetary events.
8) QUICKNESS: Management accounting reporting is very quick to feed the
management at regular intervals. On the other hand, reporting of financial
management is slow and time consuming. The accounts are prepared only at the
end of financial year.
9) ACCOUNTING PRINCIPLES: Financial accounting is governed by the generally
accepted principles and conventions. But no set principles are followed in
management accounting and used for taking policy decisions. So, form and method
of presenting figures differs from concern to concern.
10)PERIOD: Financial accounts are prepared for a particular period i.e. at the end of
the financial year. Management accounting supplies information from time to time
during the whole year.
11)PUBLICATION: Financial accounts like profit and loss account and balance sheet
are published for the benefits of the public. And every registered company is
supposed to supply a copy of profit & loss account and balance sheet to the
Registrar of companies at the end of the financial year as per the companies’ law.
Management accounts are prepared for the benefit of the management only and
these are not published.
12) AUDIT: Under company law, auditing of financial accounts is compulsory.
Management accounts are not audited as they are not based on actual figures and
only projected data are used. Both financial and management accounting are
complementary and are necessary in running the concern effectively.

 RELATION BETWEEN COST AND MANAGEMENT ACCOUNTING:

Cost accounting performs evaluation and management decision making apart

from ascertainment of cost. Most of the cost accounting concepts are used by
management accounting. Management accounting connotes a much wider field than
cost accounting. In the absence of a well established costing system the cost data will
not be available and management accounting system cannot function effectively. The
following are the main points to distinction between cost and management
accounting:

1) Object: The recording of cost of producing a product or providing the services is

the main object of cost accounting. The purpose of management accounting is to
provide information to the management for planning and co-ordinating the
activities of the business.
2) Scope: The scope of management accounting is very wid. It includes financial
accounting, cost accounting, budgeting, tax planning, reporting to management and
interpretation of financial data. On the other hand, cost accounting deals primarily
with cost ascertainment.
3) Nature: Management accounting is generally concerned with the projection of
figures for future. The policies and plans are prepared for providing future
guidelines. Cost accounting uses both past and present figures.
4) Date used: In cost accounting only those transactions are taken which can be
expresses in figure. Only quantitative aspects are recorded in cost accounting.
Management accounting uses both quantitative and qualitative information.
5) Development: The development of cost accounting is related to industrial
revolution. Financial accounting could not satisfy information needs of
management. Cost accounting was thus evolved as a supplementary accounting
method. Management accounting has developed only in the last thirty years.
Management accounting and cost accounting are both complementary subject.
6) Principle followed: Certain principle and procedures are followed for recording
costs of different products. No specific rules and procedures are followed in
reporting management accounting.

Prepared by Karthik kumar addenki, student of kakatiya university -

9014344816