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Management Accounting

Unit 1

Unit 1

Introduction to Management Accounting

Structure:
1.1 Introduction
Objectives
1.2 Meaning and Definition of Management Accounting
1.3 Features and Objectives of Management Accounting
Features
Objectives of management accounting
1.4 Nature and Scope of Management Accounting
1.5 Importance and Need for Management Accounting
Importance
Need for management accounting
1.6 Functions of Management Accounting
1.7 Differences between Financial Accounting, Cost Accounting and
Management Accounting and Similarities
1.8 Summary
1.9 Glossary
1.10 Terminal Questions
1.11 Answers

1.1 Introduction
The inadequacies or limitations of financial accounting and cost accounting
have paved the way for the evolution of management accounting.
Management accounting is the presentation of data needed by the
management, at the required time, in the most suitable format.
In this unit, you will be introduced to management accounting, which can be
defined as the art or technique of analysis, interpretation and presentation of
facts, results and information revealed by financial accounting, cost
accounting and other books and records maintained by the business for the
benefit of people who are in charge of managing the business efficiently.
Let us first understand management accounting by explaining the features
and scope or various areas covered. You will also learn why it is important
for an organisation to have a clear focus on its various uses.

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We will also learn the functions of management accounting, and how it


helps the management to effectively discharge its managerial functions.
Finally, we will differentiate between financial accounting, cost accounting
and management accounting to know the importance from the point of view
of management and its nature of functioning.
Objectives:
After studying this unit, you should be able to:
describe the meaning and features of management accounting
explain the scope of management accounting
recall the importance and functions of management accounting
distinguish between financial accounting, cost accounting
management accounting

and

1.2 Meaning and Definition of Management Accounting


In the previous section, we were introduced to management and financial
accounting. In this section, we will study about the meaning and definition of
management accounting.
Management accounting is the accounting that provides necessary
information to the management for discharging functions such as planning,
organising, directing and controlling in an efficient manner. It is concerned
with the interpretation of accounting information to guide the management
for future planning, decision making, controlling, etc. It mainly deals with
providing information and reports relating to the conduct of the various
aspects of a business.
Management accounting is a blend of financial accounting, cost accounting
and financial management to serve as a good guide to management in
planning, coordinating, executing, controlling and motivating. It is a branch
of accounting that deals with providing information to managers to enable
them to decide about the best utilisation of resources made available to the
management.
Management accounting is a science in which accounting information is
collected and analysed. This information is then provided to management
for creation of policies and decision making. It is not just concerned with the
post-mortem analysis of the historical or past results. On the other hand, it
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mainly deals with forecasts or future estimates. It helps management plan


for the future in the light of past experiences.
Management accounting is the art or technique of analysis, interpretation
and presentation of facts, results and information revealed by financial
accounting, cost accounting and other books and records maintained by the
business for the benefit of people who are in charge of managing the
business more efficiently.
Management accounting or managerial accounting is concerned with the
provisions and use of accounting information to managers within
organisations, to provide them with the basis to make informed business
decisions that will allow them to be better equipped in their management
and control functions.
In contrast to financial accountancy information, management accounting
information is:
Primarily forward-looking, instead of historical.
Model-based with a degree of abstraction to support decision-making
generically, instead of case-based.
Designed and intended for use by managers within the organisation,
instead of being intended for use by shareholders, creditors and public
regulators.
Usually confidential and used by management, instead of publicly
reported.
Computed by reference for managers, often using management
information systems, instead of by reference to general financial
accounting standards.
According to the Chartered Institute of Management Accountants (CIMA),
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" (CIMA Official Terminology).

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The Institute of Management Accountants (IMA) recently updated its


definition as follows: "Management accounting is a profession that involves
partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial
reporting and control to assist management in the formulation and
implementation of an organisations strategy".
The American Institute of Certified Public Accountants (AICPA) states that
management accounting as practice extends to the following three areas:

Strategic Management Advancing the role of the management


accountant as a strategic partner in the organisation.

Performance Management Developing the practice of business


decision-making and managing the performance of the organisation.

Risk Management Contributing to frameworks and practices for


identifying, measuring, managing and reporting risks to the achievement
of the objectives of the organisation.

The Institute of Certified Management Accountants (ICMA) states that, "A


management accountant applies his/her professional knowledge and skill in
the preparation and presentation of financial and other decision-oriented
information in such a way as to assist management in the formulation of
policies and in the planning and control of the operation of the undertaking".
Management accountants, therefore, are seen as the "value-creators"
amongst the accountants. They are much more interested in forward-looking
and taking decisions that will affect the future of the organisation, rather than
in the historical recording and compliance (score keeping) aspects of the
profession. Management accounting knowledge and experience can
therefore be obtained from varied fields and functions within an
organisation, such as information management, treasury, efficiency auditing,
marketing, valuation, pricing, logistics, etc.
In the next section, we will study about the features and objectives of
management accounting.
Self Assessment Questions
1. ______________ is concerned with the interpretation of accounting
information to guide the management for future planning, decision
making, control, etc.
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2. Management accounting is mainly concerned with the ______ or


estimates of the future.
3. Management accounting is not just concerned with the post-mortem
analysis of the historical or past results. (True/False)

1.3 Features and Objectives of Management Accounting


In the previous section, we studied about the meaning and definition of
management accounting. In this section, we will study about the features
and objectives of management accounting.
1.3.1 Features
Management accounting is mainly related to financial information, wherein
management accountants use the data provided by financial accountants to
understand the business and make decisions with respect to future
budgeting and forecasting.
Management accounting is concerned with accounting information that is
useful to management in maximising profits or minimising losses. The main
characteristics of management accounting are:

Forecasting It is concerned with the future. It is not confined only to


the collection of historical data or facts, but also helps in planning for the
future because decisions are always taken for the future course of
action.

Supply information It provides information to the management and


not decisions. It can inform, but it cannot prescribe. The way in which
the data is used depends on the efficiency of the management.

Cause and effect analysis It attempts to examine the cause and


effect of different variables. For instance, if there is a loss, the reasons
for the loss are probed. Similarly, if there is a profit, the factors directly
influencing the profitability are studied. This may be the reason that
management accounting is called as a science.

No fixed norms i.e. flexibility It has no set of rules and formats like
double-entry system of book-keeping. The analysis of data depends on
the person using it.

Achievement of objectives The principle objective of management


accounting is to enable managers to manage better. To take more

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intelligent decisions, management accounting provides necessary


information to the management.

Increase in efficiency The main objective of management accounting


is to increase the efficiency of the organisation by constant performance
appraisal. The performance appraisal will enable management to pinpoint efficient and inefficient spots. Corrective measures taken by the
management will improve the efficiency of the firm.

Quantitative and qualitative information Decision-making cannot


restrict itself to monetary and financial considerations. As such,
management accounting takes into account the non-monetary variables
as well. The management needs qualitative information (i.e., the
information that is not computable or measurable in monetary terms) as
well. Qualitative information relates to the performance of employees,
research work undertaken, efficiency of production, etc.

Accounting information The basis of management accounting is


financial and cost accounting information. It makes use of such
information in a manner befitting the managerial needs of planning,
control and decision making.

Tools techniques Various tools and techniques are used to make the
accounting information suitable for managerial needs. The tools and
techniques are budgetary control, standard costing, ratio analysis, cash
flow statement and comparative analysis, etc.

Responsibility accounting It is an important managerial tool to


control human performance. It sets the targets for each individual,
reviews their working and points out their effectiveness and
inefficiencies.

1.3.2 Objectives of management accounting


Financial accounting is typically used for documenting a company's financial
transactions and keeping a record of its financial growth. Financial
accounting is a fairly passive form of accounting. In contrast, management
accounting is involved in the strategic planning of companies. It is focused
on the future and how to make improvements that will result in better
performance and greater profits for the firm. For these reasons,
management accounting is of great importance to businesses in competitive
environments that requires the company to constantly improve their
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processes and procedures. Management accounting has three main


objectives that allow managers to make improvements and plan for the
future: measuring performance, assessing risks and allocating resources.
Other objectives are to:
Help the management promote efficiency.
Finalise budgets covering all functions of a business.
Study the actual performance with a plan for identifying deviations and
their causes.
Analyse financial statements to enable management to formulate future
policies.
Help management at frequent intervals by providing operating
statements and short-term financial statements.
Arrange for systematic allocation of responsibilities for implementation of
plans and budgets.
Provide a suitable organisation for discharging responsibilities.
In the next section, we will study about the nature and scope of
management accounting.
Self Assessment Questions
4. ________ has no set of rules and formats like double-entry system of
book keeping.
5. The basis of management accounting is ________ and cost accounting
information.
6. Management accounting takes in to account only the non-monetary
variables. (True/False)
Activity 1:
State the rules for debiting and crediting applied in double-entry system.
Draft the format of any one book of accounts with explanation.

1.4 Nature and Scope of Management Accounting


In the previous section, we studied the features and objectives of
management accounting. In this section, we will study about the nature and
scope of management accounting.

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Management accounting comprises management and accounting.


Management involves all personnel in-charge of running a business apart
from the top management. Management accounting involves providing
accounting-related details, based on which management may base its
decisions. It provides management with the tools for analysing its
administrative action and lays emphasis on possible cost, price and profit
alternatives. However, information related to accounting is not the only basis
for management to take business decisions. It should also take into
consideration other factors concerning actual execution. Management must
also apply its common sense, foresight, knowledge and experience of
running a business apart from using the information provided to it in order to
arrive at a final decision.
In management accounting, accounting does not only involve recording
business transactions such as book keeping, but it is indeed a macroeconomic approach. It is an inter-disciplinary subject, as it draws its raw
material from various other disciplines such as costing, statistics,
mathematics, financial accounting, etc. Management accounting also covers
economics, political science, psychology, sociology, management, law,
statistics, etc. While the study of political science helps us understand
authority relationship and responsibility identification, sociology helps us
understand the behaviour of a person in groups. A knowledge of psychology
helps us know the mental make-up of employers and employees. Hence,
the study of all these disciplines enables us to increase motivation and
control the actions of people responsible for cost related decisions. A
knowledge of management helps us know the processes involved in the art
of managing. The study of economics helps us attain optimal output while
forecasting sales and production, and analyse the actions of the
management in terms of profit, cost revenues, growth, etc. Statistics helps
to present information to the management in a form that can be easily
assimilated. Hence, we can state that management accounting is a subject
with wide and diverse implications.
As in accountancy, management accounting does not follow set principles
like the double-entry system. Instead, it is based on the principles of cost
benefit analysis, which states that no accounting system is good or bad as
long as it contributes to incremental benefits that are more that its
incremental costs. Applying the principles of management accounting to
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financial matters would not always help us arrive at the solution; therefore, it
is considered to be an inexact science that uses other conventions rather
than standardised principles. The facts to be studied could be interpreted in
many ways and the inferences are based on the ability, judgement and
common sense of management accountants. Hence, the subject is neither
fully matured nor is an infant.
As management accounting relates more to managerial matters, its data is
selective in nature and focuses on potential rather than on lost opportunities.
The data is operative in nature and caters to a firms operational needs such
as events, monetary and non-monetary details. The characteristic of data,
mode of presentation and duration are ascertained by managerial needs.
Reports are generated frequently and are used for managerial control and
internal uses. A management accountant must always look at his
organisation from the management point of view.
Management accounting is sensitive to management needs; however, it
assists the management and does not replace it. It acts as a service phase
to the management that provides highly personalised services instead of
acting as a service to management from the management accountant. In
other words, management accounting serves as a management information
system, thereby helping the management to better manage its business.
The main concern of management accounting is to provide the necessary
information to the management for the efficient discharge of various
managerial functions. The scope of management accounting covers the
following:

Financial accounting Management accounting is mainly concerned


with the modification or rearrangement of the information provided by
financial accounting.

Cost accounting Planning and decision-making controls are the basic


managerial functions. In the discharge of these managerial functions,
cost accounting techniques or tools such as standard costing and
budgetary control play a valuable role.

Financial management It is primarily concerned with the procurement


of funds and their efficient and effective utilisation. Although financial
management has emerged as a separate subject itself, management
accounting includes financial management as well.

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Budgeting and forecasting Budgeting means preparing budgets/


setting targets for a definite future period. Forecasting is a prediction of
what will happen under the given set of circumstances/conditions. The
comparison of actual performance with the budgeted figures will give an
idea about the performance of various departments.

Inventory or material control Inventory control includes control over


inventory or material from the time that it is acquired until its final
disposal. One of the tasks of management accounting is inventory
control. Inventory control includes control over stock of raw materials,
work in process and stock of finished goods by determining different
levels of stock minimum stock level, maximum stock level and
reordering stock level.

Statistical methods Management accounting provides data to the


management in the form of reports. For this, statistical methods or tools
such as graphs, charts, diagrams, pictorial presentation, index number,
etc. are used. For instance, comparative sales statements for a number
of years are made for knowing the difference in sales.

Taxation Taxation includes computation of income tax payable by the


business in accordance with the tax regulations, filing of returns and
payment of taxes. The management accountant has to plan taxes to
minimise the tax liabilities of the firm.

Financial statement analysis and interpretation of data


Management accounting provides various techniques for financial
analysis and interpretation like ratio analysis, comparative financial
statement, etc. Analysis and interpretation of financial statements are
important parts of management accounting. Financial statements may
be studied in comparison to statements of earlier periods or in
comparison with the statements of similar other firms. After analysis, the
interpretation is made and reports drawn from these analyses are
presented to the management in a simple format.

Methods and procedures This includes maintenance of proper data


processing and office management services, reporting on the best use
of mechanical and electronic devices. It provides statistical data to the
various departments of the organisation. It undertakes special cost

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studies and estimations, reports on cost-volume-profits relationship,


under changing circumstances.

Reporting The interpreted information must be communicated to the


management within a reasonable time in the form of statement or
reports such as comparative financial statements, cash flow statements,
fund flow statements, stock reports, etc. These reports are helpful in
reviewing the working of the business.

In the next section, we will study the importance and need for management
accounting.
Self Assessment Questions
7. Financial management is primarily concerned with the procurement of
the fund and their efficient and effective utilisation. (True/False)
8. _________ is a prediction of what will happen under the given set of
circumstances.
9. _________ includes computation of income tax payable by the
business in accordance with the tax regulations, filing of returns and
payment of taxes.

1.5 Importance and Need for Management Accounting


In the previous section, we studied about the nature and scope of
management accounting. In this section, we will study the importance and
need for management accounting.
1.5.1 Importance
Management accounting is very helpful to management in every field of
activity. It assists the management in the performance of the various
managerial functions of planning, controlling, co-coordinating, organising,
motivating and communicating. Its importance may be summarised under
the following heads:

Increases efficiency Management accounting encourages efficiency


in business operations. The targets of different departments are fixed in
advance and achievement of target forms a yardstick for measuring their
efficiency.

Measures performance The system of budgetary control and


standard costing enable the measurement of performance. The

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performance will be good if the actual cost does not exceed the standard
cost.

Effective management control The tools and techniques of


management accounting are helpful to management in planning,
controlling and coordination of the activities of the concern. The
techniques of budgetary control, standard costing and departmental
operating statements greatly help in controlling various functions.
It involves the evaluation of actual performance to see whether the
actual performance corresponds with the planned performance, and the
taking up of remedial measures, if there are deviations or variations
between the two.

Maximises profitability The use of management accounting may


control or even eliminate various types of wastage, production
defectives, etc. The various management techniques are used to control
cost of production. The reduction in cost of production increases the
sales volume, there by maximises profit to the concern.

Maximises return on capital employed Management accounting,


through the process of planning, control and coordination, helps
management get maximum returns on capital employed.

Services to customers The cost control devices employed in


management accounting enable the reduction of prices. All employees
in the concern are made cost conscious. Since, quality of goods is
determined in advance the quality of products becomes good and hence
customers are provided quality goods at reasonable prices.

Co-ordination Co-ordinating refers to inter-linking of the different


divisions of a business enterprise in such a way as to achieve the
objectives of the business as a whole. Perfect co-ordination among the
various divisions or departments of an enterprise, such as production,
purchase, finance, personnel, and sales departments can be achieved
through departmental budgets and reports, which form an integral part of
management accounting.

Organisation This refers to the identification of total work in the


undertaking, distribution of work, delegation of authority and
responsibility and provision of physical facilities for the smooth
functioning of the undertaking. Management accounting helps the

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management considerably establish a sound system of internal control


and internal audit. This in turn helps identify inefficiencies, if any, and
makes them responsible for performing the job.

Motivation Motivating refers to encouraging for maintaining high


degree of morale in the organisation and creation of such conditions
such as to induce each person to give his best to realise the goals of the
enterprise. For the purpose of motivating personnel, the management
should be in a position to find out whom to reward and whom to
penalise. Management accounting helps the management to achieve
this objective through periodical departmental profit and loss account,
budgets and reports.

Communication One of the primary objectives of the management


accounting is to keep the management fully informed about the latest
position of the company. This facilitates the management to take
properly and timely decisions. It presents the different alternative plans
before the management in a comparative manner. The performance of
the various departments is also regularly communicated to the top
management.

1.5.2 Need for management accounting


The inadequacies or limitations of financial accounting and cost accounting
have paved the way for the emergence or evolution of management
accounting. Financial accounting has failed to communicate proper
information to the management. Cost accounting with its emphasis only on
costs and not on revenues has also not been very useful to the
management. Hence there has arisen the need for the development of
management accounting.
In the next section, we will study about the functions of management
accounting.
Self Assessment Questions
10. The system of budgetary control and ______ enable the measurement
of performance.
11. _________ refers to inter-linking of the different divisions of a business
enterprise in such a way as to achieve the objectives of the business as
a whole.

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Activity 2:
What is return on capital? Compute the return on capital of your friends
organisation.

1.6 Functions of Management Accounting


In the previous section, we studied about the importance and need for
management accounting. In this section, we will study the functions of
management accounting.
The basic function of management accounting is to assist the management
to perform various managerial functions such as planning, organising,
directing and controlling effectively. The various specific functions are:

Provision of data Management accounting provides valuable data to


the management for the formulation of future policies and plans. The
accounts and documents maintained under the system of management
accounting are data about the past progress of the enterprise, which is
useful to the management for making future policies and plans.

Modification of data The available accounting data is not suitable for


managerial decision making. Management accounting modifies the
available accounting data by rearranging the same through the process
of classification and combination. For instance, the sales figures for
different months may be classified to show total sales made during the
period, product-wise, territory-wise and salesman-wise.

Analysis and interpretation of data Management accounting


analyses and interprets the financial or accounting data meaningfully
along with comments and suggestions for effective management
planning and decision making. For this purpose, the data is presented in
a comparative form with ratios for predicting the likely trends. Analytical
tools such as comparative financial statements and ratio analysis are
used and likely trends are projected.

Provision of qualitative information Mere financial data and its


analysis and interpretation are not sufficient for effective managerial
decision making and control. The management needs qualitative
information (i.e. information that is not computable or measurable in
monetary terms) as well. Qualitative information relates to the

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performance of employees of undertaking, research work undertaken,


efficiency of production, etc.

Facilitating management control Management accounting facilitates


management control through the techniques of budgetary control and
standard costing.

Budgeting and forecasting Budgeting means preparing


budgets/setting targets for definite future period. Forecasting is a
prediction of what will happen under the given set of circumstances. The
comparison of actual performance with the budgeted figures will give an
idea about the performance of various departments.

Satisfaction of the informational needs of different management


levels Management accounting satisfies the informational needs of
different management levels by processing the accounting and other
data in such a way as to satisfy the needs of the different management
levels.

Co-ordination This refers to interlinking of different divisions of a


business in such a way as to achieve the objectives of the business as a
whole. Perfect co-ordination among the various divisions or departments
of an enterprise, such as production, purchase, finance, personnel and
sales departments can be achieved through departmental budgets and
reports, which form an integral part of management accounting.

Protection of assets A management accountant should assure fiscal


protection for the assets of the business through adequate internal
control and proper insurance coverage.

Economic appraisal A management accountant should continuously


appraise economic and special forces and government influences and
interpret their effect upon the business.

The functions of a management accountant are:


Collection of data
Analysis
Presentation of data
Planning: A management accountant plans the entire accounting
functions.

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Controlling: Examines the performance against the set standard and


reports it to the management.
Reporting: He reports to the management and advises them on future
decisions.
Coordinating: preparation of master budget8.Decision making

In the next section, we will study about the differences between financial
accounting, cost accounting and management accounting.
Self Assessment Questions
12. _________ is the information which is not computable or measurable in
monetary terms.
13. A management accountant should assure fiscal protection for the
assets of the business through adequate internal control and proper
insurance coverage. (True/False)
Activity 3:
Assume you are the management accountant of one of the public limited
companies of your city. You are advised to get practical knowledge by
making comparative study and analysis of balance sheets of three years.

1.7 Differences between Financial Accounting, Cost Accounting


and Management Accounting and Similarities
In the previous section, we studied the functions of management
accounting. In this section, we will study about the differences between
financial accounting, cost accounting and management accounting and
similarities.
Despite the close relationship between financial accounting, cost accounting
and management accounting, there are certain differences. The main
differences are:

Age Financial accounting is several centuries old (4th century). The


development of cost accounting dates back to industrial revolution
(1850-1900). However, management accounting has developed only in
the last 60 years (1950 onwards).

Subject matter Financial accounting is concerned with the recording,


classifying and summarising of business transactions with a view to

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determine profit or loss of a business for a certain period and to


ascertain the assets and liabilities of the business at the end of a
particular period. On the other hand, management accounting is
concerned with the presentation of information to the management for
the efficient discharge of managerial functions. Cost accounting is
primarily concerned with the ascertainment of cost and profitability and
control of cost.

Events considered Financial accounting considers only the monetary


events (i.e. only those events that can be expressed in terms of money).
However, management accounting is interested in monetary events and
in non-monetary events such as performance of employees, quality of
products, etc. In cost accounting, mostly monetary events are
considered.

Coverage Financial accounting deals with overall performance of the


business. On the other hand, cost and management accounting deals
with the details of the various divisions, departments, products or other
sub-divisions of the enterprise.

Users of data Financial accounting is designed to provide information


through the profit and loss account and the balance sheet, to outsiders,
such as the shareholders, debenture holders, bankers, creditors,
investors, and the government. However, management accounting is
designed principally to provide information to the management. Cost
accounting provides information to both external and internal parties.

Figures taken into account Financial accounting is concerned only


with historical or past data. It confines itself to the analysis of what has
happened in the past. However, management accounting is concerned
with the past data as well as the estimates for the future i.e. future plans.
Though cost accounting takes into account estimates for the future, it
mostly uses past data.

Periodicity of reporting The period of reporting is much longer in


financial accounting as compared to cost and management accounting.
Generally financial statements (i.e. the profit and loss account and the
balance sheet) are prepared at the end of every accounting year.
However, cost and management accounting furnishes information

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quickly and at short intervals as per the requirements of the


management.

Accounting principles Generally, financial accounting is governed by


certain accepted principles, while cost and management accounting are
not governed by any accepted accounting principles. It is generally
moulded according to the needs of the particular organisation.

Legal compulsion Financial accounting has more or less become


compulsory for all forms of business organisations. It is compulsory for
joint stock companies because of statutory provisions. It is necessary
even for other forms of business organisations for tax purposes. On the
other hand, cost and management accounting is purely optional, though
it is desirable because of its immense utility.

Compulsory auditing Auditing of accounts kept and statement


prepared under financial accounting is compulsory for joint stock
companies. However, auditing of statements prepared under cost and
management accounting is not compulsory for any organisation.

Compulsory publication The publication of statements prepared


under financial accounting is compulsory for all joint stock companies,
whereas the publication of statements prepared under cost and
management accounting is not compulsory for any joint stock company.

Self Assessment Questions


14. Which of the following is NOT related to financial accounting?
a) Recording of transactions
b) Classifying transactions
c) Summarising transactions
d) Reporting to management
15. The publication of statements prepared under financial accounting is
not compulsory for all joint stock companies. (True/False)

1.8 Summary
Let us recapitulate the important concepts discussed in this unit:
Management accounting is the art or technique of analysis and
interpretation and presentation of facts, results and information revealed
by financial accounting, cost accounting and other books and records

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kept by the business for the benefit of people who are in charge of
managing the business more efficiently.
The features of management accounting are function of forecasting,
cause and effect analysis, flexibility, provision of quantitative and
qualitative information, application of tools and techniques, responsibility
accounting and so on.
The aspects or areas covered under the scope of management
accounting are financial accounting, cost accounting, financial
management, budgeting and forecasting, inventory or material control,
statistical tools and so on.
Management accounting is very important or helpful to management in
every field of activity. It assists the management in the performance of
the various managerial functions of planning, controlling, cocoordinating, organising, motivating and communicating.
Despite the close relationship between financial accounting, cost
accounting and management accounting, there are certain differences.
The main differences between financial accounting, cost accounting and
management accounting are related to subject matter, events
considered, coverage, users of data, figures taken into account, legal
compulsion and so on.

1.9 Glossary
Budgetary control A budgetary control system is a method of monitoring
and controlling income and expenditure, and for managing the demands for
cash and minimising borrowings.
Cash flow statement Financial statements reflect the inflow of revenue
vs. the outflow of expenses resulting from operating, investing and financing
activities during a specific time period.
Double-entry system Double-entry book keeping system is the dual
aspect of entering the transactions on both the sides i.e. on the debit and
credit side of an account.
Internal audit Internal auditing is an independent, objective assurance
and consulting activity designed to add value and improve an organisation's
operations.
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Management Accounting

Unit 1

Joint stock company A joint stock company is a type of business


partnership in which the capital is formed by the individual contributions of a
group of shareholders. Certificates of ownership or stocks are issued by the
company in return for each contribution, and the shareholders are free to
transfer their ownership interest at any time by selling their stockholding to
others.
Performance appraisal A performance appraisal, employee appraisal,
performance review or (career) development is a method by which the job
performance of an employee is evaluated (generally in terms of quality,
quantity, cost, and time) typically by the corresponding manager or
supervisor.
Ratio analysis A tool used by individuals to conduct a quantitative
analysis of information in a company's financial statements.
Reordering stock level The reorder level of stock is the point at which
stock on a particular item has diminished to a point where it needs to be
replenished.
Standard costing A management tool used to estimate the overall cost of
production, assuming normal operations.

1.10 Terminal Questions


1.
2.
3.
4.
5.

Define management accounting. Discuss the various features.


Explain the scope of management accounting.
Describe the importance of management accounting.
What are the functions of management accounting? Explain.
Distinguish between financial accounting, cost accounting
management accounting.

and

1.11 Answers
Self
1.
2.
3.
4.
5.

Assessment Questions
Management accounting
Forecasts
True
Management accounting
Financial

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Management Accounting

6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

Unit 1

False
True
Forecasting
Taxation
Standard costing
Co-ordinating
Qualitative information
True
d) Reporting to management
False

Terminal Questions
1. Management accounting is the accounting that provides necessary
information to the management for discharging functions such as
planning, organising, directing and controlling in an efficient manner.
The features of management accounting are function of forecasting,
cause and effect analysis, flexibility, provision of quantitative and
qualitative information, application of tools and techniques, responsibility
accounting and so on. For more details, refer sections 1.2 and 1.3.
2. Management accounting in its scope includes financial accounting, cost
accounting, financial management, budgeting and forecasting, inventory
or material control, statistical tools and so on. For more details, refer
section 1.4.
3. Management accounting is important due to its contribution for
increasing efficiency, bringing effective management control, maximising
profitability and return on capital employed, bringing coordination and so
on. For more details, refer section 1.5.
4. Management accounting performs the functions of provision of data,
modification of data, analysis and interpretation of data and so on. It
assists the management in the performance of the various managerial
functions of planning, controlling, co-coordinating, organising, motivating
and communicating. For more details, refer section 1.6.
5. The main differences between financial accounting, cost accounting and
management accounting are related to subject matter, events
considered, coverage, users of data, figures taken into account, legal
compulsion and so on. For more details, refer section 1.7.
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Management Accounting

Unit 1

References:

Lal Jawahar (2010). Accounting for Management. Himalaya Publishing


House

Pillai R. S. N and Bagavathi (2009). Management Accounting. Chand S


& Co.

Maheshwari S. N. (2009). Management Accounting & Financial Control.


Chand S & Sons

Dr. Periasamy P. (2010). Financial, Cost and Management Accounting.


Himalaya Publishing House

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