Managerial Accounting

“Managerial accounting is a system of collection and presentation of relevant economic

information relating to an enterprise for planning, controlling and decision-making.” —ICWA of
India
“Managerial accounting is the provision of information required by management for such
purposes as formulation of policies, planning and controlling the activities of the enterprise,
decision-making on the alternative courses of action, disclosure to those external to the entity
(shareholders and others), disclosure to employees and safeguarding of assets.” —CIMA London

Characteristics of Management Accounting:

(i) Technique of Selective Nature:

Management Accounting is a technique of selective nature. It takes into consideration only that
data from the income statement and position state merit which is relevant and useful to the
management. Only that information is communicated to the management which is helpful for
taking decisions on various aspects of the business.
(ii) Provides Data and not the Decisions:
The management accountant is not taking any decision bu.: provides data which is helpful to the
management in decision-making. It can inform but cannot prescribe. It is just like a map which
guides the traveller where he will be if he travels in one direction or another. Much depends on
the efficiency and wisdom of the management for utilizing the information provided by the
management accountant.
(iii) Concerned with Future:
Management accounting unlike the financial accounting deals with the forecast with the future. It
helps in planning the future because decisions are always taken for the future course of action.
(iv) Analysis of Different Variables:
Management accounting helps in analysing the reasons as to why the profit or loss is more or
less as compared to the past period. Moreover, it tries to analyse the effect of different variables
on the profits and profitability of the concern.
(v) No Set Formats for Information:
Management accounting will not provide information in a prescribed proforma like that of
financial accounting. It provides the information to the management in the form which may be
more useful to the management in taking various decisions on the various aspects of the
business.

Scope of Managerial Accounting:

The scope of managerial accounting is very wide and broad-based. It includes all information
which is provided to the management for financial analysis and interpretation of the business
operations.
(i) Financial Accounting:
Financial accounting though provides historical information but is very useful for future planning
and financial forecasting. Designing of a proper financial accounting system is a must for
obtaining full control and co-ordination of operations of the business.
(ii) Cost Accounting:
It provides various techniques of costing like marginal costing, standard costing, differential and
opportunity cost analysis, etc., which play a useful role n t operation and control of the business
undertakings.
(iii) Budgeting and Forecasting:
Forecasting on the various aspects of the business is necessary for budgeting. Budgetary control
controls the activities of the business through the operations of budget by comparing the actual
with the budgeted figures, finding out the deviations, analysing the deviations in order to
pinpoint the responsibility and take remedial action so that adverse things may not happen in
future.
Both the techniques are necessary for management accountant.
(iv) Cost Control Procedures:
These procedures are integral part of the management accounting process and includes inventory
control, cost control, labour control, budgetary control and variance analysis, etc.
(v) Reporting:
The management accountant is required to submit reports to the management on the various
aspects of the undertaking. While reporting, he may use statistical tools for presentation of
information as graphs, charts, pictorial presentation, index numbers and other devices in order to
make the information more impressive and intelligent.
(vi) Methods and Procedures:
It includes in its study all those methods and procedures which help the concern to use its
resources in the most efficient and economical manner. It undertakes special cost studies and
estimations and reports on cost volume profit relationship under changing circumstances.
(vii) Tax Accounting:
It is an integral part of management accounting and includes preparation of income statement,
determination of taxable income and filing up the return of income etc.
(viii) Internal Financial Control:
Management accounting includes the internal control methods like internal audit, efficient office
management, etc.

(ix) Interpretation:
Management accounting is closely related to the interpretation of financial data to the
management and advising them on decision-making.
(x) Office Services:
The management accountant may be required to maintain and control office services in some
organizations. This function includes data processing, reporting on best use of mechanical and
electronic devices, communication, etc.
(xi) Evaluating the Performance of the Management:
Management accounting provides methods and techniques for evaluating the performance of the
management. It evaluates the performance of the management in the light of the objectives of the
organisation. Thus, it helps in the implementation of the principle of management by exception.

Limitations of Managerial Accounting

The origin of managerial accounting can be traced to overcome the limitations of financial
accounting and cost accounting.
Though managerial accounting is helpful tool to the management as it provides information for
planning, controlling and decision making, still its effectiveness is limited by a number of
reasons. Some of the limitations of management accounting are as follows:

1. Based On Accounting Information: It is based on data and information provided by financial

accounting and cost accounting. As such the correctness and effectiveness of managerial
decisions will depend upon the quality of data provided by cost and financial accounts. So,
effectiveness of management account is limited to the reliability of sources of information.

2. Lack Of Knowledge
The use of management accounting requires the knowledge of number of related subjects.
Deficiency in knowledge in related subjects like accounting principles, statistics, economics,
principle of management etc. will limit the use of management accounting.

3. Intensive Decisions
Decision taking based on management accounting that provide scientific analysis of various
situations will be time consuming one. As such management may avoid systematic procedures
for taking decision and arrive at decision using intuitive.

4. Management Accounting Is Only A Tool

The tools and techniques of management accounting provide only information and not decisions.
Decisions are to be taken by the management and implementations of decisions are also done by
management.

5. Evolutionary Stage
Management accounting is still in a development stage and has not yet reached a final stage. The
techniques and tools used by this system give varying and differing results. It is still named as
internal accounting and/ or operational accounting.
6. Personal Prejudices and Bias
The interpretation of financial information may differ from person to person depending upon the
capability of the interpreter. Analysis and interpretation of data and information may be
influenced by personal basis. As such, the objectivity of decision may be affected by personal
prejudices and bias.

Internal Controls System

Internal controls system include a set of rules, policies, and procedures an

organization implements to provide direction, increase efficiency and strengthen
adherence to policies. In small business organizations, generally, the owner-manager
controls the total activities of his business by his personal supervision and direct
participation.
Internal control system differs from one business organization to another depending
on the nature and size of the business. To achieve the objective of a business proper
execution of business activities in the light of prevailing laws and socio-economic
condition of the country is called internal control system or structure.
The internal control system is introduced to avoid errors and frauds and for systematic
control of business activities.

There are 3 elements of the internal control system:

1. Environment control: The attitude, alertness, and work-zeal of directors, managers and
shareholders are reflected through environment control.
2. Accounting system: Accounting system means some procedures and recordings with which
identification of business transactions, classification, summarization, statement preparation
and analysis for timely presentation of correct information are performed.
3. Control procedure: The additional policies and procedures adopted by the business authority
for ensuring achievement of the specific goal of a business organization are the controlling
procedures.

These control procedures are:

 Proper delegation of power,

 Segregation of responsibility,
 Preparation and use of documents,
 Adoption of adequate security measures to protect the properties, and
 Independent control over the execution of activities.

An internal control system, not only prevent fraud forgery but also fulfills other objectives:

1. The business organization implements its policies complying with the prevailing laws of the
country.
2. Employees and officers discharge their assigned responsibilities to increase efficiency in
execution of work.
3. Financial statements provide correct and reliable information maintaining proper accounts.

Components of Internal Control System

1. Controlling the environment: Control environment is the basis of other elements of all other
components of the internal control system. Moral values, managerial skill, the honesty of
employees and managerial direction etc. are included in controlling environment.
2. Risk assessment: After setting up the objective of business, external and internal risks are to
be assessed. The management determines risk controlling means after examining the risks
related to every objective.
3. Control activities: The management establishes a controlling activities system to prevent risk
associated with every objective. These controlling activities include all those measures that
are to be followed by the employees.
4. Information and communication: Relevant information for taking decision is to be
collected and reported in proper time. The events that yield data may originate from internal
or external sources. Communication is very important for achieving management goals. The
employees are to realize what is expected of them and how their responsibilities are related to
the activities of others. Communication of the owners with outside parties’ like’s suppliers is
also very important.
5. Monitoring: When the internal control system is in practice, the organization to monitor its
effectiveness so that necessary charges can be brought if any serious problem arises.

Responsibility for Internal Control System

It is the general responsibility of all employees, officers, management of a company to follow the
internal control system. The under-mentioned three parties have definite roles to make internal
control system effective:

1. Management: Establishment and maintenance of effective internal control structure mainly

depends on the management. Through leadership and example or meeting, the management
demonstrates ethical behavior and integrity of character within the business.
2. Board of directors: The board of directors possessing a sound working knowledge gives
directives to the management so that dishonest managers cannot ignore some control
procedures. Board of directors stops this sort of unfair activities. Sometimes the efficient
 board of directors having access to the internal audit system can discover such fraud and
forgery.
3. Auditors: The auditors evaluate the effectiveness of the internal control structure of a
business organization and determine whether the business policies and activities are followed
properly. Communication network helps effective internal control structure in execution. And
all officers and employees are part of this communication network.

Objectives of Internal Control System

Internal controls system include a set of rules, policies, and procedures an organization
implements to provide direction, increase efficiency and strengthen adherence to policies. The
objectives of internal control system are:

1. financial reports are reliable,

2. operations are effective and efficient, and
3. Activities comply with applicable laws and regulations.

Characteristics of a Proper Internal Control System

An effective internal control system includes organizational planning of a business and adopts all
work-system and process to fulfill the following targets:

1. Safeguarding business assets from stealing and wastage.

2. Ensuring compliance with business policies and the law of the land.

3. Evaluating functions of each employee and officer to increase efficiency in operation.

4. Ensuring true and reliable operating data and financial statements.

It is to be kept in mind, a business organization, be its small or large, can enjoy the benefits of
adopting an internal control system. Prevention of stealing-plundering and wastage of assets are
a part of the internal control system.

Protection of Assets

A business organization protects its assets in the following ways:

1. Segregation of the duties of the employees: It means that each employee is assigned with
specific tasks. The person in charge of assets is not allowed to maintain accounts of the assets.
Some other person maintains the accounts of these assets. Since different employees perform
the same nature of transactions, the work of each is automatically checked. Segregation of the
 duties of the employees of an organization reduces the possibility of stealing assets and if
stolen, detection becomes easier. For example, there is no scope for stealing cash by a cash-
receiving employee where cash receipts accounts are maintained by a different employee.

2. Assigning specific duties to each employee: The employee assigned with a specific duty is
held responsible for his assigned activities. If and when any problem arises the manager can
immediately .identify the person concerned and holds him liable. Lost documents can easily
be detected if the task of maintaining records is assigned to a particular employee and it
becomes possible to know the recording process of transactions. An employee assigned with a
particular job can easily provide necessary information regarding that job. Moreover, an
employee feels proud if he is assigned with a particular job and tries to complete the job using
die best of his skill.

3. Rotating job assignments of the employees: Some organizations rotate job assignments of
employees at intervals to avoid fraud-forgery by the employees concerned. Under this policy,
the employee concerned can easily understand that on the placement of somebody else in his
place his dishonesty if it is done, will be detected. This ensures the honesty of an employee.

4. Using mechanical devices: Business concerns adopt various mechanical devices to avoid
stealing, destruction, and wastage of assets. Under the mechanical system, cash register,
cheque-protectors, time-clock, mechanical-counters etc. are used as control methods. Since a
cash-register contains locking-tape, each cash sale is recorded here. The amount of cheque is
written on the cheque by the cheque-protector machine to avoid any sort of alteration. Arrival
and departure of employees are recorded properly with the help of time- clock.

Statutory Audit

A statutory is another name of a financial audit. It is essentially an audit of the final statements of a
company, i.e. the profit and loss and the balance sheet. The purpose of a statutory audit is to ensure
that these accounts of the company represent a fair and accurate picture of the company’s current
financial position on the date of the balance sheet.

It is important that we understand the need for a statutory audit to be carried out. In case of a
company, the owners of the company are the shareholders. However, they do not run or manage the
day to day affairs of the company. This is done by the board of directors and the management of the
company. So the shareholders need assurance that the accounts maintained and published by the
company are authentic and genuine. This is why the law requires that an independent auditor
conduct a statutory audit.

The independent auditor has full authority to check the financial records of the company and publish
his findings via a auditors report. The shareholders and owners of the enterprise can then be assured
of the authenticity and reliability of the financial statements. Other stakeholders like creditors,
employees, potential investors etc. also benefit from the statutory audit. They too can base their
decisions on these accounts, since they are authentic.
Internal Audit
It is a function that, even though operating independently from other departments and involves
reporting directly to the audit committee, the function remains within an organization i.e. the
company employees. It is essential for performing audits of both financial and non-financial
nature within a wide of areas of operation in a business, as that are directed by the annual audit
plan. Internal audit looks at main risks facing the business and what action is being taken to
manage those risks in an effective manner, to help the organization achieve its various
objectives. For example, they may look at risks threatening a company’s reputation such as the
employment of cheap labor in foreign countries, or the strategic risks such as producing too
many products in comparison to available resources etc.

Statutory Audit vs. Internal Audit

 Internal audit is limited to the governance of an organization, management controls over

the operations of an organization and risk management. External audit is related to the
reports on financial statements of the corporate entity.
 External audit is a legal requirement while internal audit is conducted based on the
personal resolve of the business owners to measure the operation’ efficiency as conducted
by the business.
 External audit is performed by an external auditor or audit firm while the process of
internal audit is performed by the firm’s employees, nevertheless, an audit firm can also
be selected and appointed to conduct the process of internal audit.
 Internal auditor is selected or appointed by the company while the selection of the
external auditor is at the shareholder’s annual general meeting.
 External audit is performed while maintaining in perspective the various requirements of
any acceptable financial reporting standards while no such rules hold for internal audit.
 Internal auditor by means of the internal audit process is responsible to report to the
management or audit committee while statutory auditor as part of the statutory audit
process reports to the company shareholders.