MANAGEMENT ACCOUNTS

INTRODUCTION
The term management accounting was the first used in 1950 by a team of
accountants visiting U.S.A under the auspices of Anglo-American council of
productivity.
In management accounting, managers use the provisions
of accounting information in order to better inform themselves before they
decide matters within their organizations, which helps their management and
performance of control functions effected to improve their financial position.
DEFINITION
“Any form of accounting which enables a business to be conduct more
efficiently.” __________ICA__________
MEANING
Management accounting involves collecting, classifying, analysing, interpreting
and presenting all accountings information which are useful to the
management.
CHARACTERISTICS/FEATURES
Management accounting provides data to the management on the basis of
which they take decisions to achieve organizational goals and improve their
efficiency.
1.providing accounting information management accounting is based on
financial accounting. It selects only required information in financial
accounting
2. cause & effect analysis  profit or loss considered management goes a further
step. It works to find out the causes for loss and also study the factors which
influence the profitability. 
3. decision taking the mgt accounting supplies information to the mgt .The
decisions will be taken by the top level of mgt.
4.increase in efficiency The management can fix the target for each
department or division through budgetary control system. The actual
performance is compared with that of targets. The deviations are find out and
classified into two categories i.e. 1.positive deviation 2.negative deviation
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If positive deviations, the concerned department is appreciated. If negative
deviations, causes are find out to give ideas for improving the efficiency of the
relevant department. In this way, the efficiency of employees is improved in
the organization as a whole.

5.No fixed norms followed there is no need to follow fixed norms in

management accounting. Management accounting tool may be different from
one organization to other organization. 

6. Reporting it does not follow any prescribed accounting format for reporting.
This is because information is provided acc to the needs of mgt.

NATURE

1. Branch of knowledge it is an organised body of knowledge having its own

concepts and conventions. However, the principles and rules vary from
industry to industry.

2. It is a science it is not only relating to knowledge of management accounting

but a wide variety of subjects such as financial, cost, statistics, operation
research ,mgt, auditing, taxation, office mgt & so on. Management accountant
requires intimate of all fields of knowledge in order to carry on his day-to-day
activities.

3. It is an art mgt accountant requires the ability & skills in applying the tools
& techniques of mgt to various mgt problems.

4. It is an extension of cost accounting mgt accountant employs most of the

techniques of costing, such as standard costing, budgetary control, marginal
costing, cost volume profit analysis inter-firm comparision etc., to assist mgt
formulation of policy, preparation of plans & controlling the operations.

5. It is a profession in recent years mgt accounting has become one of the

profession which has become more challenging. Mgt accountants are
rendering the professional service to organisations which is known as “mgt
consultancy service.”
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6. Achievement of Objectives Management accounting fixes the standard for

various business activities on the basis of the historical information provided
by the financial accounting. Actual performance is recorded to compare the

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actual with standard. If there is any deviations, corrective action can be taken
by the management to achieve the objectives.

OBJECTIVES/FUNCTIONS

1. planning &forecast mgt accountant is to supply necessary data to the mgt

for formulating plans. Planning is essentially related to taking decisions for
future. It also includes forecasting, setting goals and deciding alternative
courses of action. Management accountant prepares statements of past
results and gives estimations for the future.

2.Controlling Management Accounting devices like standard costing and

budgetary control are helpful in controlling performance.

3. Helpful in organisation every Management is concerned with the

establishment of cost centres preparation of budgets and preparation of cost
accounts and fixing of responsibilities for different functions. The modified
data and analysis and interpretation help the management to organize.

4. Motivating employees Management accounting helps the management in

selecting best alternatives of doing the things. Targets are laid down for the
employees. They feel motivated in achieving their targets and further
incentives may be given for improving their performance.

5. Making decisions the management has to take certain important decisions.

A decision may have to be taken about the expansion and diversification of
production. There may be a question of replacement of labour with machine or
introduction of latest technological devices.

6. Co-ordinating The Management accountant acts as a coordinator among

different financial department through budgeting and financial reports.

7. Communication Management accounting establishes communication with

in the organisation and also with the outside world. The management
accountant prepares reports for the benefits of different levels of management
and employees. The activities of the concern are communicated to outsiders
such as bankers, investors, creditors, government agencies etc. who are the
stakeholders. (3)

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8. Presentation of Data both profit and loss account and balance sheet are not
useful for taking a decision in accounting. Hence, the contents of profit and
loss
account and balance sheet are modified and rearranged in such a manner that
helps the management for taking decision through various techniques.

SCOPE
The main purpose of management accounting is to utilize the accounting
information in solving the business problems and taking scientific decisions.
Moreover, the scope of management accounting is very wide. Therefore, it is
very difficult of pinpoint the exact scope of management accounting. However,
the scope of management accounting are listed below.

1. Financial accounting it deals with the historical data. The recorded facts
about an organisation are useful for planning the future course of
action.Though planning is always for the future but still it has to be based on
the past and present data. so management accounting is closely related to
financial accounting.

2. Cost accounting it is concerned with the ascertainment of various elements

of costs for different business operation and activities. These cost data are
used in the management accounting system for further analysis so as to solve
business problems and take quality decision.
3. Financial management it is concerned with the planning and controlling of
the financial resources of the firm. It deals with the raising funds and their
effective utilization. Its main aim is to use the fund in such a way that the
earning of the firm is maximized. (Every owner of the business concern expects
fair rate of return on investments. It is possible through the effective utilization
of the finance. Hence, it is termed as financial management and considered as
separate discipline. The tools in financial management are developed through
management accounting system.)
4.  Budgeting And Forecasting budgeting means expressing the plans, policies
and goals of the firm for a definite period in future. The targets are set for
different departments & responsibility is fixed for achieving these targets.
Forecasting is a prediction of what will happen as a result of a given set of
circumstances. Both budgeting & forecasting are useful for mgt a/cing in
planning various activities. (4)

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5. Inventory control the control of inventory will help in controlling the cost of
products. The management will need effective inventory control for controlling
stocks. The Management accountant will guide management as to when and
from where to purchase and how much to purchase.so the study of inventory
control will be helpful for taking managerial decisions.
6. Reporting it is divided into two types. They are interim reporting
and external reporting. Interim reporting is supplying information to the top
management. External reporting is supplying information to outsiders i.e.
shareholders, banks and financial institutions.
The reports are presented in the form of graphs, diagrams, index numbers or
other statistical techniques so as to make them easily understandable.
Interim reporting deals with the submission of financial results by means of
weekly, fortnightly, monthly, quarterly or half yearly accounts or statements to
the top management.

7. Taxation (it is an unavoidable aspect in the current business scenario. The

taxation includes tax planning, computation of tax, filing of returns and making
tax payments). Income statements are prepared and tax liabilities are
calculated. The management is informing about the tax burden from Central
Government, State Government and local authorities .Various tax returns are
to be filled with different departments and tax payments are to be made in
time. Tax accounting comes under the purview of management accountant’s
duties.
8. Internal audit it is concerned with the verification of books of accounts with
in the organisation. Internal auditing simplifies the task of external auditing .An
internal audit system is necessary to judge the performance of every
department .The internal audit helps the management in fixing responsibility
of different individuals.
9. Law all the management decisions are taken with the help of legal
environment. The following are the acts which influence the management
decisions such as the companies Act, MRTP Act, FEMA (foreign exchange mgt
act), SEBI Regulations and other labour legislation. Hence mgt a/cing relies
heavily on law of the country.

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NEED/IMPORTANCE/PURPOSE/ADVANTAGES/MERITS/BENEFITS/PROS/USES
/UTILITIES
1. Increases efficiency it increases efficiency of business operations. The targets
of different departments are fixed in advance and the achievements of these
goals is a tool for measuring their efficiency.
(The management accounting system may eliminate various types of wastage,
production, defectives and other work thereby the workers efficiency may be
improved).
2. Proper planning management is able to plan various operations with the
help of accounting information. The technique of budgeting is a helpful in
forecasting various activities.
3. Maximising profits there is a morale among the employees. Standards are
fixed and measure the actual performance to find the deviations. If the causes
for deviations are reasonable and controllable, proper action may be taken by
the management. In this way, profit is maximized.
(This indirectly increases the bars of profits for the company, as the company is
able to reduce its pricing on the products).
4. Improve service to customers the quality of products becomes good because
quality standards are pre-determined. The customers are supplied good quality
goods at reasonable prices. The increase in production of goods also enhances
supply of goods to consumers.
5. Effective management control the actual performance of every business
activity is measured and compared with the standard fixed or planned one. If
the deviations are found that are controllable, the management can decide the
course of action to exercise control. Both standard costing and budgetary
control system are highly help the management in this aspect.
6. Helps in decision making the management accounting helps in decision
making such as pricing, making or buy, acceptance of additional orders,
selection of suitable mix, etc.
7.Flexibility and freedom management accounting system is of flexible nature.
These reports do not require to be made yearly, monthly, or weekly.
Therefore, the accountant gets enough time to prepare a perfect report.
8.Employment top level of management provides employment opportunities
to management accountants.

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LIMITATIONS/DIS-ADVANTAGES/DRAWBACKS/DE-MERITS/CONS/

1. Based on accounting information the management accounting is based on

data supplied by the financial and cost accounting. If financial data is not
reliable, then management accounting will not provide correct analysis.
2. Lack of knowledge for taking decisions, the management should have a
thorough knowledge in different fields, such as Accounts, Economics, Statistics,
Taxation etc. But, in practice, it is found that the persons assign with taking
some decisions do not have such adequate knowledge.
3. Intuitive decision scientific decisions can be taken with the help of using
management accounting techniques. But, majority of the management
accountant and top level executives prefer their past experience and intuition
in making business decisions. The reason is that an intuitive decision making is
very simple and easy.
4. Not an alternative to administration the tools and techniques of
management accountants provide only information and not decisions.
Decisions are to be taken by the management and their implementation is also
done by management.
5. Top heavy structure/high cost the cost of installation of management
accounting system is very high. Hence, a small business organization can’t bear
the cost of such installation. Moreover, the utility of this system is restricted
only to big and complex organizations.
6. Personal bias there is every possibility of personal bias and manipulation
from the collection of data to the interpretation stage in financial accounting.
Thus, it losses objectivity and validity.
7. Evolutionary stage Management accounting has not reached the final stage
and is in the process of development. That is why its techniques suffer from
facility of concepts, diversity in opinions and various interpretations.
(At present, Management Accounting is in the process of development, i.e., it
is still very much in a state of evolution. So it has to face the problems of
fluidity of concepts, improvement of techniques etc.).
8. resistance from staff/psychological for introduction and operation of
management accounting system in any organisation, it requires a lot of
changes in the organisation structure, rules and regulations. These changes are
resisted by the management itself as it creates difficulties to the employees.

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DIFFERENCES BETWEEN FINANCIAL & MGT A/C’S
BASIS FINANCIAL
ACCOUNTING
1.Objectives The main objectives of
financial accounting are to
disclose the end results of the
business, and the financial
condition of the business on a
particular date.
2.Audience It produces information that
is used by external parties,
such as shareholders and
lenders.
3. Optional? It is legally required to
prepare financial accounting
reports and share them with
investors.
4.Precision Actual figures are used.
5.Focus It focuses on history; reports
on the prior quarter or year.
6.Format Financial accounts are
reported in a specific format,
so that different
organizations can be easily
compared.
7.Accounting It is strictly governed by the
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MANAGEMENT
ACCOUNTING
The main objective of managerial
accounting is to help management
by providing information that is used
to plan, set goals and evaluate these
goals.
It produces information that is used
within an organization, by managers
and employees.
Managerial accounting reports are
not legally required.
Projected or estimated figures are
used.
It focuses on the present and
forecasts for the future.
Format is informal and is on a per
department/company basis as
needed.
No standard principles are followed
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principles generally accepted principles in mgt a/cing. (8)

and conventions.

8.Reporting Defined - annually, semi- As needed - daily, weekly, monthly.

frequency and annually, quarterly, yearly.
duration

9.Information Monetary, verifiable Monetary and company goal driven

information. information.

10.Subject it deals with the It deals not only with the business as
business a whole but also each &every
Matter as a whole. segment of the business.
11. Dependency it is independent. It is dependent on financial
accounting.
12. Timing it consumes slow It consumes quick time for reporting.
time
For reporting.
13.Publication it statements are It statements are not published.
Published for the
- benefit of the public.
14. Audit it is compulsory. It can’t be audited.
15. Measuring quantitative Quantitative and qualitative both.
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FINANCIAL STATEMENT ANALYSIS
INTRODUCTION
(The statements which are prepared from accounting information are known
as financial statements. They are the end products of accounting process in an
enterprise. Under accounting process, it firstly consists of recording the
transactions in the books of prime entry and then posted in Ledger accounts.
At the end of the accounting period the balances are extracted and from these
balances, final accounts are prepared. The final accounts or financial
statements as they are sometimes called as, disclose the profitable and
financial position of the business. A business function with a view to attain two
important objectives, profitability and solvency).
(Financial analysis is the process of examining a company’s performance in the
context of its industry and economic environment in order to arrive at a
decision or recommendation. Often, the decisions and recommendations
addressed by financial analysts pertain to providing capital to companies—
specifically, whether to invest in the company’s debt or equity securities and at
what price. An investor in debt securities is concerned about the company’s
ability to pay interest and to repay the principal lent. An investor in equity
securities is an owner with a residual interest in the company and is concerned
about the company’s ability to pay dividends and the likelihood that its share
price will increase. Overall, a central focus of financial analysis is evaluating the
company’s ability to earn a return on its capital that is at least equal to the cost
of that capital, to profitably grow its operations, and to generate enough cash
to meet obligations and pursue opportunities. Fundamental financial analysis
starts with the information found in a company’s financial reports).
**************************************
Financial statements i.e. Balance Sheet and Trading and Profit and Loss
Account in the module titled ‘Financial Statements of Profit and Not for Profit
Organisations’. After preparation of the financial statements, one may be
interested in analysing the financial statements with the help of different tools
such as comparative statement, common size statement, ratio analysis, trend
analysis, fund flow analysis, cash flow analysis, etc. In this process a meaningful
relationship is established between two or more accounting figures for

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comparision. In this lesson you will learn about analysing the financial
statements by using comparative statement, common size statement and
trend analysis.
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In order to ascertain the financial status of the business every enterprise

prepares certain statements, known as financial statements. Financial
statements are mainly prepared for decision making purposes. But the
information as is provided in the financial statements is not adequately helpful
in drawing a meaningful conclusion. Thus, an effective analysis and
interpretation of financial statements is required.
DEFINITION
“The financial statements provide a summary of the accounts of a business
enterprise, the balance sheet reflecting the assets, liabilities and capital as on a
certain data and the income statement showing the results of operations
during a certain period.” _____________JOHN
N.MYER_________________
(OR)

“Financial statements are a form of reports which helps management in

decision making process such reports are prepared periodically to enable
management to carry out its day -to -day functions”.
___________N.ANTHONY______________
MEANING
The term ‘Financial Analysis’ is also known as analysis and interpretation of
financial statements .It refers to the process of determining the financial
strengths and weakness of a firm by establishing strategic relationship
between the items of the balance sheet, profit and loss account and other
operative data .The purpose of financial analysis is to diagnose the information
contained in a financial statements so as to judge the profitability and financial
soundness of the firm.

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