UNIT - 1

MANAGEMENT ACCOUNTING – NATURE AND SCOPE

 CONCEPT OF MANAGEMENT ACCOUNTING:
The Institute of Cost and Management Accounts, London has defined Management Accounting as the
“Application of Professional Knowledge and skill in the preparation of accounting information in such a way
as to assist management in the formation of policies and in the planning and control of the operations of the
undertakings.”
The American Accounting Association has defined as follows: “Management Accounting is the
application of appropriate techniques and concepts in processing historical and projected economic
objectives in the making of rational decision with a view towards these objectives.” In the words of Brown
and Howards, management accounting may be defined broadly, as that aspect of accounting, which is
concerned with the efficient management of a business through the presentation to management of such
information as, will facilitate efficient and opportune planning and control.
The above definitions clearly indicate that management accounting is concerned with accounting
information, which is useful to management. The common thread underlying these definitions is that
management accounting is concerned with the efficiency of the various phases of management. However, it
should be clearly understood that it does not supplant financial or cost accounting system; rather it
supplements them in order to serve the diverse requirements of modern management.
 LIMITATIONS OF FINANCIAL ACCOUNTING: Financial accounting which could successfully meet the call
made upon it by simple business conditions, failed to respond to the needs of modern business. Management
Accountancy is the outcome of such failure and the management accountant has emerged as a financial
controller from his old status of a mere book-keeper. The limitations of financial accounting responsible for
such development are outlined below:
(1) Presents only past data: The efficient management of modern business demands careful planning and
planning depends for its success on the data available in respect of past performance and future possibilities.
Financial accounting fails here, as it provides only post-mortem of past events. The management is more
interested in the projected financial statements for the coming year rather than in what happened in the
past. The management accounting is able to tell the management, whether and which project involving huge
investments is going to be profitable, which financial accounting cannot.
(2) Useless for controlling: Financial accounting could not be of much use to management in its controlling
function. It is beyond the capacity of a few persons to manage the modern complex business running on large
scale. A number of managerial personnel operate at the top level and middle level whereas supervisors and
foremen operate at lower level. This has necessitated co-ordination and control. Management Accountant
has been able to assist the management considerably in these functions by presenting before them the
reports and pointing out the deviations from set standards which financial accounting failed to do.
(3) Presents dead figures, not interpretation: The financial accounting presets dead figures which are static
in nature. They are not able to talk to management in their language. It presents the past data in the form of
Profit and Loss account showing the result of previous year’s trading and the Balance Sheet indicating the
financial position of the business. However, it does not present to the management, the defects ad
deficiencies of the past. This function is efficiently performed by management accountancy.
(4) Useless for taking decisions: the nature of business has so tremendously changed and has become so
dynamic and competitive that policy decisions cannot be taken on the whims of the managing director or on
the basis of chairman’s optimism. It requires presentation of data in the proper form duly analysed in detail
so that it may form the basis for the managerial action. The financial accounting is out of date for the
management action, as it records only past history. Hence this function is effectively discharged by the
management accountant.
(5) Failure to present data at various levels: Various levels of management have developed in the modern
business organisation, due to its hugeness. Management at various levels would desire to have performance
reports of activities under their jurisdiction, on the basis of which they would be able to evaluate such
performance. Financial accounting has not fulfilled the expectations of management in this respect and
hence the reporting function has been undertaken by management accountant.

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 DEFINITIONS OF MANAGEMENT ACCOUNTANCY:
The report of Anglo- American Council of Productivity (1950) has defined it as follows:
“Management Accountancy is the presentation of accounting information in such a way as to assist
the management in certain of policy and the day to day operation of an undertaking”.
Robert Anthony has put it in a simplified manner “Management Accounting is concerned with
accounting information which is useful to management”.
Institute of Cost and Works Accountants of India defined it as “A system of collection and presentation of
relevant economic information relating to an enterprise for planning, controlling and decision making”.
 CHARACTERISTICS OF MANAGEMENT ACCOUNTANCY: (S.P.U. 2014)
(1) It is an accounting system, which is helpful to the management in taking important business decisions.
(2) It is based on accounting information. It starts working only after the accounting work is over.
(3) It is concerned with analysis of all accounting information which may be useful to the management.
(4) It is concerned with preparation of budgets and budgetary control.
(5) It presents accounting information in such a way where in the actual performance is compared with
standards as laid down in budgets.
(6) It is concerned with presentation of accounting information at regular intervals in the form of reports
before the management.
 SCOPE OF MANAGEMENT ACCOUNTING: (S.P.U. 2013/2014/2015/2016/2017/2018/2019)
The main concern of management accounting is to provide necessary quantitative and qualitative
information to the management for planning and control. For this purpose, it draws out information form
accounting as well as non-accounting sources. Hence, its scope is quite vast and it includes within its fold
almost all aspect of business operations. However, the following areas may rightly be pointed out as lying
within the scope of management according.
1. Financial Accounting: The major function of management accounting is the rearrangement or modification
of data. Financial accounting provides the very basis for such a function. Hence, management accounting
cannot obtain full control and coordination of operations without a well – designed financial accounting
system.
2. Cost Accounting: Planning, decision- making and control are the basis managerial functions. The cost
accounting system provides necessary tools such as standard costing, budgetary control, inventory control,
marginal costing, and differential costing etc., for carrying out such functions efficiently. Hence, cost
accounting is considered a necessary adjunct management accounting.
3. Revaluation Accounting: Revaluation or replacement value accounting is mainly concerned with ensuring
that capital is maintained in real terms and profit is calculated on this basis.
4. Statistical Methods: Statistical tools such as graph, charts, diagrams and index numbers etc., make the
information more impressive and comprehensive. Other tools such as time series, regression, analysis,
sampling techniques etc., are highly useful for planning and forecasting.
5. Operation Research: Modern managements are faced with highly complicated business problems in their
decision-making processes. O P techniques like linear programming, queuing theory, decision theory, etc.,
enable management to find scientific solutions for the business problems.
6. Taxation: This includes computation of income tax per tax laws and regulations, filing or returns and
making tax payments. In recent times, it also includes tax planning.
7. Organization and Methods [O & M]: O & M deal with organizations reducing cost and improving the
efficiency of accounting, as also of office systems, procedures and operations etc.
8. Office services: This includes maintenance of proper data processing and other office management service,
communication and best use of latest mechanical device.
9. Law: Most of the management decisions have to be taken in a legal environment where the requirements
of a number of statutory provisions or regulations are to be fulfilled. Some of the Acts, which have their
influence on management decisions, are The Companies Act, MRTP Act, SEBI Regulations, etc.
10. Internal Audit: This includes the development of a suitable system of internal audit for internal control.
11. Internal Reporting: This includes the preparation of Quarterly, half yearly, and other interim reports and
income statements, cash flow and funds statements, scrape reports, etc.

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 It is clear that management accounting is useful to management in every field of activity and hence,
forms a part of management.
 FUNCTIONS OF MANAGEMENT ACCOUNTING: (S.P.U. 2013/2015/2016/2017/2018)
The basic function of management accounting is to assist the management in performing its function
effectively. The functions of the management are planning, organizing, directing and controlling.
Management accounting helps in the performance of each of these functions in the following ways:
(1) Provides Data: Management accounting serves as a vital source of data for management planning. The
accounts and documents are a repository of a vast quality of data about the past progress of the enterprise
which are a must for making forecasts for the future.
(2) Modifies Data: The accounting data required for managerial decisions is properly complied and classified.
For example, purchase figures for different months may be classified to know total purchases made during
each period product-wise, supplier wise and territory wise.
(3) Analysis and Interprets Data: The accounting data is analysed meaningfully for effective planning and
decision-making. For this purpose, the data is presented in a comparative form. Ratios are calculated and
likely trends are projected.
(4) Serves as a means of communicating: Management accounting provides a means of communicating
management plans upward, downward and outward through the organisations. Initially, it means identifying
the feasibility and consistency of the various segments of the plan. At large stages, it keeps all parties
informed about the plans that have been agreed upon and their roles in these plans.
(5) Facilities Control: Management accounting helps in translating given objectives and strategies into
specified goals for attainment by a specified time and secures effective accomplishment of these goals in an
efficient manner. All this is made possible through budgetary control and standard costing which are integral
parts of management accounting.
(6) Uses also Qualitative Information: Management accounting does not restrict itself to financial data for
helping the management in decision making but also uses such information which may not be capable of
being measured in monetary terms. Such information may be collected from special surveys, statistical
complications engineering records, etc.
 UTILITY OF MANAGEMENT ACCOUNTING:
Management accounting provides invaluable services to management in all of its functions. The basic
functions of management are: (1) Planning, (2) Controlling, (3) Coordinating, (4) Organising, (5) Motivating
and (6) Communicating. Management accounting helps in performance of these functions effectively as
explained below:
(1) Planning: It involves formulation of policies, setting up of goals and initiating necessary programmes for
achievement of the goals. Management accounting makes an important contribution in performance of this
function. It makes available the relevant data after pruning and analysing them suitably for effective planning
and decision making.
(2) Controlling: It involves evaluation of performance keeping in view that the actual performance coincides
with the planned one, and remedial measures are taken in the event of variation between the two. The
techniques of budgetary control, standards costing and departments operating statements greatly help in
performing this function. As a manner of the fact, the entire system of control is designed and operated by
the management’s accountant designated as controller.
(3) Coordinating: It involves interlinking of different divisions of the business enterprise in a way so as to
achieve the objective of the organization as a whole. Thus, perfect coordination is required among
production, purchase, finance, personnel, sales, departments, etc. effective coordination is achieved through
department’s budgets and reports which form the nucleus of managements accounting.
(4) Organizing: It involves grouping of operating action in a way as to identify the authority and responsibility
within the organization. Managements accounting here also plays a prominent role. The whole organization
is divided into sustainable profits or cost centers. A sound system of internal control and internal audit for
each of the cost or profits centers helps in organization and establishing a sound business structure.
(5) Motivating: It involves maintenance of a high degree of morale in the organisation. Conditions should be
in a position to find out whom to demote or promote and to rewards or penalize. Periodical department’s
profits and loss accounts, budgets and reports go a long way in achieving this objective.

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(6) Communicating: It involves transmission of data, results, etc. both to the insiders as well as outsider. The
orders of the superior should be communicated to the subordinates while the results achieved by the
subordinates should be reported to the superiors. Moreover, the management owes a duty to the creditors,
prospective investors, shareholder, etc., to communicate to them about the progress, financial positions, etc.,
of the enterprise. Management accounting helps the management in performance of this function by
developing a suitable system of reporting which emphasises and highlights the relevant facts.
Management accounting is thus helpful to the management in every field of activity. This is the reason
why management accountant is considered not only a service arm to management but also a part of
management.
 LIMITATIONS OF MANAGEMENT ACCOUNTING: (S.P.U. 2013/2015/2016/2018/2019)
Management accounting being comparatively a new discipline, it suffers from certain limitation which
limit its effectiveness. These limitations are as follows:
(1) Limitation of Basic Records: Management accounting derives its information from financial accounting
and other records. The strength and weakness of the Management accounting, therefore, depends upon the
strength and weakness of these basic records. In other words, their limitations are also the limitations of
Management accounting.
(2) Persistent Efforts: The conclusions drawn by the management accounting are not executed automatically.
He had to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.
(3) Management Accounting is Only Tool: Management accounting cannot replace the management.
Management accounting is only an advisor to the management. The decision regarding implementing is
advice is to be taken by the management. There is always a temptation to take an easy course of arriving at
decision by intuition rather than going by the advice of the management accounting.
(4) Wide Scope: Management accounting has a very wide scope incorporating many disciplines. It considers
both monetary as well as non monetary factors. This all brings inexactness and subjectivity in the conclusion
obtains through it.
(5) Top-heavy Structure: The installation of Management accounting system requires heavy cost on account
of an elaborate organisation and numerous rules and regulations. It can, therefore, be adopted only by big
concerns.
(6) Opposition to Change: Management accounting demands a breakaway from traditional accounting
practice. It calls for a rearrangement of the personal and their activities which are generally not liked by the
people involve.
(7) Evolutionary Stage: Management accounting is still in its initial stage. It has, therefore, the same
impediments as a new discipline will have, e.g. fluidity of concepts, raw techniques and imperfect analysing
tools. This all creates doubt about the very utility of management accounting.
 TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTANCY (METHODS):
Some of the tools and techniques used by a management accountant are as under:
(1) Standard Costing: It is technique in which pre-determined standards of costs are set in advance and actual
performance is compared with it. Variances are ascertained through which control function becomes
effective.
(2) Marginal Costing: It is a modern technique of determining cost in which costs are divided into fixed and
variable. Fixed costs are not included as a part of cost of production but recovered from the margin between
sales price and variable cost. The system is extremely useful in presenting information before management
with respect to cost, revenue and profits.
(3) Budgetary Control: Business policies and plans are expressed in financial terms under the system of
budgetary control. Budgets are prepared covering every aspect of business. Actual performance is compared
with budgeted figures and co – ordination and control are made effective through budget reports.
(4) Historical Costing: Historical costing is concerned with recording and ascertaining cost after they have
been incurred. As against that in standard costing, standards for cost are set for each element of cost in
advance before manufacturing is undertaken. Historical costing is not of mach use to management but may
provide basis for future planning.

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(5) Financial Policy and Accounting: Financial policy in concerned with determining how business is to be
financed, what types of securities are to be issued and what should be the source of long term and short term
borrowings.
Financial accounting is the basis of management accounting. Besides, it is compulsory for joint stock
companies to publish final accounts.
(6) Control Accounting: It is a technique used in different systems. For example, variance analysis in standard
costing, system of statement and report in Budgetary Control, Internal Check and internal audit etc., are the
techniques of control accounting. It is in presentation of data in this respect that the management
accountant can show his ingenuity in analysis and interpretation of data.
(7) Decision Accounting: The management accountant suggests alternative courses of action on a particular
project, based on the data furnished by above systems. When decisions regarding selecting a capital
expenditure project to be taken up or in case of make or buy decisions, pricing decisions etc. the
management accountant presents the data, in analytical form and suggests the profitable course of action in
the given circumstances. The management gets considerable help in making decisions on the basis of such
information.
In addition, the management accountant makes use of return on capital employed technique, break
even analysis, inter-firm comparison, operations research etc.
 DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING:
(S.P.U.
2014/2015/2016/2017/2018/2019)
Management Accounting Financial Accounting
The Management Accounting is on the other hand The Financial accounting deals with historical data.
concerned with the future policies. They portray a board picture of events that have
taken place over a period of time.
Management Accounting devotes attention to all The Financial accounting presents information for
the segments like various departments, products the business as a whole.
and processes. This would provide invaluable
information for managerial decisions.
Management Accounting provides information for Financial accounting provides information for use
internal use of management so as to enable them of outsider’s viz. investors, creditors, shareholders,
to take policy decision for the future. government, etc.
Management accounting is not compulsory but is It is obligatory fort joint stock companies to
prepared voluntarily to help the management. prepared financial accounting, and it almost
compulsory for all types of business firms to
prepare them for tax purpose.
Figures approximated to hundreds or even Accurate figure are absolutely necessary for
thousands are more useful in management Financial Accounting.
accountancy.
Management accounting makes free use of The technique and systems of cost accounting,
systems of cost accounting and statistical methods. statistical method etc. are not made use of in
Financial Accounting
Management on the other hand is also interested Financial Accounting presents only such data and
in non-monetary matters e.g. new inventions, records, which can be expressed in terms of
working condition of employees, extent of money.
competition etc.
 DIFFERENCE BETWEEN MANAGEMENT ACCOUNTANCY AND COST ACCOUNTANCY (2019)
The following are the some of the points of difference between management accountancy and cost
accountancy:
Cost Accounting Management Accounting
1. Cost accounting is primarily concerned with cost. 1. Management account is primarily concerned
Its records, collects analyses and presents the cost with presenting accounting data before

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 data before the management. management using techniques of even statistics
and mathematics, for the purpose of decision
making.
2. Cost accountancy generally makes use of 2. Management accountancy emphases even
standards costing and budgetary control for control profitability, productivity and other aspect which
purposes and mostly emphasizes variances by are of interest to management.
comparing actual figures with standards and
budgeted figures.
3. Cost accountant is concerned with costing 3. The scope of management accountancy is wider
aspect, while management accountant draws from than that of cost accountancy.
principles and practices of cost accountancy as well
as other fields like financial accounting and
statistics.
4. Cost accountant has a lower status as compare 4. The management accountant occupies a higher
to him. position in the organization set up.
5. Cost accountant has simply to assist 5. Management accountant is concerned not only
management as far as costing is concerned. He has with assisting the management on its decision-
no business to deal with management performance making function but is also concerned with
evaluation. evaluating management performance.
6. Cost accountant presents mostly historical data 6. Management accountant has to assist,
except in case of standard costing. management in future plans and policy making.
7. Cost accounting can be installed even without 7. Management accounting cannot work without
management accounting. cost accounting.
 MANAGEMENT ACCOUNTANT:
Management accounting provides significant economic and financial data to the management and the
Management Accountant is the channel through which this information efficiently and effectively flows to the
Management.
The Management Accountant has a very significant role to perform in the installation, development
and functioning of an efficient and effective management accounting system. He designs the framework of
the financial and cost control reports that provide each managerial level with the most useful data at the
most appropriate time. He educates executives in the need for control information and ways of using it. This
is because his position is unique with respect to information about the organisation.
Apart from top management no one in the organisation perhaps knows more about the various
functions of the organisation than him. He is, therefore, sometimes described as the Chief Intelligence Officer
of the management. He gathers information, breaks it down, sifts it out and organizes it into meaningful
categories. He separates relevant and irrelevant information and then ranks relevant information according
to degree of importance to management. He reports relevant information in an intelligent form to the
management and sometimes also to those who are interested in the information outside the company. He
also compares the actual performance with the planned one and reports and interprets the results of
operations to all levels of management and to the owners of the business.
Thus, in brief, management accountant or controller is the person who designs the management
information system for the organisation, operates it by means of interlocked budgets, computes variances
and exhorts others to institute corrective measures. Mr. P. L. Tandon has explained beautifully the position of
the management accountant in the following words:
“The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel
and the hub receiving the information. He possesses the information and then returns the processed
information back to where it came from.”
 Roles and Status of Management Accountant
Status of Management Accountant:
The management accountant, often referred to as controller, is the manager of accounting
information used in planning, control and decision-making areas. He is responsible for

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collecting, processing and reports; g information that will help managers/decision makers in
their planning, controlling and decision-making activities. He participates in all accounting
activities within the organization.
Role of Management Accountant:
1. Stewardship Accounting: Management accountant designs the frame-work of cost and
financial accounts and prepares reports for routine financial and operational decision-making.
2. Long-term and Short-Term Planning: Management accountant plays an important role in
forecasting future business and economic events for making future plans i.e., long-term plans,
strategic management accounting, formulating corporate strategy, market study etc.
3. Developing Management Information System (MIS): The routine reports as well as reports
for long-term decision-making are forwarded to managerial personnel at all levels to take
corrective action at the right time. The management accountant also uses these reports for
taking important decisions.
4. Maintaining Optimum Capital Structure: Management accountant has a major role to play
in raising of funds and their application. He has to decide about maintaining a proper mix
between debt and equity. Raising of funds through debt is cheaper because of tax benefits.
However, it is risky as because interest on debt has to be paid whether the firm earns
adequate profits or not. Management accountant has, therefore, to maintain an optimum
capital structure and give due consideration to various cost of capital theories, leverage and
possibility of trading on equity.
5. Participating in Management Process: The management accountant occupies a pivotal
position in the organisation. He performs a staff function and also has line authority over the
accountant and other employees in his office. He educates executives on the need for control
information and on the ways of using it. He shifts relevant information from the irrelevant
and reports the same in a clear form to the management and sometime to interested external
parties.
6. Control: The management accountant analyses accounts and prepares reports e.g.,
standard costs, budgets, variance analysis and interpretation, cash and fund flow analysis,
management of liquidity, performance evaluation and responsibility accounting etc. for
control.
7. Decision-Making: Management accountant provides necessary information to
management in taking short-term decision e.g., optimum product mix, make-or-buy, lease or
buy, pricing of product, discontinuing a product etc. and long-term decisions e.g., capital
budgeting, investment appraisal, project financing etc.
However, the job of management accountant is limited to provision of required
information in a comprehensive as well as reliable form to the management for decision-
making purposes. But the actual decision-making responsibility lies with the management. In
other words, neither the management accountant nor the internal accounting reports can
make the decisions for the management.

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