MANAGEMENT ACCOUNTING

UNIT-1
PART-A
Answer the following
1. What is Management accounting? Define it.
The term of management accounting refers to accounting for the management. Management
accounting provides necessary information to access the management in the creation of policy
and in the day-to-today operation. It enables the management to discharge all its functions ( i.e)
planning, organising ,staffing, directions and control efficiently with the help of accounting
information.
Definition:
“Management accounting is concerned with accounting information that is useful to
management.”-R.N. Anthony
2. State the objective of management accounting.
The objectives of management accounting:
 To access the management in promoting efficiency. Efficiency includes best
possible service to the customers, investors and employee.
 To prepare the budget covering all the function of business (i.e) production,
sales, research and finance.
 To analyse monetary and non-monetary transactions.
 To compare the actual performance with plan for identifying deviations and
their causes
 To interpret financial statements to enable the management to formulate
future policies
 To submit to the management at frequent intervals operating statements and
short-term financial statements.
 To arrange for the systematic allocation of responsibilities.
 To provide a suitable organisation for discharging the responsibilities.
3. State the nature of management accounting
Management accounting is a latest branch in the accounting arena, it may be regarded partly
as a science and party is a art. It is a science of ‘Quantifying and summarising’ and art
of ‘Interpreting’ accounting data.
Management Accounting also involves human judgement, impulses, whims and prejudices as
evidenced in interpretation of data, deductions and conclusion drawn of analysis.
Personal judgement of management accountant may influence the interpretations and
deductions significantly. From this point of view, Management accounting is regarded
as art. We may conclude by saying that like all other social science, management
accounting is partly a science and partly and art.
4. Explain the scope of management accounting.
Management accounting is concerned with presentation of accounting information in the
most useful way for the management. Its scope is, therefore, quite vast and includes
within its fold almost all aspects of business operations. However, the following areas
can rightly be identified as falling within the ambit of management accounting:
(i) Financial Accounting: Management accounting is mainly concerned with the
rearrangement of the information provided by financial accounting. Hence,
management cannot obtain full control and coordination of operations without a
properly designed financial accounting system.
(ii) Cost Accounting: Standard costing, marginal costing, opportunity cost analysis,
differential costing and other cost techniques play a useful role in operation and
control of the business undertaking.
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 (iii) Revaluation Accounting: This is concerned with ensuring that capital is maintained
intact in real terms and profit is calculated with this fact in mind.
(iv) Budgetary Control: This includes framing of budgets, comparison of actual
performance with the budgeted performance, computation of variances, finding of
their causes, etc.
(v) Inventory Control: It includes control over inventory from the time it is acquired till
its final disposal.
(vi) Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other
statistical methods make the information more impressive and intelligible.
(vii) Interim Reporting: This includes preparation of monthly, quarterly, half-yearly
income statements and the related reports, cash flow and funds flow statements,
scrap reports, etc.
(viii) Taxation: This includes computation of income in accordance with the tax laws,
filing of returns and making tax payments.
(ix) Office Services: This includes maintenance of proper data processing and other
office management services, reporting on best use of mechanical and electronic
devices.
(x) Internal Audit: Development of a suitable internal audit system for internal control.
5. State the importance of management accounting
 Helping Forecast the Future
 Increase the efficiency
 Effective planning
 Performance evaluations
 Profit maximization
 Reliability
PART-B
1. Explain the advantages of management accounting
Increase Efficiency:
Management accounting increases the efficiency of operation of company. Everything
is done in management accounting with a scientific system for evaluating and
comparing the performance. With this, we find deviations. We will take promotional
decisions on this basis. Other employees will also be motivated with this because if
their performance will be favourable, they get reward of this. Thus management
accounting increases efficiency.
Maximizing the Profitability:
Using of management accounting's budgetary control and capital budgeting tool,
company can easily succeed to reduce both operating and capital expenditures. After
this, company can reduce its price and then company will receive super profits.
Simplify the Financial Statements
For taking different managerial decisions, management accountant provides deep
technical reports with simple interpretations in which he mentions the facts of financial
statements, after this, company's management officers understand what is in financial
statement and how will they use this for company's progress.

Control of Business's Cash Flow:

It is one of important advantage of management accounting that it can be used for
controlling of business's cash flow. We all know that cash in hand is better than in fixed
properties if there is emergency to pay our loan or debt. So, management accountant
deeply studies from where is money coming and where is it going. To check on misuse
of money will surely control of business's cash flow.

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 5 Business-critical Decisions
To take business - critical decisions, now management accounting will become more
powerful. Global management accountants are coming for join on one plate-form for
taking all business critical decisions.
2. What are the limitations of management accounting?
(i) Limitations of basic records:
Management accounting derives its information from financial accounting, cost 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.
(ii) Persistent efforts.
The conclusions draws by the management accountant are not executed automatically. He
has to convince people at all levels. In other words, he must be an efficient salesman in
selling his ideas.
(iii) Management accounting is only a tool:
Management accounting cannot replace the management. Management accountant is only
an adviser to the management. The decision regarding implementing his 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 accountant.
(iv) 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 conclusions obtained through it.
(v) Top-heavy structure:
The installation of management accounting system requires heavy costs on account of an
elaborate organization and numerous rules and regulations. It can, therefore, be adopted
only by big concerns.
(vi) Opposition to change:
Management accounting demands a break away from traditional accounting practices. It
calls for a rearrangement of the personnel and their activities, which is generally not like by
the people involved.
(vii)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 analytical
tools. This all creates doubt about the very utility of management accounting.
3. Explain Managerial uses of management accounting.
 Productivity. To explain the use of management accounts and management information
systems in performance management, you only need to collect and evaluate data about
employee output relative to hours or payroll. If you track production and find that, on
average, it takes about 15 minutes of labour to produce one unit you sell, you can use this
information to evaluate outcomes when you change variables.

For example, if you purchase a new piece of labour-saving equipment, you can track
productivity before and after you begin using it to determine how much effect it has on your
payroll and your bottom line.

 Sales trends. By using management accounting, you can evaluate in detail which products
and accounts are earning you the most money. Sales figures can help you to pin down
whether your products are attracting a particular demographic and whether it's advantageous
to market particular products at specific times and at targeted places. This management
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 accounting information gives you the tools you need to target marketing efforts and pinpoint
your production numbers.

 Financial planning. Management accounting helps you to pay your bills and keep your
business afloat. By understanding how much money you have available and how much cash
you can expect to have during upcoming periods, you can make strategic decisions about
when to borrow money and when to make long-term investments. Planning these moves
carefully can save you the stress of running out of working capital and it can save you money
on interest and late fees.
4. What are the characteristics of management accounting?
The objective of Management accounting is to record, analyse and present financial data to the
Management in such a way that it becomes useful and helpful in planning and running business
operations systematically and effectively.
The following are the main characteristics of management accounting:
(1) Providing Financial Information:
The main emphasis of management accounting is to provide financial information to
management. The information is provided in a manner suitable to various levels of
management for reviewing policies and decision making.
(2) Cause and Effect Analysis:
Financial accounting confines itself to presentation of P&L account and Balance Sheet.
Management accounting analyses the cause and effect of the facts and figures thereon. If there
is loss causes for the losses are investigated. If there is profit the variable affecting the profit
are also analysed. The amount of profit is compared with expenditure, sales, capital employed,
etc., to draw appropriate conclusions relating to the effect of those items on profit.
(3) Use of Special Techniques and Concepts:
Management accounting employs special techniques like standard costing, budgetary control,
marginal costing, fund flow, cash flow, ratio analysis, responsibility accounting, etc. to make
accounting data more useful and helpful to the management. Each of these techniques or
concepts is a useful tool for specific purpose in analysis and interpretation of data, establishing
control over operations, etc.
(4) Decision Making:
Main objective of management accounting is to provide relevant information-to management to
take various important decisions. Historical information provides a base on which the future
impact is predicted, alternatives are developed and decisions are made to select to select the
most beneficial course of action.
(5) No Fixed Conventions:
Financial accounting has various established principles and rules in preparing the financial
accounts. Management accounting has no such fixed rules. The tools or techniques applied by
the management accounting are same but application of these techniques various from concern
to concern and situation to situation.
Interpretation of analysed data depends on the person using it. The conclusions derived from
application of a technique depend on the intelligence and experience of the management
account. The presentation of information depends on the requirements of the concern. Every
concern has its own was of application of the techniques to suit its needs.
(6) Achievement of Objectives:
Management accounting is helpful in realising the enterprise objectives. Based on the historical
information and with adjustments for predicate future changes, objectives are laid down.
Actual performance is recorded. Comparison of actual with predetermined results is made. If
there are deviations of actual from the predetermined results, corrective action is taken and
predicted objectives are achieved. This becomes possible with the help of management
accounting techniques of standard costing and budgetary control.
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(7) Improving Efficiency:
The purpose of accounting is to provide information to increase efficiency. The efficiency of
departments and divisions can be improved by fixation of targets or goals for a specific period.
The actual performance is compared with that of targets. Positive deviations are reviewed. The
negative deviations are probed to ascertain the causes. The ways and means to tackle the causes
are analysed and targets are achieved. The process of fixing and achieving the targets leads to
gradual improvement in overall efficiency.
(8) Forecasting:
Management accounting is concerned with taking decisions for future implementation. This
involves prediction and forecasting of future. It is helpful in planning and laying down of
objectives.
(9) Providing of Information and not Decisions:
Management accounting provides financial information and not the decisions. That is why it is
said that management accounting depends on the efficiency of the management in using
information and taking effective decisions.
5. Explain the detail the various function of Management Accounting?

The basic function of management accounting is to assist the management in performing its
functions 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:
(i) Provides data: Management accounting serves as a vital source of data for
management planning. The accounts and documents are a repository of a vast
quantity of data about the past progress of the enterprise, which are a must for
making forecasts for the future.
(ii) Modifies data: The accounting data required for managerial decisions is properly
compiled 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.
(iii) Analyses and interprets data: The accounting data is analyzed 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.
(iv) Serves as a means of communicating: Management accounting provides a means of
communicating management plans upward, downward and outward through the
organization. Initially, it means identifying the feasibility and consistency of the
various segments of 8 the plan. At later stages it keeps all parties informed about the
plans that have been agreed upon and their roles in these plans.
(v) Facilitates control: Management accounting helps in translating given objectives
and strategy 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 is an integral part of
management accounting.
(vi) 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 form special surveys, statistical compilations,
engineering records, etc.

PART-C
1. 1. Distinguish between financial Accounting and Management Accounting?

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 Financial accounting and management accounting are closely interrelated since
management accounting is to a large extent rearrangement of the data provided by financial
accounting. Moreover, all accounting is financial in the sense that all accounting systems are in
monetary terms and management is responsible for the contents of the financial accounting
statements. In spite of such a close relationship between the two, there are certain fundamental
differences. These differences can be laid down as follows:
(i) Objectives: Financial accounting is designed to supply information in the form of
profit and loss account and balance sheet to external parties like shareholders, creditors, banks,
investors and Government. Information is supplied periodically and is usually of such type in
which management is not much interested.
(ii) Analyzing performance: Financial accounting portrays the position of business as a
whole. The financial statements like income statement and balance sheet report on overall
performance or statues of the business. On the other hand, management accounting directs its
attention to the various divisions, departments of the business and reports about the profitability,
performance, etc., of each of them. Financial accounting deals with the aggregates and,
therefore, cannot reveal what part of the management action is going wrong and why.
Management accounting provides detailed analytical data for these purposes.
(iii) Data used: Financial accounting is concerned with the monetary record of past events.
It is a post-mortem analysis of past activity and, therefore, out the date for management action.
Management accounting is accounting for future and, therefore, it supplies data both for present
and future duly analyzed in detail in the 'management language' so that it becomes a base for
management action.
(iv) Monetary measurement: In financial accounting only such economic events find
place, which can be described in money. However, the management is equally interested in non-
monetary economic events, viz., technical innovations, personnel in the organization, changes in
the value of money, etc. These events affect management's decision and, therefore, management
accounting cannot afford to ignore them. For example, change in the value of money may not
find a place in financial accounting on account of "going concern concept". But while affecting
an insurance policy on an asset or providing for replacement of an asset, the management will
have to take into account this factor.
(v) Periodicity of reporting: The period of reporting is much longer in financial
accounting as compared to management accounting. The Income Statement and the Balance
Sheet are usually prepared yearly or in some cases half-yearly. Management requires
information at frequent intervals and, therefore, financial accounting fails to cater to the needs of
the management. In management accounting there is more emphasis on furnishing information
quickly and at comparatively short intervals as per the requirements of the management.
(vi) Precision: There is less emphasis on precision in case of management accounting as
compared to financial accounting since the information is meant for internal consumption.
(vii) Nature: Financial accounting is more objective while management accounting is more
subjective. This is because management accounting is fundamentally based on judgement rather
than on measurement.
(viii) Legal compulsion: Financial accounting has more or less become compulsory for
every business on account of the legal provisions of one or the other Act. However, a business is
free to install or not to install system of management accounting

2.. Distingustish between Management Accounting and Cost Accounting?

BASIS OF
COST ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

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Meaning The recording, classifying and The accounting in which the both
summarising of cost data of an financial and non-financial information
organisation is known as cost are provided to managers is known as
accounting. Management Accounting.

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of Providing information to managers to

production. set goals and forecast strategies.

Scope Concerned with ascertainment, Impart and effect aspect of costs.

allocation, distribution and
accounting aspects of cost.

Specific Procedure Yes No

Recording Records past and present data It gives more stress on the analysis of
future projections.

Planning Short range planning Short range and long range planning

Interdependency Can be installed without Cannot be installed without cost

management accounting. accounting.

Cost accounting is the process of accounting for costs. It embraces the accounting procedures
relating to recording of all income and expenditure and the preparation of periodical statements
and reports with the object of ascertaining and controlling costs. It is, thus, the formal
mechanism by means of which the costs of products or services are ascertained and controlled.
On the other hand, management accounting involves collecting, analyzing, interpreting and
presenting all accounting information, which is useful to the management. It is closely
associated with management control, which comprises planning, executing, measuring and
evaluating the performance of an organization. Thus, management accounting draws heavily on
cost data and other information derived from cost accounting. Today cost accounting is
generally indistinguishable from the so-called management accounting or internal accounting
because it serves multiple purposes. However, management accounting can be distinguished
from cost accounting in one important respect. Management accounting has a wider scope as
compared to cost accounting. Cost accounting deals primarily with cost data while
management accounting involves the considerations of both cost and revenue. Management
accounting is an all inclusive accounting information system, which covers financial
accounting, cost accounting, and all aspects of financial management. But it is not a substitute
for other accounting functions. It involves a continuous process of reporting cost, financial and
other relevant data in an analytical and informative way to management. We should not be very
much concerned with boundaries of cost accounting and management accounting since they are
complementary in nature. In the absence of a suitable system of cost accounting, management
accountant will not be in a position to have detailed cost information and his function is bound
to lose significance. On the other hand, the management accountant cannot effectively use the
cost
3. Briefly explain the Tools and Techniques of Management Accounting?
Tools and Techniques of Management Accounting

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Management accounting provides accounting service to the management through its various
functions, and has to employ a number of tools, techniques and methods. No one satisfy all
managerial needs. With gradual development of this subject, a number of new tools and
techniques have been developed either replacing the old ones or as an additions to them. The
important tools and techniques used in management accounting are discussed below.
1. Financial planning
Financial planning involves determination of both long term and short term financial objectives
of the firm and formulation of financial procedures to achieve the objectives. Determination of
capital structure is an important aspect of financial planning. Once the finance manager has
determined the firms financial requirements, his next task is to see that these funds are in hand.
2. Analysis of Financial Statements
It is said that financial statements are mere silent heaps of figures. Management accounting
provides tongue to the silent heaps of figures and analyzes the financial statements. This helps
in classifying and presenting data in a manner useful to the management. The significance of
information provided is explained in a non technical language in the form of common - size
statements, comparative financial statements, ratio analysis, funds flow and cash flow
techniques.
3. Historical Cost Accounting
The statement of actual cost s incurred forms historical cost accounting. The actual cost is
compared to the standard cost which gives an idea about the performance of the business
concern.
4. Budgetary Control
Budgetary control means control of costs with help of budgets. In it various budgets targets are
predetermined. Then actual performance is compared with the budgeted one. This helps in
establishing the responsibilities and co-ordination the departments. Budgets thus are used as a
tool for planning and control.
5. Standard Costing
Standard costing is a very significant cost control device. Under this technique, costs are
determined in advance by systematic analysis. The actual costs are compared with standards,
the variances are analysed to ascertain the causes and action is taken to correct the same in
order to increase efficiency. Usually standard costing is used along with budgetary control for
effective control operations.
6. Marginal Costing
Marginal costing means the ascertainment of marginal costs and its effect on profit due to
changes in the volume and type of output. It is done by dividing total costs into fixed costs and
variable costs. While the variable costs are considered for decision making, fixed costs are
treated as period costs to be charged t costing profit and loss account. Marginal costing
techniques is highly useful to the management in taking various vital decision like price
fixation, profit planning, sales mix, make or buy components etc.
7. Decision Accounting
Decision making is an important task of management. Decisions on capital expenditure,
whether to make or buy ,what price to be charged and other important matters may assisted by
the employment of terms of costs, prices and profits furnished by the management accountant.
Best choice is made after considering other non financial factors.

8. Revaluation Accounting
It is also known as replacement or price level accounting. It is suggested as a tool to combat the
effects of inflation on accounting values.
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4. What are the function of a Management Accountant?
.1. Planning of Accounting Function
An accounting system is maintained in an organization which should cover standards of costs,
sales forecast, production planning, profit planning, allocation of resources, capital
budgeting and short term and long term financial planning. Moreover, he has to prepare the
necessary procedures to implement the plan effectively.
2. Controlling
The management accountant has to measure the actual performance and compare with
standard. Based on this comparison, he has to find the differences and interpret the results of
operation and submit the same to all levels of management. This is done through appropriate
accounting reports for controlling.
3. Reporting
The top management requests the management accountant to prepare the report for the root
causes for an unfavorable event or operations. In this report, the accountant can pin point real
reasons and the persons who are responsible.
4. Coordinating
He consults all levels of management for framing a policy or an action programme. Such type
of consultation brings co-ordination between the accounts department and top management.
5. Interpreting
The accounting information is modified and presented before the management with
interpretation. The interpretation is made in different phases. If so, real reasons for the
operating results can be understood by the management.
6. Evaluation
He has to evaluate the effectiveness of policies, organization structure and procedures adopted
for attaining the objectives. For which, he has to consult the same with functional managers
and top executives.
7. Advising
He has to advise the management in order to improve the performance of operations.
8. Administration of Tax
A business organization is liable to pay value added tax, income tax and other taxes to the local
government, state government and central government. In this aspect, the management
accountant is expected to pay the taxes and maintain the accounting records as the case may be.
9. Government Reporting
He will have to supervise all the statements and returns which are to be submitted to the
government periodically within due date.
10. Appraisal of External Effects
There may be changes in the state and central government policy. Sometimes, there may be
amendments in the existing laws. These policy changes and amendments have an impact on the
attainment of business objectives. The extent of impact has to be assessed by the management
accountant.
11. Economic Appraisal
The economic condition of the nation is periodically published by the central government.
Now, the management accountant is to make economic appraisal and find the influence of
economic condition over the business activities. In this aspect, he can prepare a report and
submit before top management along with his/her comments.

12. Protection of Assets

This function is performed through maintenance of separate fixed assets register for each type
of fixed assets. Moreover, he can frame the rules and regulation for using each type of fixed
assets. He can take insurance coverage to all types of fixed assets.
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5. Discuss the various steps required for Installing the Management Accounting System?
1. Preparation of Organization Manual
The organization manual contains the duties, powers, scope and responsibilities of each
executive in an organization. Moreover, it indicates the means and line of communication
between the executives. This prevents the overlapping of functions.
2. Appointment and Training of Employees
Right candidates should be appointed and suitable training should be provided to them. If so,
they can perform their work independently very effectively.
3. Preparation of Various Forms and Reports
The top management can design various forms and decide the contents of reports according to
the needs of managerial decision making. The main objective of preparing various forms and
reports is avoiding “Bureaucratization”.
4. Classification and Codification of Accounts
The financial accounting information is classified and codified for effective analysis and
interpretation. The accounts are classified on the basis of nature of accounts. The codification
accounts facilitates for easy identification of accounts.
5. Setting up of Cost Centers
There is a need of setting up of cost centre, profit centre, investment centre and budget centre.
If so, only relevant information are collected and analyzed in relation to each of them.
6. Integration of Cost and Financial Data
Both cost accounting data and financial accounting data are used in the management
accounting. Hence, there is a need of suitable system to integrate both cost accounts and
financial accounts. It avoids duplication of data. The integration system should be accurate and
reliable.
7. Introducing Management Accounting Techniques
The needs of one business organization are differing from another. The top management can
introduce various management accounting techniques on the needs of organization and
practicability.
8. Setting up of Budgetary Control System
Every organization should prepare the budgets in order to achieve its objectives economically
and efficiently. Hence, the management should establish suitable budgetary control system.
Moreover, the proposed system should be flexible and accommodate the changes in future.
9. Using of Operations Research Techniques
Every business is running under fast changing economic, political and social environment.
Everyday number of new types of problems may be encountered by the management. The
Operations Research Techniques are highly useful to cope with the emerging problems.

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