UNIVERSITY OF THE WEST

MONA CAMPUS

Introduction to Cost & Management Accounting – ACCT 1003(MS15B)

MANAGEMENT ACCOUNTING
AN OVERVIEW
Management Accounting (MA) refers to accounting for management i.e. accounting which provides
information in the most useful way to management for discharging its function. The main functions of
management are planning, organizing, directing and controlling. In order to carry out these functions
effectively, management needs cost related information, which is provided by the management
accountant. Several accounting bodies and individuals have carried numerous definitions of MA:

The International Federation of Accountants (IFAC) defines MA as “the process of identification,

measurement, accumulation, analysis, preparation, interpretation and communication of information
(both financial and operating) used by management to plan, evaluate and control within an organization,
and to assure use of and accountability for it’s resources.”

The Management accounting Team of the Anglo-American Council of Productivity gives a simpler and
more clear-cut definition. It defines MA as “the presentation of accounting information in such a way to
assist management in the creation of policy and in the day-to-day operations of an undertaking.”

MA is a field of accounting that provides economic and financial information for managers and other
internal users. It is applicable in all types of businesses e.g. service, merchandising, manufacturing, as
well as in different business forms such as sole proprietorships, partnerships and companies. It is
necessary in non-profit as well as profit-oriented organizations.

Accounting systems should provide information for three broad purposes

i) Internal reporting to managers, for use in planning and controlling routine operations.
ii) Internal reporting to managers, for use in making non-routine decisions and in formulating
major plans and policies.
iii) External reporting to stockholders, government and other outside parties for use in investor
decisions, income tax collection etc.

Management Accounting (MA) v Financial Accounting (FA)

MA and FA are closely related since Ma is to a large extent re-arrangement of the data provided by FA.
Despites this close relationship, there are certain fundamental differences.

1. FA is concerned mainly with reporting on the stewardship function of management and is

aimed primarily at supplying information to the external users including shareholders,
 creditors, banks, investors and government. Stewardship function includes indicating whether
funds have been properly spent and recorded.
MA is concerned with providing information to be used inside the organization by
management. Primarily officers, heads of department, unit managers, managers and
supervisors, use reports generated from MA internally. This information generated extends
beyond the “cloak” of the double entry system of accounting and is often more detailed.
Hence, FA is primarily an external reporting process whereas MA is primarily an internal
reporting process.

2. FA focuses on the aggregate and therefore portrays the position of the business as a whole.
MA directs its attention to the various divisions and departments of the organization and
reports on the profitability and performance of each of them. It provides detailed analytical
data, which pinpoints the part of management that is going wrong and in many instances,
why.

3. FA uses historical data in the preparation of financial statements and is therefore said to be
backward looking and non-dynamic. MA is future oriented, dynamic, produces future
oriented figures and is meant to be relevant in the decision making process.

4. FA techniques include the procedures and methods by which the financial statements of
individual entities and group of entities are prepared. Emphasis is usually placed on
comparability and disclosure and the rules that regulate the published financial information.
These are usually set externally to the entity by Company Law or by accounting standards
and other accepted principles.

Unlike FA, MA is not required to follow generally accepted accounting principles. It is

determined internally by each individual organization in response to its particular needs.
Management very often determines the form of presentation.

5. In FA, only economic events, which can be quantified in monetary terms, are presented. In
MA both monetary and non-monetary events such as technical innovations and time value of
money are taken into account.

6. The period of reporting is much longer in FA as opposed to MA. In FA the financial accounts
(BS and IS) are prepared annually and on rare occasions, semi-annually. MA on the other
hand provides information “on demand”, as management requires information to be
furnished quickly and at more frequent intervals.

7. FA is more objective while MA is more subjective. FA is often accused of sacrificing

decision relevancy for objectivity as it is based solely on measurement. MA is more
judgmental in nature and very often reflects the management accountant’s personal input,
which is incapable of external verification.

8. The field of MA is less sharply defined as it draws heavily on disciplines such as economics,
decision sciences and behavioural sciences. FA on the other hand is more sharply defined
and related disciplines are used to a lesser extent.

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 COST ACCOUNTING
Cost accounting (CA) has evolved out of FA, therefore its language and basic methods are similar to
those found in FA. Costing is a routine procedure concerned with establishing the detailed cost of
individual product and processes. In order to implement a costing system, a clear organizational
structure needs to be established that gives management specific responsibilities within carefully defined
limits. Such limits are usually referred to as cost centers. A cost center is similar to a department but can
extend to sub-units within a department or even individuals.

Each department (cost center) is expected to be run in an efficient and responsible manner; hence the
manager must keep in mind that keeping profits up and costs down for his/her designated area becomes
a primary focus of his/her job.

Purposes of Cost Accounting

1. To point management to any inefficiencies in relation to material, usage of machinery
equipment or tools, or wastes that are highlighted by cost accounts.

2. To serve as a guide to determining selling prices. Management is provided with a

composition of total cost so that selling prices can be adjusted to meet prevailing
competition.

3. To assist in cost control. When inefficiencies are identified, action will be taken in respect of
significant variation of costs.

4. To provide comparative statements of costs in which the costs of the current period are
compared with the recorded costs of a previous period, as well as with estimated costs. In this
way management will know whether or not the costs are being properly controlled.

5. To assist in distinguishing between profitable and non-profitable activities.

6. To reveal the causes of increases or decreases in profits shown by the financial accounts or
budget or other estimates of profit.

Cost Accounting V Management Accounting

The two main differences between CA and MA are:

1. CA is the process of accounting for costs. It is the mechanism by which the cost of products
or services are ascertained and controlled. MA on the other hand involves collecting,
analyzing, interpreting and presenting all accounting information, which is useful to
management. MA draws heavily on cost data and other information derived from CA.

2. CA deals primarily with cost data while MA takes both costs and revenues into account.

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Cost Accounting V Financial Accounting

All organizations need financial accounts of one kind or another; however cost accounts are necessary
where it is essential to have control over cost. CA is concerned with the composition of cost and the
sources of it. FA is concerned with the determination of profits but not with how or why the profits
arise. Costing systems are specifically designed to help management plan and control and have several
advantages over FA.
1. It can be produced frequently and regularly.
2. It is very detailed.
3. It is current and up-to-date.
4. It does not depend entirely on historical data.
5. It encourages a forward-looking approach.

Limitations of Management Accounting

Although MA in its broadest sense is deemed to be superior to FA, it has numerous limitations. These
include:

1. MA derives information from FA and other records; therefore conclusions drawn by the
management accountant depend to a large extent on the accuracy of the FA records.

2. Implementing a MA system without the cooperation of all levels of management is “useless”.

All levels of management must exert some amount of effort to achieve the target or goals of
the organization.

3. MA is a tool of management and will not replace management and administration. Decisions
are of management and not the management accountant.

4. Only very large organizations can adopt a MA system; its installation requires an elaborate
organization and a very large number of rules and regulations, which can be quite costly.

5. The adoption of a system of MA very often brings about a radical change in the established
pattern of activity of the management personnel. This is bound to encounter opposition from
some quarter within the organization, as many persons are often in opposition to change.