Chapter 1

n Nature of Management
Accounting
NATURE OF MANAGEMENT
ACCOUNTING

FINANCIAL ACCOUNTING

COST ACCOUNTING

MANAGEMENT ACCOUNTING
 Accounting
Accounting is the process of identifying, measuring
and communicating economic information
to permit informed judgements and
decisions by users of information.

Business Accounting System

Financial Management
Cost Accounting
Accounting Accounting
 Management Accounting Information

Management accounting information is

the accounting information
specifically prepared to
aid managers.
Management accounting information
is used in three managerial functions

1. Planning
Planning is the process of deciding what action
should be taken in the future.
2. Implementation
Implementation involves specific actions planned
in advance to fulfill the budgets.
3. Control
Control comprises managerial action to correct
conditions that cause deviation between
the actual and planned performance.
 Functions of Controller

Controller is the highest level management

accountant.

Management Accountants are responsible

for the design and operation of the
management accounting
system.
 Management Accounting vs.
Financial Accounting
Management
Dimension Financial Accounting
Accounting
Information Varies according to
Unified structure
precision use of the information

Sources of Whatever is useful Generally accepted

principles to Management accounting principles

Information
Optional Statutory Obligation
precision

Time- Historical and

Historical
orientation estimates of the future
 Management Accounting vs.
Financial Accounting
Management
Dimension Financial Accounting
Accounting
Responsibility
Report entity Overall organisation
centres
External
A means to the end of
Purpose reporting/statements for
assisting management
outside users
Relatively small group:
Users Relatively large
know identity

Time- Historical and estimates

Historical
orientation of the future
 Important Similarities between
Financial and Management Accounting

Most elements of financial accounting are also

found in management accounting.

Basic data collected for both are in accordance with

the generally accepted financial accounting
principles to avoid duplication.

Both are used in decision making.

Relationship between Cost Accounting
and Management Accounting

Cost Accounting provides Data for Appraisal

Information.

Cost Accounting helps in Profit Planning.

Cost Accounting is useful for the purpose of

control.
 Cost Accounting

Provides Data for

Purpose of
Performance Profit Planning
Appraisal
Control

Management
Accounting
 Management Accounting
Information and Their Uses
Management Accounting information is used
for three distinct purposes.

Purposes Uses
Historical Data Future estimates
Basis for external reporting.
1. Analysing economic Normal pricing
Measurement performance decisions
Cost-plus contract payments.
Analysing managerial Strategic planning
2. Control
performance Budgeting
3. Alternative Capital budgeting
None
choices Short-run decisions
 Measurement Purposes
For the measurement purpose the management accounting
system focuses on the measurement of full costs.

Full Cost Accounting measures the resources used in

performing some activity. It is the sum
of direct and indirect costs.

Full costs are used in

(i) Financial reporting,
(ii) Analysing economic performance and
(iii)Cost-plus contracts.
 Control Purposes

For control purposes, management accounting

measures costs by responsibility centres.

Responsibility Centres is an organisation unit headed

by a manager who is responsible
for its operations and performances.
 Alternative Choice Decisions

The alternative decisions use differential costs.

Differential costs are costs which differ according

to the alternatives.

For short-run decisions only direct costs are relevant.

For long-range decisions full
costs are relevant.