Management Accounting

Meaning

Management accounting is the process of preparing reports about business operations

that help managers make short-term and long-term decisions. It helps a business pursue its goals
by identifying, measuring, analyzing, interpreting and communicating information to managers.

Definition

According to the Institute of Management Accountants (IMA): "Management accounting is

a profession that involves partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial reporting and control to
assist management in the formulation and implementation of an organization's strategy".

Nature and characteristics of Management Accounting

1. Selective Nature

Management accounting selects only few information out of much information provided by
the financial accounting system. The reason is that all the financial accounting information is not
necessary to management.

2. More Emphasis on Future

There is no meaning of collection of historical data. The management accounting attempts to

highlight upon what should have been. In this aspect, the use of standard costing, cost variances
and budgetary control emphasizes to highlight upon the futuristic nature of management
accounting.

3. Provides only information but no decision

The financial accounting information is presented in the different basis and in different manner
which helps the management for proper planning and take quality decisions. It is up to the
intelligence of management executives to take valid decision out of available information.

4. The Problem of Choice

An attempt is made to solve the managerial problems. For which, a comparative analysis of
various available alternatives are taken into account and only that alternative is normally
selected which seems to be more attractive and profitable. For example, Capital Budgeting
techniques.

5. Study Causes and Effects Relationship

Under financial accounting system, profit and loss account is prepared to know the quantum of
profit earned or loss suffered. It does not disclose the reasons for such quantum of profit earned
or loss suffered. But, under management accounting system, it study the cause and effects
relationship prevailing between the variables which affect business activity and profitability
through analysis.

6. Not bounded by the Rules of Financial Accounting

Management accounting never follows the rules of financial aacounting. But it is concerned with
the informations which are highly useful to the management for decidion making and
controlling.

9. It modifies, analyses and interprets data

The financial accounting information are modified, analyzed and interpreted with new
dimensions. In this way, data help the management to take the line of action towards control of
destiny of an undertaking.

10. No Specific Rules and Conventions

Financial Accounting System has rules and conventions to record the business transactions in
the books of accounts. But, there is no such rules and conventions to the management
accounting. Moreover, the tools and techniques applied by the management are varying from one
period to another and one concern to another.

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

12. Improving 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.

Positive deviations and

Negative deviations.

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.
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.

(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.
Objectives of Management Accounting
1. Assistance in Planning and Formulation of Future Policies:
Management accounting assists management in planning the activities of the business.
Planning is deciding in advance what is to be done, when it is to be done, how it is to be done
and by whom it is to be done. It involves forecasting on the basis of available information,
setting goals, framing policies, determining the alternative courses of actions and deciding on
the programme of activities to be undertaken.

2. Helps in the Interpretation of Financial Information:

Accounting is a technical subject and may not be easily understandable by everyone till
the user has a good knowledge of the subject. Management may not be able to use the
accounting information in its raw form due to lack of knowledge of accounting
techniques.Management accountant presents the information in an intelligible and non-
technical manner. This will help the management in interpreting the financial data, evaluating
alternative courses of action available and guiding the management in taking decisions and
having the most desired financial results.

3. Helps in Controlling Performance:

Management accounting is a useful device of managerial control. The whole

organisation is divided into responsibility centres and each centre is put under the charge of
one responsible person. He will be associated with the planning and framing of the budgets
and be required to execute the plans and standards and deviations are analysed in order to
pinpoint the responsibility. Management accounting assists management in location of weak
spots and in taking corrective actions against such spots which are not in conformity with the
budgeted performance. Thus, management accounting helps management in discharging its
control function successfully through budgetary control and standard costing.

4. Helps in Organizing:

The management accountant recommends the use of budgeting, responsibility

accounting, cost control techniques and internal financial control. This all needs the intensive
study of the organisation structure. In turn, it helps to rationalise the organisation structure

5. Helps in the Solution of Strategic Business Problems:

Whenever there is a question of starting a new business, expanding or diversifying the

existing business, strategic business problem has to be faced and solved.Similarly when in a
particular situation, there are different alternatives as whether labour should be replaced by
machinery or not, whether selling price should be reduced or not, whether to export the item
or not etc., a management accountant helps in solving such problems and decision-
making.Management accounting provides feedback to the management such as what business
to engage in or diversify how to run that business efficiently. This is most important
contribution which the management accountant has made.

6. Helps in Coordinating Operations:

Management accounting helps the management in co-coordinating the activities of the

concern by getting prepared functional budgets in the first instance and then co-coordinating
the whole activities of the concern by integrating all functional budgets into one known as
master budget. Thus, management accounting is a useful tool in coordinating the various
operations of the business.

7. Helps in Motivating Employees:

The management accountant by setting goals, planning the best and economical course
of action and then measuring the performance tries his best to increase the effectiveness of
the organisation and thereby motivate the members of the organisation.

8. Communicating Up-to-date Information:

Management accounting assists management in communicating the financial facts

about the enterprise to the persons who are interested in these facts so that they may be
guided to a line of action to be pursued. Management needs information for taking decisions
and for evaluating performance of the business.The required information can be made
available to the management by means of reports which are an integral part of the
management accounting. Reports are means of communication of facts which should be
brought to the notice of various levels of management so that they may be guided for taking
suitable action for the purposes of control.

9. Helps in Evaluating the Efficiency and Effectiveness of Policies:

Management accounting also lays emphasis on management audit which means

evaluating the efficiency and effectiveness o£ management policies. Management policies are
reviewed from time to time to make an improvement in them so that maximum efficiency may
be achieved.
Functions 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 communication:

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 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.
Distinction between Financial Accounting and Management Accounting

BASIS FOR COMPARISON FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Financial Accounting is an The accounting system which

accounting system that focuses provides relevant information to
on the preparation of financial the managers to make policies,
Meaning statement of an organization to plans and strategies for running
provide the financial the business effectively is
information to the interested known as Management
parties. Accounting.

Preparation Mandatory Not Compulsory

Monetary and non-monetary

Information Monetary information only.
information

To assist the management in

To provide financial planning and decision making
Objective
information to outsiders. process by providing detailed
information on various matters.

Format Specified Not specified

Financial Statements are

The reports are prepared as per
prepared at the end of the
Time Frame the need and requirements of
accounting period which is
the organization.
usually one year.

User Internal and external parties Only internal management.

Summarized Reports about the

Complete and Detailed reports
Reports financial position of the
regarding various informations.
organization

Required to be published and Neither published nor audited

Publishing and auditing
audited by statutory auditors by statutory auditors.
Difference between management and cost accounting are as follows:

S.No. Cost Accounting Management Accounting

1 The main objective of cost accounting is The primary objective of management
to assist the management in cost control accounting is to provide necessary information
and decision-making. to the management in the process of its
planning, controlling, and performance
evaluation, and decision-making.

2 Cost accounting system uses Management accounting uses both

quantitative cost data that can be quantitative and qualitative data. It also uses
measured in monitory terms. those data that cannot be measured in terms of
money.

3 Determination of cost and cost control Efficient and effective performance of a

are the primary roles of cost accounting. concern is the primary role of management
accounting.

4 Success of cost accounting does not Success of management accounting depends

depend upon management accounting on sound financial accounting system and cost
system. accounting systems of a concern.

5 Cost-related data as obtained from Management accounting is based on the data

financial accounting is the base of cost as received from financial accounting and cost
accounting. accounting.

6 Provides future cost-related decisions Provides historical and predictive information

based on the historical cost information. for future decision-making.

7 Cost accounting reports are useful to the Management accounting prepares reports
management as well as the shareholders exclusively meant for the management.
and creditors of a concern.

8 Only cost accounting principles are used Principals of cost accounting and financial
in it. accounting are used in management
accounting.

9 Statutory audit of cost accounting No statutory requirement of audit for reports.

reports are necessary in some cases,
especially big business houses.

10 Cost accounting is restricted to cost- Management accounting uses financial

related data. accounting data as well as cost accounting
data.
Tools of management accounting
Limitations of Management accounting
1. Based on Financial and Cost Records
Both financial and cost accounting information are used in the management accounting
system. The accuracy and validity of management account is largely based on the accuracy if financial
and cost records maintained. These records determine the Strength and weakness of management
accounting.

2. Personal Bias
The analysis and interpretation of financial statements are fully depending upon the capability of the
analyst and interpreter. Hence, personal prejudices and bias of an individual can affect the objectivity
and effectiveness of the conclusions and recommendations.

3. Lack of Knowledge and Understanding of the Related Subjects

Financial accounting, cost accounting, statistics, economics, psychology and sociology are the
related subjects of management accounting. The organization can derive more benefits of
management accounting if the management accountant has thorough knowledge over related
subjects. If not so, the success of management accounting system is questionable.
4. Provides only Data
Under management accounting system, many alternatives are developed to solve a problem
and submitted before the management. Out of the many alternatives available, the management can
select any one of alternatives or even discard all of them. Hence, management accounting can only
provide data and not prescribe any course of action.

5. Preference to Intuitive Decision Making

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.

6. Management Accounting is only a Tool

The management accountant is using the management accounting system as a tool to give
advice and facilitate the management for decision making. The actual decisions, their implementation
and follow up action are the prerogative of the management.

7. Continuity and Participation

The decisions are taken by the management. Their implementation is vested in the hands of
management accountant. The continuous efforts of management accountant and full participation of
all levels of management are necessary for successful operation of management accounting system.

8. Broad Based Scope

The scope of management accounting is very wide since it considers both monetary and non-
monetary transactions of the business organization. The limited knowledge and experience of
the management accountant can lead to prepare the data unreliable and undependable.

9. Costly Installation
The cost of installation of management accounting system is very high. Hence, a small
business organization can not bear the cost of such installation. Moreover, the utility of this system is
restricted only to big and complex organizations.

10. Resistance to Change

The installation of management accounting system brings some changes in the organizational
set up and accounting practice. The personnel concerned may resist such changes unless they are
getting confidence.

11. Evolutionary State

Management accounting is a recent development discipline. The utility of management
accounting is depending upon the intelligent interpretation of the data available for managerial use.
Hence, it is presumed that the management accounting stands in evolutionary stage.

12. Unquantifiable Variables

Management accounting seeks to interpret and evaluate an objective historical event on
record in terms of money. But, in practice, the business organization is facing many problems which
cannot be exposed.