UNIT I

INTRODUCTION TO
MANAGEMENT
ACCOUNTING
Contents
Meaning ................................................................................................................................. 2

Characteristics /Nature of Management Accounting: ............................................................ 2

Functions of Management Accounting. ................................................................................. 3

Tools and techniques used in Management Accounting........................................................ 5

Difference between Cost Accounting and Management Accounting .................................... 6

Difference between Financial Accounting & Management Accounting ............................... 7

Limitations of Management Accounting. .............................................................................. 8

Functions of Management Accountant ................................................................................ 11

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 Nature And Scope of Management Accounting
Meaning
Management Accounting: Management Accounting is a segment of Accounting that deals
specifically with the analysis and reporting of information to management about the operations
of the organization with an objective to facilitate decision making. According to the Chartered
Institute of Management Accountants, “the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of information used by
management to plan, evaluate and control within an entity and to assure an appropriate use of
and accountability for its resources.
Characteristics /Nature of Management Accounting:
1. Helpful in 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.
2. Provides Data, not the Decision: 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.
3. Selective in Nature: Management Accounting is a technique of selective nature. It
takes into consideration only that data from the income statement and position state
merit which is relevant and useful to the management. Only that information is
communicated to the management which is helpful for taking decisions on various
aspects of the business.
4. Assist in Achieving 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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 5. Related to Future: Management accounting unlike the financial accounting deals with
the forecast with the future. It helps in planning the future because decisions are always
taken for the future course of action.
6. Increase in 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.
7. Use of Special Techniques: 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.
Functions of Management Accounting.
1. Data Collection: The first function of management accounting is to collect the requisite
data from all possible resources. It collects the economic and financial data from the
financial statements like the Profit/Loss account and Balance Sheet. It also considers
the non-monetary factors for decision making.
2. Data Processing: The data so collected and stored needs to be converted into
information through processing. Data processing refers to series of activities consisting
of compilation, classification, tabulation, and summarization that aims to make data
information.
3. Presentation of Data: The data which is processed is presented in a manner to assist
decision making. management accounting modifies and rearranges data as per the
requirements for decision making through various techniques.
4. Aid of Planning and Forecasting: Management accounting is helpful to the
management in the process of planning through the techniques of budgetary control and
standard costing. Forecasting is extensively used in preparing budgets and setting
standards.
5. Help in Organising: Organising is concerned with establishment of relationships
among different individuals in the firm. It includes delegation of authority and fixing
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 responsibility. Management Accounting aims at aiding the Management in organising
through establishment of cost centres, profit centres, responsibility centres, Budget
preparation etc. These activities are helpful in setting up an effective organisational
framework.
6. Decision Making: Management accounting provides comparative data for analysis and
interpretation for effective decision making and policy formulation.
7. Reporting to Management of Different levels: One of the Major objectives of
Management accounting is to keep the Management informed about the performance,
adherence to plans and progress of various sections of the organisation. Top
Management needs feed-back about implementation of its plans policies and
programmes. Middle level Management and even junior executives need data for day
to day operating decisions. Periodical and frequent reports are prepared and sent in time
by Management Accountant to cater to the needs of all the levels of Management.
8. Communication of Management Policies: Management accounting conveys the
policies of the management downward to the personal effectively for proper
implementation.
9. Effective Control: Standard costing and budgetary control are integral part of
management accounting. These techniques lay-down targets, compare actual will
standards and budgets to evaluate the performance and control the deviations.
10. Incorporation of Non-Financial Information: Management accounting considers
both financial and non-financial information for developing alternative courses of
action which leads to effective and accurate decisions.
11. Coordination: The targets of different departments are communicated to them, and
their performance is reported to the management from time to time. This continual
reporting helps the management in coordinating various activities to improve the
overall performance.
12. Motivating Employees: Budgets, standards and other programmers are to be
implemented in practice by the employees. A major objective of Management
accounting is to determine the targets in the form of budgets, standards and programme
in such a way that the employees feel motivated to achieve them. This is usually
accomplished by making the targets practicable and offering suitable monetary and
non-monetary incentives to achieve them.

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Tools and techniques used in Management Accounting.

1. Financial Planning: Planning is necessary not only for better organizational

performance and progress but also for efficient utilization of available resources.
Financial planning is the process of deciding in advance the financial objectives,
policies and procedures. An organization can achieve long term as well as short term
financial objectives by employing financial planning.
2. Financial Statement Analysis: Analysis of financial statements is means to classify
and present the data in manner useful to the management. The significance of
information provided is explained in a nontechnical language in the form of ratio
analysis, funds flow and cash flow techniques.
3. Cost Accounting: Cost accounting is a vital part of the accounting system. It includes
recording, classifying, analysis and reporting of all cost facets in a company’s
performance. Cost accounting procedures have to be designed carefully after taking
into consideration the nature and requirements of the business and the data required at
the different levels of management for effective cost contri9l and cost reduction.
4. Standard Costing: Another major technique commonly used by the organizations for
exercising control is standard costing. Under Standard costing, the costs are determined
in advance by systematic analysis. The actual costs are compared with standards. The
variances are analysed to find the causes and action is taken for removal of the same to
increase efficiency. Generally, standard costing is used along with budgetary control
for effective control of operations.
5. Marginal Costing: Marginal costing is a managerial technique that considers only
variable cost in the decisions concerning with additional output. It is a reporting system
that values inventory and cost of sales at its manufacturing variable cost. It is frequently
used as internal management reporting system.
6. Budgetary Control: Budgetary control refers to a system of business control that uses
budgets to control the major activities of business. The budgets for all major activities
of the business are prepared in advance and the actual operations are carried out in
accordance with the budget estimates. The actual are compared with budgets to reveal
deviations and individuals responsible for the same. Corrective actions are initiated to
eliminate the negative deviations in future.

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 7. Fund Flow Analysis: Fund flow analysis attempts to highlight the causes of change in
the financial position of a business enterprise between two balance sheet dates. Any
statement prepared for this purpose refers to as fund flow statement. A fund flow
statement helps managers in the efficient management of funds.
8. Management Reporting: Management reporting is considered as an essential
component of a well-designed planning and control system. Decision makers frequently
require information on various aspects of business. Thus, it is the responsibility of the
management accountant to communicate the required information to management at
the right time and in a right manner.
9. Statistical Analysis: Accountants frequently confront masses of data from which they
have to draw systematic and logical conclusions. Statistical analysis in general and
sampling theory in particular provides them a scientific method to draw reliable and
valid conclusions about the properties of an entire population by studying only a chosen
sample of the population

Difference between Cost Accounting and Management Accounting

Points of
Cost Accounting Management Accounting
difference

The recording, classifying, The accounting in which both financial

and summarizing of cost and non-financial information are
Meaning
data of an organisation is provided to managers is known as
known as cost accounting Management Accounting

Scope of management accounting is

Scope of cost accounting is
broader than that of cost accounting as it
limited to providing cost
Scope provides all types of information cost
information for managerial
accounting as well as financial accounting
uses
information managerial uses

Information
Quantitative Quantitative and Qualitative
Type
Main emphasis is on cost
ascertainment and cost Main emphasis is on planning, controlling
Emphasis
control to ensure maximum and decision making to maximise profits
profit

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 Management accounting also uses all these
Various techniques used by
techniques used in cost accounting but in
cost accounting include
addition it also uses techniques like ratio
standard costing, marginal
Techniques analysis, funds flow statement, statistical
costing , cost volume profit
employed analysis, operations research and certain
analysis, budgetary control,
techniques from various branches of
uniform costing and inter-
knowledge like mathematics, economics
firm comparison
whichever can help management in its task.

Evolution of cost accounting Evolution of management accounting is due

is mainly due to the to the limitations of cost accounting. In fact
Evolution
limitations of financial management accounting is an extension of
accounting the managerial aspects of cost accounting

Maintenance of cost records

Management accounting is purely
Statutory has been made compulsory
voluntary and its use depends upon its
requirements in selected industries.
utility to management
(manufacturing)

Cost accounting focuses on Management accounting focuses on both

Planning
short range planning short range and long-range planning

Cost accounting can be

Management accounting cannot be installed
Interdependency installed without
without cost accounting
management accounting.

Difference between Financial Accounting & Management Accounting

Points of difference Financial Accounting Management Accounting
Recording of monetary transactions
Provide information for
Basic Function and publication of financial
decision making
statements
End users External and Internal parties Internal parties only
The Companies Act prescribes the
Formats There is no specific format
formats for reporting
Objectivity of It lays emphasis on objectivity of It lays emphasis on objectivity
reports data and subjectivity of data
Audit Reports are subject to audit Reports are not subject to audit
It presents daily, weekly,
monthly, quarterly, half yearly
Frequency of report It generally presents annual report
reports as per the needs of
management

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Availability of reports Available to public Not available to public

Regulation The Companies Act governs it Managerial needs govern it

It deals with the recording of It deals with the projection of

Nature historical data which is monetary in data for future planning and
nature decision making
Not obligatory. It is voluntary
Obligation Obligatory for all types of firms for enhancing efficiency of the
organization
Management Accounting
Reports relate to various
Financial Accounting Reports relate
Coverage of reports segments of the organization –
to the entire organization
department, division, product,
function, Responsibility
The scope of management
The scope of financial accounting is
Scope accounting is wider than that of
narrow
financial accounting
It lays more emphasis on accuracy of It lays lesser emphasis on
Accuracy
figures accuracy of figures
Management accounting is
Statutory Financial Statements are to be purely voluntary, and its use
requirements prepared and published compulsorily depends upon its utility to
management
Can use any measurement unit
Uses money as a measurement unit
Unit of measurement such as units, labour hours,
for the transactions
machine hours

Limitations of Management Accounting.

1. Dependence for Basic Records: Management Accounting uses data that are available
from financial statements. Thus, the validity of the decisions largely depends on the
reliability of the historical data as obtained from the conventional financial statements.
Any drawback in such statements is bound to affect the effectiveness of the decision.
2. Personal Bias: Analysis and interpretation of financial information depends upon the
capability of the analyst and interpreter. Personal judgment and usage of discretion
become necessary in several areas of Management accounting. The principle of
objectivity is not always followed in its real spirit in management accounting as the
collection and analysis are considerably influenced by the personal bias of the
management accountant.

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 3. Management Accounting is only a Tool: Management accounting cannot be
considered as an alternative or substitute to Management. Management accountant acts
as an adviser and facilitator for decision making by management. The actual decisions,
their implementation and follow up action are the prerogative of the Management.
4. Management Accounting provides only Data: The main function of Management
Accounting is to provide data in the form of “Alternatives” to the Management. It is for
Management to make suitable choice among the alternatives or even discard all of them.
So, Management Accounting can only Inform and not prescribe‟.
5. Resistance to Change: Installation of Management accounting involves basic changes
in the organisational set up and traditional accounting practices. The personnel
concerned may resist such change unless they are taken into confidence and convinced
of the need for such changes.
6. Costly to Install: Installation of Management Accounting involves huge expenditure
because of the elaborate organisation needed and the large number of changes in
procedures, forms and rules. So, small firms may not be able to afford the cost. Only
big organizations can afford to Maintain Management accounting as a department or
aid to management.
7. Evolutionary Stage: Management Accounting is in the process of evolution and as
such it still has to go through many developmental processes before reaching a final
stage. Consequently, the techniques of management accounting lack the sharpness and
fluidity that is required of an efficient system. Even the analysis and interpretation
considerably differ from organization to organization.
8. Difficult to find the right person: The application of management accounting tools
and techniques requires knowledge about various subjects like accounting, costing,
economics, taxation, statistics and mathematics, engineering and management. To find
a manager in the organization with a comprehensive knowledge of all subjects is almost
impossible.
Status and Role of Management Accountant:
Traditionally, the role of the management accountant has been of a facilitator responsible for
providing sufficient accounting information to the decision makers in an organization.
Traditionally, the job of the management accountant in an organization as advocated by
Williamson (2003) has revolved around the following major activities. ∙
∙ Accounting for product valuation and pricing
∙ Policy formulation and planning
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∙ Decision making
∙ Cost Control
Changing Role of Management Accountant: Recent developments in information
technology, accompanied by the emergence of knowledge management, a rapidly changing
competitive environment and increasing globalization of business have led corporate houses to
introduce strategic orientation in their planning process. The change in orientation is bound to
bring drastic change not only in the nature and scope of management accounting but also in the
task and role of the management accountants. The role of accountants should continually
evolve to remain relevant in the changing business environment. The traditional role of
management accountant which has been restricted to the supplier of operational and financial
information within the organization is no longer sufficient to meet the growing demands of the
changing business environment. Therefore, the management accountant needs to grow into a
high-level decision support specialist who would help a company in strategic management
efforts. The management accountant will be an active participant in the decision-making
process along with functional managers in the organization. Such participation will not only
make him a member of a firm’s functional team that is responsible for value creation but also
change the nature of his job from a staff to a business partner. Accountants are bound to help
their organizations not only in measuring the cost of operations but also eliminating non-value-
added costs. He needs to possess sufficient knowledge of the latest costing tools and
techniques.
• Depending upon the company situation - size, nature and organisational set up and his
own capabilities and position in the company, the management accountant may be
required to perform various and varied functions.

• The importance and effectiveness of his function would also depend upon the
confidence reposed in him by the top management and the functional managers. His
functions generally embrace each and every activity of the management which can be
summarized as follows:

1. Establishes, coordinates and administers plans to facilitate the forecasting of sales,

expense budgets and cost standards that will permit profit planning, capital budgeting
and financing

2. will formulate accounting policy and procedures. Operating data and special reports
must be prepared so that the performance can be compared with plans and standards,

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 and any variance between actual operations and pre-determined standards can be
analysed for corrective actions by management. Such comparisons between actual and
expected activities should help the management in proper fixation of responsibility
and also in the evaluation of the various functional and divisional heads.

3. Management Accountant is responsible for the protection of the business assets to the
extent possible by external controls, internal auditing and insurance coverage.

4. He will be responsible for tax policies and procedures and will supervise and
coordinate the reports required by various authorities

Management Accountant must continually be aware of economic and social forces as

well as the effect of governmental policies and actions on business activities.
• An analysis of the above list (obviously not exhaustive) of functions, reflects the
status of a management accountant. He is the principal officer in charge of the
accounts of the company.
• He shall be responsible to the Board of directors for the maintenance of adequate
accounting procedures and records on the operation of the business.
• He shall be responsible to the president or the chairman of the board with respect to
the administration of his office.
• He shall perform such other duties and functions as may from time to time be
assigned to him by the president or chairman of the board or the Board of directors.
Thus, in his broad functional activities, the management accountant is responsible to
the policy making group of top management, whereas, in his administrative activities
he is responsible to the top executive officer.
Functions of Management Accountant
Referred to as controller, he is responsible for collecting, processing and reporting
information that will help managers in their planning, controlling and decision making
activities. The role and responsibility of a management accountant is one of support.
They provide help to those managers who have primary responsibility to fulfil the
basic managerial functions. He participates in all accounting activities and performs
vital functions within organization such as :
• Providing help in the design of an accounting information system
• Collecting data

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• Helping in the maintenance of accounting records, preparation of financial statements
• Helping in the budget preparation
• Preparation of performance reports, control reports, special managerial reports.
Analysis for planning, control and decision making
• Interpreting accounting information based on the particular requirements of
management
• Ensuring that the accounting information system is adequate and useful in accordance
with the budgets, plans policies and decision requirements

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