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Introduction to management accounting

  1. Submitted To: Dr. Sunil Verma Submitted By: Himanshu Swami Professor of Management BBA(GEN) 5th sem Accounting Section : A SGT UNIVERSITY , GURUGRAM Roll no. 150602003
  2. One simple definition of management accounting is the provision of financial and non-financial decision-making information to managers. 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"
  3. •Analysis and Interpretation of Data:- The process by which sense and meaning are made of the data gathered in qualitative research, and by which the emergent knowledge is applied to clients' problems. This data often takes the form of records of group discussions and interviews, but is not limited to this. •Future-oriented:- Future-oriented is a term used in finance and economics to describe agents that discount the future lightly and so have a low discount rate, or equivalently a high discount factor. Conversely, present-oriented agents discount the future heavily and so have a high discount rate, or equivalently a low discount factor.
  4. •Serves as a yardstick:- An efficiency of an individual can be assessed only by fixing the standard. If not so, the concerned individual has no option of knowing his level of efficiency. Anybody can improve maintain his efficiency on comparing with standard. Likewise, the financial position of the business concern can be identified only by fixing standards for various ratios and then reporting upon the condition. There is no hard and fast rule for fixing the standard regarding various ratios. Even though, the followings may be regarded as yardsticks for ratio analysis.
  5. The main concern of management accounting is to provide necessary quantitative and qualitative information to the management for planning and control. For this purpose it draws out information from accounting as well as non-accounting sources. Hence, its scope is quite vast and it includes within its fold almost all aspects of business operations. However, the following areas may rightly be pointed out as lying within the scope of management accounting. I. Financial Accounting:- The major function of management accounting is the rearrangement or modification of data. Financial accounting provides the very basis for such a function. Hence, management accounting cannot obtain full control and coordination of operations without a well-designed financial accounting system.
  6. ii. Cost Accounting:- Planning, decision-making and control are the basic managerial functions. The cost accounting system provides necessary tools such as standard costing, budgetary control, inventory control, marginal costing, and differential costing etc., for carrying out such functions efficiently. Hence, cost accounting is considered a necessary adjunct of management accounting. iii. Statistical Methods:- Statistical tools such as graph, charts, diagrams and index numbers etc., make the information more impressive and comprehensive. Other tools such as time series, regression analysis, sampling techniques etc., are highly useful for planning and forecasting.
  7. iv. Operations Research:- Modern managements are faced with highly complicated business problems in their decision-making processes. O P techniques like linear programming, queuing theory, decision theory, etc., enable management to find scientific solutions for the business problems. v. Taxation:- This includes computation of income tax as per tax laws and regulations, filing of returns and making tax payments. In recent times, it also includes tax planning. vi. Organization and Methods [O&M]:- O&M deal with organizations reducing cost and improving the efficiency of accounting, as also of office systems, procedures, and operations etc.
  8. •Planning and Formulation of Future Policies •Analysis and Interpretation of Financial Information •Controlling •Helps in Organizing •Helps in the Solution of Strategic Business Problems •Helps in Coordinating Operations •Helps in Motivating Employees •Communicating Up-to-date Information •Helps in Evaluating the Efficiency and Effectiveness of Policies
  9. A management accounting tool is a framework, model, technique or process that enables management accountants to: improve performance; facilitate decision-making; support strategic goals and objectives; and otherwise add value.
  10. • Financial Statement Analysis: - Profit and Loss account and Balance Sheet are important financial statements. These statements are analyzed for different period. This type of analysis helps the management to know the rate of growth of business concern. This analysis is done through comparative financial statements, common size statements and ratio analysis. •Fund Flow Analysis:- This analysis find out the movement of fund from one period to another. Moreover, this analysis is very useful to know whether the fund is properly used or not in a year when compared to the previous year. The working capital changes and funds from operation are also find out through this analysis.
  11. •Cash Flow Analysis:- The movement of cash from one period to another can be find out through this analysis. Besides, the reasons for cash balance and changes between two periods are also find out. It studies the cash from operation and the movement of cash in a period. •Budgetary Control:- Under Budgetary control techniques, future financial needs are estimated and arranged according to an orderly basis. It is used to control the financial performances of business concern. Business operations are directed in a desired direction. •Standard Costing:- Standard costing is predetermined cost. It provides a yard stick for measuring actual performance. It is used to find the reasons for the deviations if any.
  12. •Marginal Costing:- Marginal costing technique is used to fix the selling price, selection of best sales mix, best use of scarce raw materials or resources, to take make or buy decision, acceptance or rejection of bulk order and foreign order and the like. This is based on the fixed cost, variable cost and contribution. •Management Reporting:- The management accountant is preparing the report on the basis of the contents of profit and loss account and balance sheet and submit the same before the top management. Thus prepared reports disclose the strength and weakness indifferent areas of operating activities and financial activities. These identification are highly useful to management for exercising control and decision-making.
  13. Management Accounting is in the process of development. Hence, it suffers form all the limitations of a new discipline. Some of these limitations are: •Limitations of Accounting Data:- Management accounting derives its information from financial accounting, cost accounting and other records. It is concerned with the rearrangement or modification of data. The correctness or otherwise of the management accounting depends upon the correctness of these basic records. The limitations of these records are also the limitations of management accounting.
  14. •Highly Expensive:- The installation of management accounting system needs a very elaborate organization. This results in heavy investment which can be afforded only by big concerns. •Evolutionary stage:- Management accounting is only in a developmental stage. Its concepts and conventions are not as exact and established as that of other branches of accounting. Therefore, its results depend to a very great extent upon the intelligent interpretation of the data of managerial use. •Personal Bias:- The interpretation of financial information depends upon the capacity of interpreter as one has to make a personal judgment. Personal prejudices and bias affect the objectivity of decisions.
  15. •Lack of Objectivity:- There is every possibility of personal bias and manipulation from the collection of data to the interpretation stage in financial accounting. Thus, it losses objectivity and validity.