Management accounting

Management accounting
MEANING –DEFINITION –OBJECTIVES –SCOPE –UTILITY –FUNCTIONS –ADVANTAGES –LIMITATIONS -
TOOLS -RELATIONSHIP BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING –
RELATIONSHIP BETWEEN MANAGEMENT ACCOUNTING AND COST ACCOUNTING

Meaning
 The term management accounting refers to accounting for management .
 Accounting which provides necessary information to the management for
discharging its functions
 The management accounting provides information to management For
planning,organising,directing and controlling of business operations to done in an
orderly manner

Definition
 According to Management accounting team Of the Anglo American council of
productivity “ Management is accounting is the presentation of accounting
information in such a way as to assist management in the creation of policy and in
the day-to-day operations of the undertaking”
 The Institute of Chartered Accountants of England and Wales defines,
“Management Accouaung is that form of accounting which enables a business to
be conducted more efficiently.”
 According to R. N. Anthony, “Management Accounting is concerned with
accounting information that is useful to management.”

Objectives
The main objective of managerial accounting is to maximize profit and minimize losses.
Uses of Information
Management accounting presents accounting information in a form that enables the
management, investors, and creditors to analyze the financial statements.
Planning and Policy Formulation
Management accounting provides costing and statistical data to be utilized in setting
goals and formulating future policies.
Decision making
Management accounting techniques like cost-volume-profit analysis, standard costing,
budgetary control, capital budgeting, funds flow analysis, etc. Assist the management in arriving at the
correct decision.

Objectives
Motivating
By setting goals, planning the best and economic courses of action, and also
by measuring the performances of the employees, it tries to increase their efficiency
and, ultimately, motivate the organization as a whole.
Controlling
Management accounting helps management in controlling the performance of the
organization. Actual performance is compared with operating plans, standards, and
budgets, and deviations are reported to the management so that corrective measures
may be taken.

Objectives
Reporting
One of the primary objectives of management accounting is to keep the
management fully informed about the latest positions of the concern. The facilitates
management to take proper and timely decisions.
Help in organisation
Organizing is the process of allocating and arranging human and nonhuman
resources so that plans can be carried out successfully.
Helpful in decision making
Make decisions based on profit,cost ,price and saving

SCOPE
The scope of management accounting is Very wide and broad based.
It includes which is provided to the management for financial analysis and
interpretation of business operations
FINANCIAL ACCOUNTING
. Financial accounting provides though historical information But is very
useful For future planning and forecasting . Designing of proper financial accounting
system is a must For obtaining Full control and coordination of business operations
Cost accounting

Scope
Cost accounting is concerned with the ascertainment of various elements of costs for
different business operation and activities. These cost data are used in the management
accounting system for further analysis so as to solve business problems and take quality decision.
Budgeting and Forecasting
Under budgetary control system, the budgets are prepared on functional basis and
measure the actual performance, find the difference between the actual and standard for taking
corrective actions In this way, budgeting assists the management for identifying responsibility and
ensuring coordination.
Revaluation Accounting
This type of accounting system is ensuring that the capital is maintained intact in real terms.
By keeping this fact in mind, correct amount of profit is calculated and used for managerial
decision making.

Scope
Cost Control Procedures
Cost control procedures are an integral part of management accounting process. In includes
inventory control, cost control, time control, budgetary control, standard costing etc.
Statistical Methods
In order to analyze the financial accounting data, tables, diagrams and graphs are used in
the management accounting system. These are nothing but statistical methods.
Inventory Control
Inventory control refers to exercising control over the utilization of raw materials, processing
of work in progress and disposal of finished goods for a specific period.

Scope
Reporting
Reporting is divided into two types. They are interim reporting and external reporting. Interim
reporting is supplying information to the top management. External reporting is supplying information
to outsiders i.e. Shareholders, banks and financial institutions.
Taxation
It includes the computation of corporate income tax in accordance with the tax laws, filing of
returns and making tax payments.
Methods and Procedures Design and Installation
Management accounting is relating to the most efficient and economic system of accounting
suitable to any size and type of undertaking. Moreover, it employ best use of mechanical and
electronic devices.

Scope
Internal Audit
Internal audit is conducted by the business organization with the help of paid employee who has
thorough accounting knowledge. All the relevant records are maintained under the management accounting
system so that the internal audit is conducted in an effective manner.
Office Services
It includes maintenance of proper data processing and other office management services.
Financial management
The tools in financial management are developed through management accounting system.
Interpretation
Management accounting is relating to the interpretation of financial data to management and
advising them on decision-making.

Utility
 Utility of management accounting is related to
 Management accounting involves formulation of policies and setting up of
goals and initiating necessary programs for achievement of goals and gives
suitable effective planning and decision making
 The techniques of budgetary control standard costing and departmental
operating statements greatly help in performing controlling function
 It involves interlinking of different divisions of business enterprise in a way
so as to ensure the objectives of the organisation as a whole . Effective
coordination is achieved through departmental budgets and reports which
form the nucleus of management accounting

Utility
 The whole organisation is divided into suitable profit Or costs .A sound system of internal
control and internal audit for each of cost Or profit centres helps in organising and
establishing a sound business structure
 The superior should be in a position to find out whom to demote or promote and to reward
or Penalise. A periodical departmental P&L, budgets and reports go a long way in achieving
the motivation objective
 Management accounting helps the management in performance of Communication
function by developing a suitable system of reporting this emphasis and highlights the
facts to investor ,shareholders and creditors

Functions
Following are the functions of management accounting
 Provides data
 Modifies data
 Communication
 Analysis and interpretation of data
 Facilities control
 Uses qualitative data also
 To assist Planning

Functions
 To assist planning
 To assist organising
 To assist in motivation
 To coordinate
 To control
 Serves as a means of communicatin

Advantages
1.Planning
The management can prepare the plan and execute the same for effective operation of business. In this
context, various functional budgets are prepared and accounting information are rearranged in department
wise, product wise, section wise and the like for proper planning.
2. Controlling
The actual performance of every business activity is measured and compared with the standard fixed or
planned one. If the deviations are found that are controllable, the management can decide the course of
action to exercise control. Both standard costing and budgetary control system are highly help the
management in this aspect.
3. Service to Customers
Better and improved services by management to customers are assured by this system of accounting

Advantages
4. Organizing
The scope of authority and responsibility of key executives are properly defined and explained under
management accounting system. Hence, everyone knows who is responsible for what and to whom? It
helps for proper organizing the work in an organization.
5. Coordinating
It is the process of integrating the various work performed in an organization to achieve the objectives
effectively. Thus, perfect coordination is required for among production, purchase, finance, personnel,
sales and the like departments. This is achieved through preparing budgets and reports of perform
ance.
6. Improvement of Efficiency
The management accounting system may eliminate various types of wastage, production, defectives
and other work thereby the workers efficiency may be improved.

Advantages
7. Motivating
It helps to maintain high degree of morale among the employees. The reports of business operation are
periodically prepared and submitted before the top management periodically. Based on the report, the
management can find out whom to demote or promote or to reward or penalize. In this way, the employees are
motivated.
8. Communication
Two way communication is followed in an organization if management accounting system is followed. Modified
accounting information and reports regarding performance are sent to top management for decision making. In
another way, assignment of work and responsibilities over employees are communicated to lower level executives.
9. Regulation of Business Activities
Proper planning, organizing, coordination and motivation can bring systematic regularity in the business activities.

Advantages
10. Maximization of Profit
There is a morale among the employees. Standards are fixed and measure the actual performance to
find the deviations. If the causes for deviations are reasonable and controllable, proper action may be
taken by the management. In this way, profit is maximized.
11. Reliability
The tools used in management accounting system are reliable. This procedure usually makes the data
supplied to management accurate and reliable.

Limitations
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.

Limitations
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.s

Limitations
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

Limitations
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
depend 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

Tools
Following are the tools in management accounting
 Financial statements analysis – Ratio analysis
 Fund flow analysis
 Cash flow analysis
 Costing techniques including marginal ,differential, standard and opportunity
costing
 Budgetary control
 Management reporting

Financial accounting Vs management
accounting
 Financial Accounting is the original form of accounting that deals with recording business transactions
and summarizing the data into reports, which are presented to the users so that financial decisions can be
made rationally.
 On the other hand, management accounting is a new field of accounting that studies managerial aspects.
It deals with the provision of financial data to the company’s management so that they can make rational
economic decisions.
Basic Financial accounting Management accounting
Nature of statements
prepared
General purpose financial statements Special purpose financial statements
Orientation Historical Future

Financial accounting vs management
accounting
Users Internal and external Internal only
Rules GAAP followed No fixed rules
Reports Only financial aspects Financial and non financial aspects
Time Span Financial statements are prepared
for a fixed period, i.e. One year.
Management Reports are
prepared whenever needed.
Objectives To create periodical reports To assist internal management in
planning and decision-making

Financial accounting vs management
accounting
Publishing and auditing Required to be published
and audited by statutory
auditors
It is not meant to be
published or audited. It is
for internal use only.
Format Specified Not specified
Requirements Mandatory Not mandatory
Unit of account Recognise whole business Results of the division

Cost accounting vs Management
accounting
 Cost accounting is that branch of accounting which aims at generating information to control
operations with a view to maximizing profits and efficiency of the company, that is why it is also termed
control accounting. Conversely,
 management accounting is the type of accounting which assist management in planning and
decision-making and thus known as decision accounting
Basic Cost accounting Management accounting
Information type Quantitative Quantitative and qualitative
Objectives Ascertainment of cost of
production.
Providing information to
managers to set goals and
forecast strategies.
Specific procedures Yes No

Cost accounting vs management
accounting
Scope Concerned with ascertainment,
allocation, distribution and
accounting aspects of cost.
Impart and effect aspect of
costs.
Recording Records past and present data It gives more stress on the
analysis of future projections
Planning Short range planning Short and long range planning
Interdependency Can be installed without
management accounting
Cannot be installed without
cost accounting

Cost accounting vs management
accounting
Area Deals with cost ascertainment Wider scope It includes
Financial accounting, budgeting
, taxation etc
Development Its development Is related to
Industrial revolutions
It develops accordance to the
need of modern Business world
Rules and regulations It follows certain principles and
procedures for recording cost
Of different products
It doesn’t follws any specific
rules and regulations

Prepared by
Saravanan Rethinasamy
M.Com

Management accounting

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