Subject: Management Accounting

Subject
Course
Semester
Topic

Topic: Introduction to MA

CLASS NOTES
Management Accounting
BBA and BBA B&I
Third
Introduction to Management Accounting

These notes include the following topics:

1. Meaning of Accounting
2. Management Accounting
3. Nature and Scope of Management Accounting
4. Tools of Management Accounting
5. Functions of Management Accounting
6. Utilities of Management Accounting
7. Limitations of Management Accounting
8. Financial accounting Vs Management Accounting
9. Cost accounting Vs Management Accounting
10. Role of Management Accountant
The accountancy is the gift of limited human memory which is replaced by a
standard system of recording the business transactions and events.
The utility of the system is further enhanced to simply recording too many
applications of analysis on the recorded accounting data.
MEANING OF ACCOUNTING
The committee on Terminology set up by the American Institute of Certified
Accountants defines accounting as an art of recording, classifying and summarizing
of financial transactions and events in terms of money, summarizing and interpreting
the results thereof. The accounting is broadly divided into two branches of
accounting as per the users of accounting:
1. Financial Accounting: The financial accounting deals with the calculation of the
profit and loss of the business. These statements are prepared for the external
parties like creditors, financial institutions, shareholders, government bodies,
labor unions etc. It deals with only monitory record. Non monitory records
such as business competition and
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business reputation, fashion, political changes are not considered in

financial accounting, the main focus is on reporting what has happened in the
past and there is absolutely no focus on the future performance of the
business. There are set of principles and conventions that are followed in
financial accounting. The Indian companies Act has made it obligatory for the
companies to maintain a system of financial accounting.
2. Management Accounting: It is related to a system of collection of relevant
information and presentation of financial as well as others, relating to
enterprise for helping managers in planning, controlling and decision making.
It is oriented primarily towards management control and other groups inside
the business organization involved in decision making. The management of
any business require some timely reports and statement that are required to
analyze the performance of the various segments and sectors of the business
and thus provide reporting and information to the managers by the use of the
tools of the management accounting.
This branch of accounting is not so old and was not known to the world till
1950. The report was published by the Anglo- American council of productivity
management accounting team after its visit to United States during April-June
1950. The team in its report defines management accounting as:

Preparation of the accounting information in such a way as to assist the

management in the creation of policies and to the day to day operation of an
undertaking.

Definition of Management Accounting

Management accounting is the application of appropriate techniques and concepts
in processing historical and projected economic data of an entity to assist
management in establishing plans for reasonable economic objectives in the making
of rational decisions with a view towards these objectives
By American Accounting Association
Management accounting is the application of professional knowledge and skills in
the preparation of accounting information in such a way as to assist management in
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the formation of policies and in the planning and control of the operations
of the undertaking.
By: ICMA, London
Management accounting is concerned with the efficient management of business
through the presentation to management of such information as will facilitate
efficient and opportune planning and control By: Brown & Howard
Management accounting is the adaptation and analysis of accounting information
and its diagnosis and explanation in such a way as to assist management.
Thus, management accounting is a discipline designed for gathering, summarizing,
interpreting and communicating of financial as well as operating information to plan,
evaluate and control the use of the resources of the firm and to establish the
accountability for the purpose.

Why cant accounting information which is used for the financial accounting
can be used for management accounting?
The following are the reasons why the information gathered by the financial
accounting cannot be used up in the managerial accounting:
1.
2.
3.
4.
5.
6.

Relevant to specific problem

Latest and updated
Near to accuracy
Simplicity
Objectivity
Economical
Characteristics or Nature of Management Accounting

The main characteristics of management accounting are very much clear from its
definition that it is an informative accounting. The following are the other major
characteristics of management accounting:
1. Useful in decision making: The management accounting aims to assist the
management in the various decisions making processes and controlling. It is
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Subject: Management Accounting

2.
3.

4.

5.

6.

Topic: Introduction to MA

concerned with all such information which can prove useful to

management in decision making.
Financial and cost information: Basic accounting information useful for
management accounting is derived from financial and cost accounting records.
Internal Use: Information provided by the management accounting is
exclusively for use by the management for internal use. Such information is not
to be given to parties external to the business such as shareholders and others.
Purely optional: Management accounting is purely voluntary techniques to
control the management affairs. There is no statutory obligation to prepare
management accounts. Its adoption by any firm depends upon its utility and
desirability.
Concerned with future: As management accounting is concerned with decision
making, it is related with future because decisions are taken for future course
of action and not the past.
Flexibility in presentation of information: Unlike financial accounting, in
management accounting there are no prescribed formats for the presentation
of information to management. The form of presentation of information is left
to the wisdom of the management accountant who decides which is most
useful format of providing the relevant information, depending upon the utility
of each type of form and information.

Scope of Management Accounting

Management accounting has a very wide scope. It includes not only the financial
accounting and cost accounting but also all types of internal financial controls,
internal audit, tax accounting, office services and many more. Thus scope of
management accounting inter alia includes the following:
1. Financial Accounting: Financial accounting provides basic historical data which
helps management to forecast and plan the various operations of the business.
All these forecast aims to the future and thus there should be a well designed
financial accounting system that will serve as the base for the management
accounting.
2. Cost Accounting: Many techniques of cost control like standard costing and
budgetary control and techniques of profit planning and decision making like

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marginal costing, CVP analysis and differential cost analysis are used
by the management accounting.
3. Budgeting and forecasting: In order to plan business activities for the future,
forecasting and budgeting plays a very significant role. Forecasting helps in the
preparation of budgets and budgeting helps management accounting in
exercising budgetary control.
4. Tax planning: In order to take advantages of the provisions of the tax laws,
management accountant has to depend upon tax accounting and planning to
minimize its tax liabilities and save more funds of the business.
5. Reporting to the management: For effective and timely decisions, there should
be a system of prompt and intelligent reporting to management. Both routine
and special reports are prepared for submission to top management, middle
order management and operating levels of management depending on their
requirement.
6. Cost control: Any system of management accounting is incomplete without
effective cost control procedures like inventory management, labor control etc.
7. Statistical tools: Various tools of analyzing and presenting statistical data like
graphs, tables, charts etc are used in preparing reports for use by the
management.
8. Internal control and internal audit: Management accountant heavily depends
on internal controls like internal audit and internal check to plug loop holes in
the financial system of the concern.
9. Financial analysis and interpretation: Management accounting employs
various techniques to analyze and interpret financial data to make it
understandable and useable top the management.
10. Office services: Management accountant is expected to maintain and control
office routines and procedure like filing, copying, communicating, electronic
data processing and other allied services.
Tools and techniques for Management Accounting
1. Financial Accounting: the data required for the analysis and application of
various tools of management accounting the primary data that is required is
provided by financial accounting. Thus without financial accounting system,
management accounting cannot be operative. Management accounting deals

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Subject: Management Accounting

2.

3.

4.

5.

6.

7.

8.

Topic: Introduction to MA

with the rearrangement of the information provided by financial

accounting.
Ratio Analysis: It develops mathematical relationship between the two
variables and thus is the vain to the information to the management
accountant.
Fund flow statement and cash flow statement: Funds flow statement attempts
to highlight the causes of changes in the financial condition of a business
enterprises between two dates. Funds flow statement helps the management
in the efficient planning and control of funds of the business. Same way cash
flow statement emphasis to ascertain the reasons which has caused the
difference in the cash balance between two balance sheet dates. This assists
the management in making funds and cash projections for the next period.
Cost Accounting: It includes recording and ascertainment and assignment of
cost to various cost centers which are directly related to the responsibility
centers in the management control and thus the cost accountancy helps in
fixation of the standard cost of production which is further compared in actual
cost of production to analyze the variance.
Standard Costing: Under this technique standards for cost are laid down and
actual are compared with the standards of costs to work-out the variances for
all elements of cost. Thus the standards are used to control the major activities
of the business.
Marginal Costing: It is a reporting system that values inventory and cost of
sales at its variable manufacturing cost. It separates the cost into fixed and
variable elements. In these technique variable costs is charged to product
whereas fixed cost is written off as period cost.
Budgetary Control: This includes framing of budgets, comparison of actual
performance with the budgeted performance, computation of variances and
finding the causes of variance. Thus, Budgets are used to control all the major
activities of the business. Generally the budget is prepared by updating the
previous years figures in the light of some forward projections.
Interim Reporting: Preparation of income statement, cash flow and fund flow
statements and other related reports on weekly/monthly/quarterly/halfyearly basis to communicate accurate information to measurement at the right
time and in a right manner.

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Subject: Management Accounting

Topic: Introduction to MA

9. Statistical Methods: Use of statistical tools like graphs, charts,

pictorial presentation, index numbers and other statistical tools makes the
information more impressive and under storable. Further, statistical analysis
and in particular sampling theory provides a scientific method from drawing
valid and reliable conclusions about the properties of an entire population
when only a properly chosen sample of the population has been studied in
detail.
FUNCTIONS OF MANAGEMENT ACCOUNTING
The primary function of management accounting is to assist the management in
discharging its functions effectively. As we are well aware that planning, organizing,
directing, coordinating and controlling are the important functions performed by the
management. Management accounting helps in the performance of each of these
functions by supplying meaningful information to the management regarding each
and every concerned activity. The major functions are summarized below:
1. Provides and Modifies Data for Planning: Management accounting serve as a
vital source of data for management planning. Plans are guidelines for the
future operations which are generally made with the help of records of past
performance. The accounting data required for managerial decision is properly
compiled and classified.
2. Analysis and Interprets Data: The economic data as collected from financial
statements do not have much management utility unless it is properly
analyzed in the light of the nature of the decisions. For this purpose the data is
presented in a comparative form, ratios are calculated and likely trends are
projected. In fact, only the process makes the data meaningful for the
management.
3. Means of Communicating: The management accountant has to spend maximum
time in communicating various required reports in upward, downward and
outward direction in the organization. The publication of annual reports is also
an important task of a management accountant.
4. Facilitates Coordination: With the help of various accounting tools,
management accountant facilitates the coordination within various
departments of the business. The efficient coordination contributes to the

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Subject: Management Accounting

Topic: Introduction to MA

efficiency of the organization which in turn increases the profitability

of a concern.
5. Facilitate Control: Given objectives and goals of an organization are transferred
into specified strategies and goals to be achieved in a specified time and in a
specified manner. All this is made possible through budgetary control and
standard costing which ensures that actual performance should be near to
standards and budgets and is variations occurs than suggest corrective
measures for efficient control.
6. Uses Qualitative Information: Management is always interested to know the
areas of business which can contribute to the stability and profitability of the
concern. To meet this objective management accountant undertakes various
special studies and also consults to the specialists of the area and more over
also considers the qualitative information too to meet the challenges of
dynamic business world.

1.

2.

3.

4.

UTILITY OF MANAGEMENT ACCOUNTING

Planning: Management accounting makes an important contribution in the
performance of this first management function by making available the
relevant data after pruning and analyzing them suitably for effective planning
and decision-making.
Controlling: The techniques of budgetary control, standard costing and
departmental operating statements greatly help in performing this function. As
a matter of fact the entire system of control is designed and operated by the
management accountant, with the help of various tools available in
management accounting, the evaluation of actual performance with planned
one is made and remedial measures are taken in the event of variations
between the two.
Coordinating: This function of management involves interlinking of different
divisions of the business unit in a way so as to achieve the objectives of the
organization as a whole. Therefore, perfect coordination is required among all
the departments of a business unit such as production department, purchase
department, finance department, personnel department and marketing
department.
Organizing: Management accounting plays a prominent role in this very

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Subject: Management Accounting

Topic: Introduction to MA

function of management. It involves identifying the authority and

responsibility within various groups of the organization to boost up the
operative action plan.
5. Motivating: Establishing various costs and profits centers within the
organization help in maintaining the high degree of morale. Periodical
departmental profit and loss accounts, budgets and reports go a long way in
achieving this objective.
6. Communicating: Management accounting keeps management informed about
the on-going operations enabling it to suggest remedial measures in case of
deviations. This becomes feasible only because the management accounting
provides data, results etc. of actual and standards to both internal and external
parties.
LIMITATIONS OF MANAGEMENT ACCOUNTING
Management accounting suffers from certain limitations which limit its effectiveness.
These limitations are stated below:
1. Authenticity of Basic Records: Management accounting uses data that are
derived from financial and costing statements. The strength and weakness of
the management accounting, therefore, depends upon the strength and
weakness of these basic records. In other words, their limitations are also the
limitations of management accounting.
2. Requires Comprehensive Knowledge: The application of management
accounting tools and techniques require knowledge about various subjects like
accounting, costing, economics, taxation, statistics and management etc. To
find an individual in the management with a comprehensive knowledge of all
such is almost impossible.
3. Management accounting is only a Tool: The management system cannot be
replaced by a system of management accounting as the latter system simply
provides the necessary data for a decision and not the decision itself. Thus,
management accounting is only an adviser to the management.
4. Element of Intuition: There is always a temptation to take an easy course of
arriving at decision by intuition rather than going by advice of the
management accountant. Though, management accounting attempts to analyze

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Topic: Introduction to MA

both qualitative as well as quantitative factors that influence a

decision, yet the elements of intuition in managerial decision has not been
completely eliminated. There is tendency among business executives to use
short cut approach to a managerial problem rather than lengthy process as
required under scientific analysis of management accounting.
5. Heavy Installation Cost: The installation of management accounting system
requires a heavy investment both in terms of money and manpower.
Therefore, smaller concerns may not be able to afford it.

Difference Between
Financial Accounting and Management Accounting
Basic
1. Objectives

2. End-users

3. Nature of
Data used

4. Focus on
time frame

5. Adherence
to

Financial Accounting
The basic objective of
financial accounting is to
assess the operational results
and financial position of a
business.
External parties like
creditors, financial
institutions, shareholders,
government bodies, labor
unions etc. are end-users of
financial accounting.
Financial accounting is
concerned with monetary
events such as nature of
competition, business
reputation, change in fashion,
political changes etc. are not
at all considered in financial
accounting.
Financial accounting is
primarily concerned with
reporting what has happened
in the past. This is historical
in nature and records only
such business transactions
which have already occurred.
Financial accounting follows
certain generally accepted

Management Accounting
Objective of management
accounting is to support and
facilitate managerial decisions
by preparing analytical and
critical reports.
Internal parties i.e. managers
and management on all levels of
the organization is end-users of
management accounting.

Management accounting uses

both monetary and nonmonetary data.

Management accounting has

strong future orientation and
deals with protection of data to
be used for future planning and
control.

Management accounting the

other hand is not governed by

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Subject: Management Accounting

Topic: Introduction to MA

Accounting
Principles

accounting principles. These

standards explain as what
should be done in financial
accounting to protect the
interest of the external
parties who have no excess
to the firms financial
records.
6. Precision
There is no scope for
approximates is financial
accounting. Financial
accounting pays more
emphasis on precision and
considers only actual figure
in the preparation of its
statements.
7. Reporting
The period of reporting is
Frequency much longer in financial
accounting as compared to
management accounting. The
Balance Sheet and the
Income Statement is
prepared yearly or in some
cases half-yearly.
8. Compulsion The Indian companies act has
made it obligatory for the
companies to maintain a
system financial accounting

these standards. Managers can

set their own rules and
procedures about the form and
contents of the information
according to the requirement of
the decision to be taken.

Reports and statements

prepared under management
accounting contain more
approximate figures than the
actual figures. Thus,
management accounting is less
precise as compared to financial
accounting.
For regular decision making ,
management requires
information at frequent
intervals and therefore the
periods of reporting is very less
in management accounting

Maintaining management
accounting system is entirely on
the discretion of the
management and no way is
compulsory under any law.

Difference Between
Cost Accounting and Management Accounting
Basis
1. scope

Cost accounting
Scope of cost accounting is
limited to ascertain and
provide cost information to
the management for
managerial uses.

Management accounting
Scope of management is very
wider than that of cost
accounting as it provides all
types of information. Whether
regarding cost monetary or
non-monetary for managerial
uses.

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Subject: Management Accounting

2. objective

3. techniques
used

Topic: Introduction to MA

Main objective of cost

account ting is to ascertain
cost, cost control and cost
reduction.
Cost accounting includes
marginal costing, absorption
costing, standard costing,
uniform costing, budgetary
control and CVP analysis etc.

4. Evolution

Evolution of cost accounting

is mainly due to the
limitations of financial
accounting

5. obligation

Maintenance of cost records

has been made compulsory
in selected industries as
notified by the government
from time to time.
Cost accounting uses only
cost data derived from cost
sheet, fob card, time cards,
stores ledgers etc. and some
information from financial
accounts

6. nature of
data used

Major objective of management

accounting is to assist
management in discharging its
managerial functions
Apart from all techniques used
in cost accounting, management
accounting uses techniques like
ratio analysis, fund and cash
flow analysis, operation
research and certain techniques
from mathematics and
economic also.
Evolution of management
accounting is due to the
limitation of cost accounting. In
fact, management accounting is
an extension of managerial
aspects of cost accounting.
Management accounting is
entirely voluntary and its use
depends upon its utility to
management
Management accounting all
information either monetary or
non-monetary derived from
cost accounts, financial
accounts and from any other
source as well.

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Subject: Management Accounting

Topic: Introduction to MA

Role of management Accountant

In todays scenario, the role of management accountant is very complex as due to
completion and changing focus of the organizations to huge cost cutting techniques
managers are constantly involved in practice and experimentation of new and better
policies. Thus role of the management accountant is now added with more
responsibilities. The responsibilities that define the role of management accountant
are explained as follow:
1. Preparation of CFS and FFS
2. Preparation of Budgets
3. CVP analysis
4. Management audit
5. Management cost controlling
6. Management decision analysis
7. Standard costing
8. Decision making by marginal costing
9. Statistical analysis
10. Financial statement analysis
11. Trend analysis

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Subject: Management Accounting

Topic: Introduction to MA

Self Evaluation Questions

1. Explain the role of management accounting in present day business decision
making in a firm.
2. Management accounting is an extension of financial accounting. Elucidate and
explain the need of management accounting.
3. Management accounting can be viewed as management oriented accounting.
Comment.
4. Explain the limitations of financial accounting. Discuss how management
accounting helps in overcoming them.
5. Explain the concept of management accounting. How does it differ from the
financial accounting?
6. A management accounting system is useful to both large scale and small scale
business organizations. Elucidate this statement.
7. Cost accounting act as the standard for judging managerial process but scope
is still limited as compared to management accounting?
8. Management accounting is the presentation of accounting information in such
a way as to assist the management in decision making. Comment.
9. Discuss in details the functions of management accounting.
10. The role of management accountant is changing in todays scenario. Define the
key responsibilities defining the role of management accountant.

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