UNIT 01

MANAGEMENT ACCOUNTING
INTRODUCTION
Management accounting can be viewed as Management-oriented
Accounting. Basically it is the study of managerial aspect of financial
accounting, "accounting in relation to management function". It
shows how the accounting function can be re-oriented so as to fit it
within the framework of management activity. The primary task of
management accounting is, therefore, to redesign the entire
accounting system so that it may serve the operational needs of the
firm. If furnishes definite accounting information, past, present or
future, which may be used as a basis for management action. The
financial data are so devised and systematically development that
they become a unique tool for management decision

Some leading definitions of Management Accounting are

given below:
“Management Accounting is concerned with accounting
information that is useful to management.” —R.N. Anthony

“Management Accounting is the term used to describe

accounting methods, systems and techniques which
coupled with special knowledge and ability, assists
management in its task of maximising profits or
minimising losses. Management Accountancy is the
blending together into a coherent whole, financial
accounting, cost accountancy and all aspects of financial
management.” —Batty
“Management accounting is a system of collection and presentation
of relevant economic information relating to an enterprise for
planning, controlling and decision-making.” —ICWA of India

“Management accounting is the provision of information required

by management for such purposes as formulation of policies,
planning and controlling the activities of the enterprise, decision-
making on the alternative courses of action, disclosure to those
external to the entity (shareholders and others), disclosure to
employees and safeguarding of assets.” —CIMA London

Scope of Management Accounting:

The scope of management accounting is very wide and broad-based.
It includes all information which is provided to the management for
financial analysis and interpretation of the business operations.

Following field of activities are included in the scope of

this subject:
(i) Financial Accounting:
Financial accounting though provides historical information but is
very useful for future planning and financial forecasting. Designing
of a proper financial accounting system is a must for obtaining full
control and co-ordination of operations of the business.

(ii) Cost Accounting:

It provides various techniques of costing like marginal costing,
standard costing, differential and opportunity cost analysis, etc.,
which play a useful role n t operation and control of the business
undertakings.

(iii) Budgeting and Forecasting:

Forecasting on the various aspects of the business is necessary for
budgeting. Budgetary control controls the activities of the business
through the operations of budget by comparing the actual with the
budgeted figures, finding out the deviations, analysing the
deviations in order to pinpoint the responsibility and take remedial
action so that adverse things may not happen in future.

Both the techniques are necessary for management accountant.

(iv) Cost Control Procedures:

These procedures are integral part of the management accounting
process and includes inventory control, cost control, labour control,
budgetary control and variance analysis, etc.

(v) Reporting:
The management accountant is required to submit reports to the
management on the various aspects of the undertaking. While
reporting, he may use statistical tools for presentation of
information as graphs, charts, pictorial presentation, index
numbers and other devices in order to make the information more
impressive and intelligent.

(vi) Methods and Procedures:

It includes in its study all those methods and procedures which help
the concern to use its resources in the most efficient and economical
manner. It undertakes special cost studies and estimations and
reports on cost volume profit relationship under changing
circumstances.

(vii) Tax Accounting:

It is an integral part of management accounting and includes
preparation of income statement, determination of taxable income
and filing up the return of income etc.

(viii) Internal Financial Control:

Management accounting includes the internal control methods like
internal audit, efficient office management, etc.

(ix) Interpretation:
 Management accounting is closely related to the interpretation of
financial data to the management and advising them on decision-
making.

(x) Office Services:

The management accountant may be required to maintain and
control office services in some organizations. This function includes
data processing, reporting on best use of mechanical and electronic
devices, communication, etc.

(xi) Evaluating the Performance of the Management:

Management accounting provides methods and techniques for
evaluating the performance of the management. It evaluates the
performance of the management in the light of the objectives of the
organisation. Thus, it helps in the implementation of the principle
of management by exception.

It, therefore, can be said that management accounting services not

only as a tool in the hands of the management for evaluation; the
performance of its subordinates, but also provides methods and
techniques for evaluating the performance of the management itself.

CHARACTERISTICS AND NATURE OF

MANAGEMENT ACCOUNTING

It is matter of fact that management accounting is the backbone for

every organization. Because it assists the management of organization
through providing the relevant and accurate information at the right
time for taking rational decisions to short out the business problems.
Thus, it is clear that a management accounting should possess these
essential characteristics:-

 Helpful in Decision Making:- It is an important feature of

management accounting. In fact, it helps the management of
organization by providing relevant and accurate information from
 various sources (like financial and cost accounting) in order to
make sound decisions to remove business problems.

 Provides Data, Not the Decision:- It only provides required data

and information to the management, not the decision. It is up to the
management that how they utilize the available data and
information to resolving the business problems through taking
effective decisions.

 Selective in Nature:- It is also a potent characteristic of this

accounting system. Here selective means, in management
accounting a management accountant is only collect those data and
information from a variety of alternatives which may create more
benefits and easiness to the management in decision making.
Hence, it is selective in nature.

 Assist in Achieving Objectives:- Management Accounting is

always assist organization in achieving its predetermined goals.
Because it provides detailed information in regarding the weakness
and the strength of organization in the form of report, on the basis
of that any organization can eliminate recognized weakness
(business problems) and may achieve its goal easily.

 Related to Future:- Management Accounting is an accounting

system which is directly related to future course of events. It means
by preparing this account any organization can forecast its future on
the basis available information in relating the past events
(Historical data).

 Increase in Efficiency:- It also plays an essential role in increasing

efficiency of organization. As we know that in this competitive
business age it is difficult for every organization to carry out its
entity for ever. Hence to survive for long run it is important for
organization to increase its efficiency by finding the errors and
removing it through management accounting techniques (standard
costing, budgetary control, control accounting),

 Use of Special Techniques:- Management Accounting uses special

tools or techniques (like standard costing, budgetary control,
control accounting, marginal costing etc) for composing the
accounting information and data more accurate and relevant. So
that management can easily make their decisions. The type of
technique to be applied will be determined according to the
situation and necessity.

Difference Between Cost Accounting and Financial

Accounting
Cost Accounting refers to that branch of accounting
which deals with costs incurred in the production of
units of an organization. On the other hand,financial
accounting refers to the accounting concerned with
recording financial data of an organization, in order to
exhibit exact position of the business.
Cost accounting generates information so as to keep a
check on operations, with an aim of maximizing profit
and efficiency of the concern. Conversely, Financial
accounting ascertains the financial results, for the
accounting period and the position of the assets and
liabilities on the last day of the period. There is no
comparison between these two because they are equally
important for the users. This article presents you the
difference between cost accounting and financial
accounting in tabular form.
Content: Cost Accounting Vs Financial Accounting

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart

COST ACCOUNTING FINANCIAL ACCOUNTING

BASIS FOR
COMPARISON

Meaning Cost Accounting is an Financial Accounting is an

accounting system, accounting system that
through which an captures the records of
organization keeps the financial information
track of various costs about the business to
incurred in the business show the correct financial
in production activities. position of the company
at a particular date.

Information Records the information Records the information

type related to material, labor which are in monetary
and overhead, which are terms.
used in the production
process.

Which type of Both historical and pre- Only historical cost.

cost is used for determined cost
recording?

Users Information provided by Users of information

the cost accounting is provided by the financial
used only by the internal accounting are internal
management of the and external parties like
 COST ACCOUNTING FINANCIAL ACCOUNTING
BASIS FOR
COMPARISON

organization like creditors, shareholders,

employees, directors, customers etc.
managers, supervisors
etc.

Valuation of At cost Cost or Net Realizable

Stock Value, whichever is less.

Mandatory No, except for Yes for all firms.

manufacturing firms it is
mandatory.

Time of Details provided by cost Financial statements are

Reporting accounting are reported at the end of the
frequently prepared and accounting period, which
reported to the is normally 1 year.
management.

Profit Analysis Generally, the profit is Income, expenditure and

analyzed for a particular profit are analyzed
product, job, batch or together for a particular
process. period of the whole entity.
 COST ACCOUNTING FINANCIAL ACCOUNTING
BASIS FOR
COMPARISON

Purpose Reducing and controlling Keeping complete record

costs. of the financial
transactions.

Forecasting Forecasting is possible Forecasting is not at all

through budgeting possible.
techniques.

Key Differences Between Cost Accounting and Financial

Accounting

The following are the major differences between cost accounting and financial
accounting:

1. Cost Accounting aims at maintaining cost records of an organisation.

Financial Accounting aims at maintaining all the financial data of an
organisation.
2. Cost Accounting Records both historical and per-determined costs.
Conversely, Financial Accounting records only historical costs.
3. Users of Cost Accounting is limited to internal management of the
entity, whereas users of Financial Accounting are internal as well as
external parties.
4. In cost, accounting stock is valued at cost while in financial accounting,
the stock is valued at the lower of the two i.e. cost or net realisable value.
5. Cost Accounting is mandatory only for the organisation which is
engaged in manufacturing and production activities. On the other hand,
Financial Accounting is mandatory for all the organisations, as well as
compliance with the provisions of Companies Act and Income Tax Act is
also a must.
 6. Cost Accounting information is reported periodically at frequent
intervals, but financial accounting information is reported after the
completion of the financial year i.e. generally one year.
7. Cost Accounting information determines profit related to a particular
product, job or process. As opposed to Financial Accounting, which
determines the profit for the whole organisation made during a
particular period.
8. The purpose of Cost Accounting is to control costs, but the purpose of
financial accounting is to keep complete records of the financial
information, on the basis of which reporting can be done at the end of
the accounting period.

Advantages of Management Accounting

1 It helps to increase the efficiency of all functions
of3 management
2 It helps in target-fixing, decision-making, price-fixing, selection
of product-mix and so on
3 Forecasting and Budgeting help the concern to plan the future
and financial activities
4 Various tools and techniques provide reliability and authenticity
to carry out the business functions
5 It is useful in controlling wast1age and defects
6 It helps in complete communication between all levels of
management
7 It helps in controlling the cost of production thus increasing the
profit percentage
8 It is proactive-analyses the governmental policies and socio-
economic scenario which helps to assess the external
environmental impacts on the o1rganization

Limitations of Management Accounting

It is concerned with financial and cost accounting. If these records are
not reliable, it will affect the effectiveness of management accounting.

1. Decisions taken by the management accountant may or may not

be executed by the management.
 2. It is very expensive. Only big concerns can adopt this method of
accounting.
3. New rules and regulations are to be framed, hence there is a
possibility of opposition from the employees.
4. It is only in the developing stage.
5. It provides only data and not decisions.
6. It is a tool to the management and not an alternative of
management.

The Role of Management Accounting in an

Organization

1. Helping Forecast the Future:

Forecasting aids decision-making and answering questions,

such as: Should the company invest in more equipment?
Should it diversify into different markets? Should it buy
another company? Management accounting helps in
answering these critical questions and forecasting the future
trends in business.

2. Helping in Make-or-buy Decisions:

Is it cheaper to procure materials or a product from a third

party or manufacture them in-house? Cost and production
availability are the deciding factors in this choice. Through
management accounting, insights will be developed which
will enable decision-making at both operational and strategic
levels.

3. Forecasting Cash Flows:

 Predicting cash flows and the impact of cash flow on the
business is essential. How much cost will the company incur
in the future? Where will its revenues come from and will
the revenues increase or decrease in the future?
Management accounting involves designing of budgets and
trend charts, and managers use this information to decide
how to allocate money and resources to generate the
projected revenue growth.

4. Helping Understand Performance Variances:

Business performance discrepancies are variances between

what was predicted and what is actually achieved.
Management accounting uses analytical techniques to help
the management build on positive variances and manage
the negative ones.

5. Analyzing the Rate of Return:

Before embarking on a project that requires heavy

investments, the company would need to analyze the
expected rate of return (ROR). If given two or more
investment opportunities, how should the company choose
the most profitable one? In how many years would the
company break even on a project? What are the cash flows
likely to be? These are all vital questions that can be
answered through management accounting.