Introduction of Management accounting

Accounting is the language of business. It gives the financial picture of the

business Accounting.

The history of accounting indicates the evolution pattern of the concept of

accounting. The following phases were considered in the evolution of accounting.

• Stewardship accounting – In the early times the business transactions were

recorded the books on a day to day basis. The person employed for
recording these transactions was called as a steward and the type of
accounting was termed as steward ship accounting.
• Financial accounting – A double entry accounting system was been
invented and implemented in this type of accounting. According to this
type of accounting the financial status of the business can be presented
through statements like Balance Sheet and Profit and loss account.
• Cost Accounting – For controlling the efficiency and profitability of the
company this accounting technique was considered. This accounting
techniques uses the methods and techniques for helping the management
in planning and controlling costs.
• Management Accounting – The accounting method which uses the
historical financial information available from the financial statements,
combines it with the recent qualitative information from the market for the
management.
• Social responsibility accounting – When the economic and social effects
of the business are considered while doing the accounting it is termed as
social responsibility accounting.
• Inflation accounting – When time value of money is considered and
required amount is generated from the internal sources of finance for
covering the rate of inflation it is termed as inflation accounting.
• Human resource accounting – The accounting method which considers the
employees in the organisation as wealth, and accounts their employees is
termed as human resource accounting method.

FINANCIAL AND COST ACCOUNTING

Financial accounting gives the overall view of how the business has fared in a
particular period through its financial statements-i.e. the Balance Sheet and Profit
& Loss Account. But financial accounting suffers from certain limitations.
Therefore the management does not have the necessary information for making
decision or future planning. Cost accounting deals primarily with the cost data
and fails to report what the results are at each stage.
Financial and Cost accounting are useful but these suffer still from the following
limitations and to compensate and overcome these drawbacks the third body of
knowledge which automatically follows is Management accounting. The last
term above “Management Accounting” is comparatively of recent origin.
The limitations of Financial and Cost accounting are as follows:
(i) Historical Nature. Financial accounting is historical in nature i.e. all the
data is collected from events that have occurred in the past e.g. assets are
recorded at their cost. No changes in their value are made in the books after
its acquisition. Thus, realizable or replaceable value is never mentioned.
Therefore the management does not have the necessary information for
decision-making and future planning.

(ii) No Help in Decision Making. Data is of historical nature, and does not
facilitate the management in selecting a profitable alternative as the
financial accounting data is inadequate and in a way incomplete.

(iii) Incomplete Knowledge of Costs: Financial accounting relates to the entity

as a whole. Data regarding cost relating to the different products or
processes is not available in order to gauge and rank the profitability of
each. Similarly data of wastages/scraps, deficits, and losses is also not
available. Therefore establishing and setting the prices of the products
without the availability of a detailed analysis of costs is not there in
financial accounts.

(iv) No provision for Corrective Cost Control action. Expenses are recorded
after they are incurred therefore costs cannot be controlled. No budgeting
technique to check the reasonableness of any expenditure. Responsibility
accounting also has to gain sufficient momentum. Deviation analysis
wherein the variation from actual occurs cannot be done through financial
accounting.

(v) Expertise requirements: Financial accounting is a highly technical subject

 in nature. It requires expertise-persons who possess adequate knowledge of
accounting and are well versed in the practice of accounting are required.
Management accountants are required to summarize many different types
of information as per their requirements which may be monetary i.e. cost
oriented or non-monetary i.e. non cost oriented.

(vi) Limited Scope: Cost accounting deals primarily with the cost data so the
scope of as compared to management accounting is limited.

MANAGEMENT ACCOUNTING
Definitions Of Management Accounting :
1. According to the Chartered Institute of Management Accountants (CIMA),
Management Accounting is "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 appropriate use of and accountability for its
resources. Management accounting also comprises the preparation of
financial reports for non management groups such as shareholders,
creditors, regulatory agencies and tax authorities" (CIMA Official
Terminology).

2. The Institute of Certified Management Accountants (ICMA), state "A

management accountant applies his or her professional knowledge and
skill in the preparation and presentation of financial and other
decision oriented information in such a way as to assist management in
the formulation of policies and in the planning and control of the
operation of the undertaking. Management Accountants therefore are seen
as the "value-creators" amongst the accountants. They are much more
interested in forward looking and taking decisions that will affect the future
of the organization, than in the historical recording and compliance
(scorekeeping) aspects of the profession. Management accounting
knowledge and experience can therefore be obtained from varied fields and
functions within an organization, such as information management,
treasury, efficiency auditing, marketing, valuation, pricing, logistics,
etc."
 3. Rose defines Management Accounting as “the Adaptation and Analysis of
accounting information and its diagnosis and explanation in a way to assist
management”.

4. Batty defines Management Accounting as “it is the term used to describe

the accounting methods, systems and techniques which coupled with
special knowledge and ability assist management in its task of maximizing
profits.”

5. R. N. Anthony defines Management Accounting -“Management

Accounting is concerned with information that is useful to management”.

Importance, Scope And Objectives Of Management Accounting:

The span and application areas of management are very expansive and includes
all information, which is provided to the management for financial analysis and
interpretation of the business operations. From the above definition itself the
following areas of activities that are included in the scope of this subject
emerge:

1. Methods and Procedures-(process of identification).: The management

accountant is responsible for the design and operation of the management
accounting system. All those methods and procedures which help the
concern to use its resources efficiently and economically are analyzed and
put into place.

2. Internal Financial Control & Office Services Control-(accountability for

its resources and efficiency auditing).: The Management Accountant is a
person who is in-charge of the accounting functions. He plays a very
important role in the working of an organization. He through control ensures
that employees perform properly. It includes establishing the internal control
methods like proper internal control, internal audit, etc. The management
accountant may be required to maintain and control office functioning in
some organizations and ensure that employees perform properly. The
Management Accountant at the top most level is rightly called as a
Controller of Accounts. He may be required to look into electronic data
processing devices-computer generated information and communication.

3. Financial Accounting (professional knowledge): Financial accounting

recapitulates historical information which is very useful for future financial
 planning and forecasting. Laying out the blue print of a proper financial
accounting system is a crucial for management of business operations by the
management accountant.

4. Cost Accounting and cost control procedures- (professional knowledge).

It gives various techniques of costing like marginal costing. Standard
costing, etc., which plays a useful role in the operation and control of the
business undertakings. These procedures are integral part of the
management accounting process and include stock control, budgetary
control and variance analysis, etc.

5. Tax Accounting-(professional knowledge). It is an integral part of the

management accounting and includes preparation of income statement,
determination and filling up the return of taxable income etc.

6. Forecasting-(forward looking and taking decisions that will affect the

future of the organization). Forecasting on the various aspects of the
business is necessary for budgeting.

7. Interpretation-(identification, measurement, accumulation, analysis).

Management Accounting is closely related with the interpretation of
financial data to the management and advising them on decision making,
interpretation of financial data follows the sequence of identification of
relevant data, measurement of data, accumulation/collection of relevant
data, and its analysis.

8. Reporting-(preparation of financial reports, marketing, valuation,

pricing, logistics). The management accountant is required to submit
reports to the management on the various aspects of the undertaking and
while reporting; he may use statistical tools for to make the information
more cohesive and intelligent.

9. Budgeting-Through Budgetary control the management accountant controls

the activities of the business by comparing the actual with the budgeted
figures, finding out deviations, analyzing the deviations to pinpoint the
responsibility and take remedial action so that adverse things may not
reoccur in future.

10. Office Services- The management accountant may be required to maintain

and control administrative services in the organization. This function
 includes data processing, reporting through the use of electronic devices like
computers, or the software available which would facilitate his working like
Tally, etc.
Functions of Management Accounting
Management accounting provides an overall frame work which assists the
management in decision making and achieving the economic objective and
goal. Management Accounting includes each and every function which
helps the management in discharging its responsibilities. Following are
some of the functions of Management Accounting:
1. Planning: Every org has a mission statement which has to be achieved.
These goals and objectives are achieved through plans both and long term.
The short term planning involves a short analysis of the companies internal
strengths and weakness and external opportunities and threats and assessing
competitors, markets, etc. long term planning will also involve ERP
techniques is enterprise resource planning in terms of money men and
material
2. Controlling: the management accounting controls the total financial
performance of the organization through an in depth evaluation of the profit
and loss account and balance sheet. Comparative financial statements are
drawn up for this evaluation, an in depth ratio analysis is also undertaken,
cash flow statements are prepared for keeping a tab on the expenditure and
cost control and cost reduction is taken up through a proper and effective
reporting system Control means monitoring actual against budgeted and
corrective remedial action wherever necessary and possible.
3. Coordination: the aim of management accounting is to facilitate their
managers in running their organizations efficiently. Coordination is the
essence of managerial efficiency. For coordination various tools are
deployed financial score keeping is one of them. Herein budgeting is very
important for setting standards and keeping a score on the predicted financial
estimates vis-à-vis. The actual finances consumed and reconciling the
variations between the two
4. Organizing: it is through management accounting that the whole
organization is organized. The blue print is laid out within which the
different functions are assigned to different people.
5. Financial evaluation: the economic viability of every investment is
appraised through management accounting. Determination of short term and
long term financial needs of the organization, the relevant capitalization
 structure, funding of project, dissemination of the expenditure incurred in
the funding are few examples of the financial evaluation exercise.
6. Financial analysis and interpretation: management accounting now fulfils
the information needs of the organization. The data which was earlier
recorded is now analyzed and presented to the management to facilitate the
decision making process.
Advantages of management accounting:
1. It increases the efficiency of the business through planning and budgeting.
2. All resources available are used to the fullest possible extent, thereby
avoiding wastages, reducing cost of production, maximizing profits and
thereby increasing the return on investment (ROI).
3. Control of variations is facilitated as actual are continuously compared with
standards that have been set.
4. The high quality of products and processes rendered facilitates the
organization in building up a good public image.
5. Employees are constantly motivated as they are fitted into the right slots
befitting their skill sets.
6. Interpretation of financial data is always possible easily and readily.
Conclusions can be arrived as and when required.
7. It is one of the diagnostic/investigative techniques available to managers for
improving the organizations performance through the accounting system.
8. It generates a data bank for all future transactions.
Principal systems and Techniques of Management Accounting:
The management accounting is a communication system which provides
information for the formulation of policies and planning and controlling the
activities of the organization.
It provides both qualitative and quantitative data to the management for this
it makes use of the following Principal systems and techniques:
1. Analysis of Financial records: the financial records and statements are to be
analyzed so that the financial strength and weakness of the organization may
be identified. The data should be interpreted in such a way that sound
policies may be established regarding major decisions of investment finance
and dividend.
2. Statistical analysis: systematic and logical conclusions are to be deduced
through statistical analysis and for this various statistical tools maybe
employed like sampling techniques where in representative samples of
suitable sizes are chosen to represent the properties of the entire population.
 Management accountants fall back very often on sampling theories when
they have loads of data available for drawing inferences. The other tools
employed are graphs, charts, regression lines, statistical quality analysis,
statistical quality control, linear programming.
3. Analysis of cost accounting records: in cost accounting costs are recorded
after they are incurred, actual costs incurred are then compared with
previously made predictions, standard costs. Such comparison is beneficial
to control costs and plan properly for the future.
4. Standard costing: standard costing is a major technique employed by
management accounting. Standard costs are predetermined costs against
which actual costs are compared, once variations are observed, remedial
action is taken. It also helps in pinpointing the responsibility for such
variances.
5. Marginal costing: in marginal costing the variable costs are considered for
decision making costs control and maximization of profits of the
organization.
6. Ratio analysis: ratio analysis is one of the most important technique and
tools of management accounting. Ratios help in gauging the profitability,
long term and short term solvency of the organization. The ratios establish
a relationship between figures and understand the needs of the organization
as well as review performance.
7. Budgetary control: all financial budgets are prepared in advance. Budget is
an estimate of the future needs calculated for a definite period, on the basis
of previous year’s speakers. Responsibilities fixed for the execution of this
budgets and later on efficiency of its execution is benchmarked against the
budget.
8. Fund flow statement: the fund flow statement reveals the sources from
which funds have been procured and the areas where they have been applied.
Funds are very crucial for the businesses economic viability and they should
be available at the right time for their proper utilization. A fund flow
statement helps management in proper planning, disbursement utilization
and control of cash
9. Information reporting: for any decision to be taken in the business
information about various activities is required by the decision makers at all
levels of the business. It becomes the responsibility of the management
account to communicate the right information at the opportune time in the
appropriate manner to facilitate the decision makers the management
 accountant prepares the necessary information reports as required at the
different levels and communicates the same
10. Return on Investment: ROI: every organization has to be an economically
viable and feasible one, outsiders and insiders are interested in measuring
the overall performance of the business. This overall performance is
translated in terms of profitability and for this a very important statistical
ratio is return on investment (ROI). A satisfactory return shows that the
organization is performing well.
Disadvantages of management accounting:
1. Costly system: Normally it is observed that the management accounting
system can be adopted by large organizations as it requires an elaborate
internal setup, large number of manuals, in house experts, etc.
2. Resistance to rearrangement: The present setup within an organization may
have to realign. And any such change always meets with resistance, as there
is always a resistance to change within the labour force. Constant
educational information helps to allay fears, which the organization must
undertake.
3. Scientific decision making: management accounting as tool employees the
process of scientific decision making. But managers tend to fall back on the
intuitive decision making process rather than the scientific ones. Herein the
system fails and managers should be encouraged to consciously adopt the
scientific decision making process.
4. Combination of expertise knowledge: management accounting is the end
product of a combination of a number of subjects like statistics, economics,
taxation, sociology, psychology and of course accounting persons are
required to have in-depth knowledge of all these subjects, which is very
often missing in the managerial personnel, this lacunae adversely affects the
decisions taken.
5. Infancy stage: Management accounting is still in the evolutionary stage. The
analytical tools and techniques therefore need to be sharpened and precise
norms laid down for their application.
6. Personal bias: Analysis of information should be strictly on the basis of
objectivity and personal bias should not be allowed to creep in.

Distinction between Financial and Management accounting

Serial no/nature Financial accounting Management accounting
1. Optional versus Financial accounting is Management accounting is
compulsory compulsory for every joint optional as it is the need of
stock company and has to managers.
fulfill statutory Company
Law provisions and taxation
rules
2. Presentation Financial accounting aims to Management accounting is a
present a true and fair view of continuous process of analysis
the overall results of the planning and control,
business entity in accordance basically for supporting
with well accepted concepts decision making. It does not
and conventions, accounting have to conform to any
standards and legal standards or rules but can lay
requirements. down it own.
3. Nature of data Financial accou7nting makes Management accounting
used use of historical data. The emphasis on providing
data herein is normally futuristic data to the
represented in rupee value managers. The data herein is
and therefore quantitative in normally descriptive and
nature. The data relates to the qualitative in nature. The data
enterprise as a whole and relates to various products, or
reports on its overall processes, whichever are
performance. required i.e. it may even report
on segment performance

4. Object and In financial accounting the In management accounting

purpose profit and loss account spells the purpose is to select one
out the result of the business course of action which is
operations and the balance considered the best when
sheet details out the assets different alternatives are
and liabilities. Thus the available and tries to forecast
purpose is to ascertain the the future.
overall working of the
organization.
5. Closure In financial accounting the In management accounting
results are laid out at the end the information is laid out as
of the year quickly as possible whenever
 required by the management,
to facilitate the decision
making process
6. Style In financial accounting, since In management accounting
the rules are standardized the the style of presenting the
style of presenting the information is tailored and
information and the details customized and summarized
are also as per the to meet the requirements.
standardized norms.
7. Access In financial accounting In management accounting
access is publicly available. the access is restricted, as the
There is also publication and information is confidential as
easy availability of financial it is for supporting the
information. decision making activity.
8. Accuracy In financial accounting the In management accounting
information is collected the information is collected
slowly but the details are fast and accepts
accurate, eliminating approximations.
approximations.
9. Application In financial accounting the In management accounting
information is technical in the information is for the use
nature normally used by of non-accountants also.
experts and accountants.
10. Measurement unit In financial accounting the In management accounting
data is normally quantified in the data is normally quantified
terms of money. in terms of money and
quantum of units.

Distinction between Cost and Management accounting

Serial no/nature Cost accounting Management accounting

1. Optional versus In Cost accounting the In Management accounting

compulsory ICWAI lays down the rules there are no such rules and
and regulations as per which regulations for the preparation
the reports have to be of the reports and these are
prepared.
 modified on a need based
requirement.
2. Object and In Cost accounting the In Management accounting
purpose purpose is towards stress is more on the impact
ascertaining the cost of goods and effect of the cost, so the
and services for stock total object of data collection
valuation purposes, price and its application is modified
fixation policies, profit to suit this purpose.
determination, etc.
3. Application Cost accounting does not In Management accounting
include financial accounting both cost accounting,
as well as tax planning. Cost financial accounting and tax
accounting does not include planning are embraced and
fund flow analysis, cash flow employed. Therefore the tools
analysis and ratio analysis. herein are wider and include
techniques like marginal
costing, standard costing,
budgetary control, fund flow
analysis, cash flow analysis
and ratio analysis.
4. Time frame Cost accounting is historical Management accounting is
in approach and projects the futuristic in the sense that it
past. It collects information predicts the future on the basis
about the costs that have of past and present and it is
already been incurred. Cost concerned with short term and
accounting is generally long term planning.
concerned with short term
planning.
5. Installation and Cost accounting systems can Management accounting
Status in be installed without systems cannot be installed
organizational management accounting. without cost accounting, so
hierarchy the management accountant is
generally placed at a higher
level than the cost accountant,
because of his in-depth
expertise knowledge.