B.Com.

: VI Semester
BCOM-22-601: Accounting for Managers
Dr. Santosh Kumar
Assistant Professor
School of Management Sciences, Varanasi
 Unit -1
Management Accounting

MEANING AND EMERGENCE OF MANAGEMENT ACCOUNTING

Management Accounting is comprised of two words 'Management' and
'Accounting'. It is the study of managerial aspect of accounting. The emphasis of
management accounting is to redesign accounting in such a way that it is helpful to
the management in formation of policy, control of execution and appreciation of
effectiveness. It is that system of accounting which helps management in carrying
out its functions more efficiently. It is generally viewed as management oriented
accounting.
The term 'Management Accounting' is of a recent origin. This term was first
used in 1950 by a team of accountants visiting U.S.A. under the auspices of
Anglo—American Council on Productivity. The terminology of cost
accountancy had no reference to the word management accountancy before the
report of this study group. The complexities of business environment have
necessitated the use of management accounting for planning, coordinating and
controlling functions of management.
A small undertaking with a local character is generally managed by the owner
himself. The owner is in touch with day—to—day working of the enterprise and
he plans and coordinates the activities himself. The use of simple accounting
enables the preparation of profit and loss account and balance sheet for
determining profitability and assessing financial position of the enterprise. All
informational needs for managerial purposes are met by simple financial
statements. Since the owner is both the decision—maker and implementer of such
decisions, he does not feel the necessity of any communication system and no
additional information is required for managerial purposes. The evolution of joint
stock company form of organisation has resulted in large—scale production and
separation of ownership and management.
The introduction of professionalism in management has brought in the
division of organisation into functional areas and delegation of authority and
decentralisation of decision—making. The decision-making no more remains a
matter of intuition. It requires the evolution of information system for helping
management in planning and assessing the results.
Definition
The Management Accounting has been defined by various scholars/authorities from
time to time. The following are some important definitions of Management
Accounting:
 The Institute of Chartered Accountants of England and Wales; “Any form
of accounting which enables a business to be conducted more efficiently can be
regarded as Management Accounting”.
 Anglo-American Council on Productivity; “Management Accounting is the
presentation of accounting information in such a way as to assist management in
the creation of policy and the day to day operation of any undertaking”.
 R.N. Anthony; “Management Accounting is concerned with accounting
information that is useful to management”.
 J. Batty; “Management Accounting is the terms used to describe the account
methods, systems and techniques which, coupled with special knowledge and
ability, assist management in the task of maximizing profits or minimizing
losses”.
In brief we can say that Management Accounting which is also known as Accounting
for Managers is a process of collecting information (both qualitative and quantitative)
from various sources such as Financial Accounting, Cost Accounting, Tax Accounting,
Human Resource Accounting, etc. selecting the important ones out of the total,
analyzing them with the help of certain tools or techniques and then pass on to the
management for taking decisions in the interest of the organization and the parties
interested into it. Therefore, it can be said that the Management Accounting is selective
in nature where only important information’s are supplied to the management which
have been collected from different sources. The management takes both routine and
strategical decisions with the help of the information. Actually the Management
Accounting works two ways – one the management is capable of knowing each and
every thing about its organization, finds out the strong and weak points and accordingly
takes decisions for grabbing the opportunities available to the organization in the
external environment by facing the challenges and on the other hand the performance
of the management can also be evaluated by various stakeholders during a particular
time period by going through the financial statements of the organization.
Nature/ Characteristics of Management Accounting
On the basis of the meaning and definitions, the following are the main
characteristics/nature of Management Accounting:
1. Providing Accounting Information: Management accounting is based on
accounting information. The collection and classification of data is the primary
function of accounting department. The information so collected is used by the
management for taking policy decisions. Management accounting involves the
presentation of information in a way it suits managerial needs. The accounting
data is used for reviewing various policy decisions. Management accounting
is a service function and it provides necessary information to different levels
of management.
2. Cause and Effect Analysis: Financial accounting is limited to the preparation
of profit and loss account/statement and finding out the ultimate result, i.e.,
profit or loss. Management accounting goes a step further. The cause and
effect' relationship is discussed in management accounting. If there is a loss,
the reasons for the loss are probed. If there is a profit, the factors directly
influencing the profitability are also studied. The figures of profits are
compared to sales, different expenditures, current assets, interest payables,
share capital, etc. So, the study of cause and effect relationship is possible in
management accounting.
3. Use of Special Techniques and Concepts: Management accounting uses
special techniques and concepts to make accounting data more useful. The
techniques usually used include financial planning and analysis, standard
costing, budgetary control, marginal costing, project appraisal, control
accounting, etc. The type of technique to be used will be determined according
to the situation and necessity.
4. Taking Important Decisions: Management accounting helps in taking
various important decisions. It supplies necessary information to the
management which may base its decisions on it. The historical data is studied
to see its possible impact on future decisions. The implications of various
alternative decisions are also taken into account while taking important
decisions.
5. Achieving of Objectives: In management accounting, the accounting
information is used in such a way that it helps in achieving organisational
objectives. Historical data is used for formulating plans and setting up
objectives. The recording of actual performance and comparing it with targeted
figures will give an idea to the management about the performance of various
departments. In case there are deviations between the standards set and actual
 performance of various departments corrective measures. can be taken at once.
All this is possible with the help of budgetary control and standard costing.
6. No Fixed Norms Followed: In financial accounting certain rules are followed
for preparing different accounting books. On the other hand, no specific rules
are followed in management accounting. Though the tools of management
accounting are the same but their use differs from concern to concern. The
analysis of data depends upon the person using it. The deriving of conclusions
also depends upon the intelligence of the management accountant. Every
concern uses the figures in its own way. The presentation of figures will be in
the way which suits the concern most. So, every concern has its own rules and
by-rules for analysing the data.
7. Increase in Efficiency: The purpose of using accounting information is to
increase efficiency of the concern. The efficiency can be achieved by setting
up goals for each department or section. The performance appraisal will enable
the management to pin point efficient and inefficient spots. An effort is made
to take corrective measures so that efficiency is improved. The constant review
of working will make the staff cost-conscious. Everyone will try to control cost
on one's own part.
8. Supplies Information and not Decision: The management accountant
supplies information to the management. The decisions are to be taken by the
top management. The information is classified in the manner in which it is
required by the management. Management accountant is only to guide and not
to supply decisions. The data is to be used by management for taking various
decisions. ‘How is the data to be utilised' will depend upon the calibre and
efficiency of the management.
9. Concerned with Forecasting: The management accounting is concerned with
the future. It helps the management in planning and forecasting. The historical
information is used to plan future course of action. The information is supplied
with the object to guide management for taking future decisions.

SCOPE OF MANAGEMENT ACCOUNTING

Management accounting is a new approach to accounting. It provides techniques
for the interpretation of accounting data. It also helps in developing realistic
approach to future course of action. The main aim is to help management in its
functions of planning, directing and controlling. Management accounting is
related to a number of fields. At the Seventh International Conference of
Accountants held in Amsterdam in 1957, the main emphasis was on Cost
Accounting, Budgetary Control, Materials Control, Interim Reporting,
Determination of the most efficient and economical accounting system, special
cost and economic studies and assisting management in interpreting financial data.
The following facts of management accounting are of a great significance and
from the scope this subject.
1. Financial Accounting: Financial accounting deals with the historical data.
The recorded facts about an organisation are useful for planning the future
course of action. Though planning is always for the future but still it has to
be based on past and present data The control aspect too is based on
financial data. The performance appraisal is based on recorded facts and
figures. So management accounting is closely related to financial
accounting.
2. Cost Accounting: Cost accounting provides various techniques for
determining cost of manufacturing products or cost of providing service. It
uses financial data for finding out cost of various jobs, products or
processes. The systems of standard costing, marginal costing, differential
costing and opportunity costing are all helpful to the management for
planning various business activities.
Cost accounting also helps in finding out economical and non—economical
fields of production. The efficiency of different departments is judged by
setting up standards and finding out variances. So cost accounting is an
essential part of management accounting.
3. Financial Management: Financial management is concerned with the
planning and controlling of the financial resources of the firm. It deals with
raising of funds and their effective utilisation. Its main aim is to use business
funds in such a way that earnings are maximised. Finance has become so
much important for every business undertaking that all managerial activities
are connected with it. Financial viability of various propositions influences
decisions on them. Although, financial management has emerged as a
separate subject, management accounting includes and extends to the
operation of financial management also.
4. Budgeting and Forecasting: Budgeting means expressing the plans,
policies and goals of the enterprise for a definite period in future. The targets
are set for different department: and responsibility is fixed for achieving
 these targets. The comparison of actual performance with budgeted figures
will give an idea to the management about their performance of different
departmental. Forecasting, on the other hand, is a prediction of what will
happen as a result of a given set of circumstances. Forecasting is a
judgement whereas budgeting is an organisational object. Both budgeting
and forecasting are useful for management accountant in planning various
activities.

5. Inventory Control: Inventory is used to denote stock of raw materials,

goods in the process of manufacture and finished products. Inventory has a
special significance in accounting for determining correct income for a
given period. Inventory control is significant as it involves large stuns. the
management should determine different levels of stocks, i.e., minimum
level, maximum level, re-ordering level for inventory control. The control
of inventory will help in controlling costs of products. Management will
need effective inventory control for controlling stocks. Management
accountant will guide management as to when and from where to purchase
and how much to purchase. So, the study of inventory control will be
helpful for taking managerial decisions.
6. Reporting to Management: One of the functions of management
accountant is to keep the management informed of various activities of the
concern so as to assist it in controlling the enterprise. The reports are
presented in the form of graphs, diagrams, index numbers or other statistical
techniques so as to make them easily understandable. The management
accountant sends interim reports to the management and these reports may
be monthly, quarterly, half-yearly. The reports may cover profit and loss
statement, cash and fund flow statements, stock reports, absentee reports
and reports on orders in hand, etc. These reports are helpful in giving a
constant review of the working of the business.
7. Interpretation of Data: The management accountant interprets various
financial statements to the management. These statements give an idea
about the financial and earning position of the concern. These statements
may be studied in comparison to statements of earlier periods or in
comparison with the statements of similar other concerns. The significance
of these reports is explained to the management in a simple language. If the
statements are not properly interpreted, then wrong conclusions may be
 drawn. So, interpretation is as important as compiling of financial
statements.
8. Control procedures and Methods: Control procedures and methods are
needed to use various factors of production in a most economical way. The
studies about cost, relationship of cost and profits are useful for using
economic resources efficiently and economically.
9. Internal Audit: Internal audit system is necessary to judge the performance
of every department. The actual performance of every department and
individual is compared with the pre—determined standards. Management
is able to know deviations in performance. Internal audit helps management
in fixing responsibility of different individuals.
10. Tax Accounting: In the present complex tax systems, tax planning is an
important part of management accounting. Income statements are prepared
and tax liabilities are calculated. The management is informed about the tax
burden from central government, state government and local authorities.
Various tax returns are to be filed with different departments and tax
payments are to be made in time. Tax accounting comes under the purview
of management accountant's duties.
11. Office Services: Management accountant may be required to control an
office. He will be expected to deal with data processing, filing, copying,
duplicating, communicating, etc. He will also be reporting about the utility
of different office machines.

OBJECTIVES OF MANAGEMENT ACCOUNTING

The primary objective of management accounting is to enable management to
maximise profits or minimise losses. This is done through the presentation of
statements in such a way that management is able to take correct policy decisions.
The following are the important objectives of management accounting:
1. Planning and Policy Formulation: The object of management accounting
is to supply necessary data to the management for formulating plans.
Planning is essentially related to taking decisions for future. It also includes
forecasting, setting goals and deciding alternative course of action. The
figures supplied and opinion given by the management accountant help
management in planning and policy formation.
2. Helpful in Controlling Performance: Management accounting devices like
standard costing and budgetary control are helpful in controlling
 performance. The work is divided into different units and separate goals are
set up for each unit. The performance of every unit is made the responsibility
of a particular person. The required authority for getting the work done is
also delegated to the concerned persons. The actual results are compared
with predetermined objectives. The management is able to find out the
deviations and take necessary corrective measures. Different departmental
heads are associated with preparing budgets and setting up goals. The
management accountant acts as a coordinating link between different
departments and he also monitors their performance to the top management.
The management is able to control performance of each and every individual
with the help of management accounting devices.
3. Helpful in Organising: Organisation is related to the establishment of
relationship among different individuals in the concern. It also includes the
delegation of authority and fixing of responsibility. Management accounting
is connected the establishment of cost centers, preparation of budgets,
preparation of cost control accounts and fixing of responsibility for different
functions. All these aspects are helpful in setting up an effective and efficient
organisational framework.
4. Helpful in Interpreting Financial Information: The main object of
management accounting is to present financial information to the
management in such a way that it is easily understood. Financial information
is of technical nature and managerial personnel may not be able to
understand the significance and utility of various financial statements.
Management accountant explains these statements to the management in a
simple language. If necessary, he uses statistical devices like charts,
diagrams, index numbers, etc. so that the information is easily followed.
5. Motivating Employees: Management accounting helps the management in
selecting best alternatives of doing the things. Targets are laid down for the
employees. They feel motivated in achieving their targets and further
incentives may be given for improving their performance.

6. Helpful in Making Decisions: The management has to take certain

important decisions A decision may have to be taken about the expansion or
diversification of production. There may be a question of replacement of
labour with machine or introduction of latest technological devices.
Management accountant prepares a report on the feasibility of various
alternatives and makes an assessment of their financial implications. The
 information provided by the accountant helps management in selecting a
suitable alternative and taking correct decisions.
7. Reporting to Management: One of the primary objectives of management
accounting is to keep the management fully informed about the latest
position of the concern. This helps management in taking proper and timely
decisions. The management is kept informed through regular financial and
other reports. The performance of various departments is also regularly
communicated to the top management.

8. Helpful in Co-ordination: Management accounting provides tools which

are helpful in coordinating the activities of different sections or departments.
Co-ordination is done through functional budgeting. Management
accountant acts as a co-coordinator and reconciles the activities of different
sections.
9. Helpful in Tax Administration: The complexities of tax system are
increasing every day. Management accounting helps in various tax liabilities
and depositing correct amount of taxes with the concerned authorities.
Various tax returns are to be filed under different tax laws. Tax administration
is carried on with the advice and guidance of the management accountant.

FUNCTIONS/ROLE OF MANAGEMENT ACCOUNTING

Management accounting is a part of accounting. It has developed out of the need for
making more and more use of accounting for taking managerial decisions.
Management accounting is signed the functions of classifying presenting and
interpreting data in such a way that it helps management in controlling and running
the enterprise in an efficient and economical manner.
Some of the functions of management accounting are given as follows:
1. Planning and Forecasting: Management fixes various targets to be achieved
by the business in near future. Planning and forecasting are essential for
achieving business objectives. One of the important functions of the
management accounting is to help management in planning for short—term
and long term periods and also in making forecasts for the future.
Management accountants use various techniques such as budgeting, standard
costing, marginal costing, fund flow statements, probability and trend ratios,
etc. for fixing targets. These techniques are useful in planning various
activities. So, management accounting tools are useful in planning and
forecasting.
2. Modification of Data: Management accounting helps in modifying
accounting data. The information is modified in such a way that it becomes
useful for the management. If sales data is required, it can be classified
according to product, area, season—wise, type of customers and time taken
for getting payments, etc. Similarly, if production figures are needed, these
can be classified according to product, quality, time taken by the
manufacturing processes, rate of production, etc. The modification of data in
similar groups makes the data more understandable and useful. Management
accountant classifies and modifies information according to the requirements
of the management.
3. Financial Analysis and Interpretation: Management accountant undertakes
the job of presenting financial data in a simplified way. Financial data is
generally collected and presented in a technical way. Top managerial
executives may lack technical knowledge.
Management accountant analyses and interprets financial data in a simple
way and presents it in a non-technical language. He gives facts and figures
about various policies and evaluates them in monetary terms. He gives his
opinion about various alternative courses of action so that it becomes easy
for the management to take a decision.
4. Facilitates Managerial Control: Management accounting is very useful in
controlling performance. All accounting efforts are directed towards control
of the enterprise. The standards of various departments and individuals are
set-up. The actual performance is recorded and deviations are calculated. It
enables the management to assess the performance of everyone in the
organisation. Performance evaluation is possible through standard costing and
budgetary control which are an integral part of management accounting.
5. Communication: Management accounting establishes communication
within the organisation and with the outside world. The management
accountant prepares reports for the benefit of different levels of management
and employees. The activities of the concern, are communicated to outsiders
such as bankers, investors, creditors, government agencies, etc. The filing of
various tax is also entrusted to the accountant.
6. Use of Qualitative Information: The field of management accounting is not
restricted to the use of monetary data only. It collects and uses qualitative
information also. While preparing a production budget, management
accountant may not only use past production figures, but he may rely on the
 assessment of persons dealing with production, productivity reports,
consumer surveys and many other business documents. The use of qualitative
information is as helpful as monetary information. Management can assess
various aspects of a plan before finalising it.
7. Co-ordinating: The co—ordination among different departments is essential
for smooth running of the concern. Management accountant acts as a co-
ordinator among different financial departments through budgeting and
financial reports. The targets and performances of different departments are
communicated to them from time to time. It helps to increase the efficiency
of various sections thereby increasing profitability of the concern.
8. Helpful in taking Strategic Decisions: Management accounting helps in
taking strategic decisions. It supplies analytical information regarding various
alternatives and the choice of management is made easy. These decisions may
be regarding seasonal or temporary stoppage of production, replacement
decisions, expansion or diversification of works and a correct decision is
taken.
9. Supplying Information to Various Levels of Management: Every
management level needs accounting information for decisions making and
policy execution. Top management takes broader decisions and leaves day-to-
day decisions for the lower levels of management. Management accountant
feeds information to different levels of management so that further decisions
are taken. The supply of adequate information at the proper time will increase
efficiency of the management.

PRINCIPLES OF MANAGEMENT ACCOUNTING

Management Accounting is based on the following principles:
1) Business Entity: According to this principle, the business organization is
a separate entity in comparison to its stakeholders like, owners, managers,
workers, creditors, government, bankers and society, etc. and decisions are
made for business only.
2) Objectivity over Subjectivity: It is thought that various statements and
reports under Management Accounting are prepared objectively which are
free from personal biases of individuals or managers. Hence, it works on
the principle of objectivity over subjectivity.
3) Permanency: It is presumed under Management Accounting that the
practices, procedures and methods, etc. will remain the same and generally
 no changes are made in them until it is necessary to do so for the sake of
scientific comparisons and decision making. It is also known as the
principle of consistency.
4) Classification of costs: This principle of Management Accounting divides
the costs into normal and abnormal costs. The normal costs are bound to
happen in every case but they need to be controlled. The abnormal costs
are the costs which happen due to uncontrollable factors like, natural
calamities, fire or theft, etc.
5) Flexibility over Rigidity: The methods or systems adopted under
Management Accounting should be flexible which may be changed as per
changed circumstances and not the rigid ones which become useless in
alternate conditions.
6) Surplus: Under this principle of Management Accounting, the systems
should be used only up to the extent they prove to be profitable for the
organization. They should be abandoned or changed as soon as they
become unprofitable for the business.
7) Management by Exception: It’s a principle of control used by
Management Accounting according to which the actual performance of
individuals is compared with the targeted performance and if negative
deviations are observed, the corrective or remedial actions are initiated.
But in case of no deviation, no actions are recommended.
8) Forward looking: This principle of Management Accounting helps in
making forecasts regarding the future of the firm and is tried to make it
more efficient and profitable.
9) Optimum use of resources: This principle of Management Accounting
ensures the best possible use of scarce available resources by controlling
the wastages or leakages.
10) Information: This principle says that the information should be
collected, analyzed, interpreted and presented to the management with the
help of an authentic source having a minimum cost.
11) Nature of costs: This principle of Management Accounting underlines
the need of differentiation between controllable and uncontrollable cost by
the concerned managers.
12) Principle of Prudence: This principle is also known as the principle
of conservatism where all future possible losses should be treated as the
losses while all future possible gains or profits should not be considered
 until they are received. This principle helps in bringing about more
efficiency in the organization.

TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING

A number of tools and techniques are used to supply the information required by
the management. No one technique can satisfy all managerial needs.
The tools and techniques used in management accounting are discussed as follows:
1. Financial Policy and Accounting: Every concern has to take a decision
about the sources of raising funds. The finds can be raised either through
the issue of share capital or through the raising of loans. Again, a decision
is to be taken about the type of capital, i.e., equity share capital or
preference share capital. Preference share capital can be sub—divided into
a number of types. The second decision concerns the raising of loans.
Whether the loans should be long term or short-term is again a matter of
policy. The proportion between share capital and loans should also be
decided. All these decisions are very important and management
accounting provides techniques for financial planning.
Tax planning is another aspect where management is helped by the
management accountant. He tries to use various rules and regulations for
the benefit of the organisation.
2. Analysis of Financial Statements: The analysis of financial statements is
meant to classify and present the data in such a way that it becomes useful
for the management. The meaning and significance of the data is explained
in a non—technical language. The techniques of financial analysis include
comparative financial statements, ratios, funds flow statements, trend
analysis, etc.
 Common-size Statements: Common-size statements are the
statements under which the items of financial statements (Income
Statement and Balance Sheet, etc.) are converted into percentage
by taking a common base which is equal to 100. After that,
percentage of individual items is calculated by dividing it by the
total and multiplying by 100. For example, the cost of machinery
in the Balance Sheet may be Rs. 1 lakh and the total of asset side
Rs. 10 lakh, then machinery is 10 per cent of the total assets. In
 this way, various items of financial statement may be compared
year-over-year through common-size statement.
 Comparative Statements: Comparative Income Statement and
Balance Sheet are prepared under Management Accounting to see
the changes of items therein over a period of two years and
increase or decrease is calculated in absolute terms and then in
percentages; so that the management may note the changes and
their impact on the financial position of the firm and make take
the decisions accordingly.
 Ratio Analysis: To study the financial statements seriously and
systematically with the help of ratios is known as ratio-analysis.
The profitability, financial position (short-term and long-term)
and the pace of the business is ascertained with the help of
profitability, Balance Sheet ratios and with the help of turnover
ratios, respectively.
 Trend Analysis: The possibility of happening or non-happening
of something in the long-run is known as the trend and to study
the same statistically is known as trend analysis. The trends may
be increasing, decreasing, constant or fluctuating. The study of
trend helps the management significantly in taking the decisions
regarding the business organization.
 Cash Flow Statement: It is a statement prepared in the end of
the financial year to see the changes in cash position in between
two dates (In the beginning and in the end of the financial year)
by taking into consideration operating, financing and investing
activities. The cash thought to be the life blood of a business
organization can better be managed with the help of cash flow
statement. Which is thought to be the life blood of a business
organization can better be managed with the help of
 Funds Flow Statement: It is a statement to be prepared in the
end of the financial year to know the changes in working capital
in between two dates (In the beginning and in the end of the
financial year). It helps in the better management of working
capital by observing the uses and applications of funds.

3. Historical Cost Accounting: The system of recording actual cost data on

or after the date when it has been incurred is known as historical cost
accounting. The actual cost is compared to the standard cost and it gives
 an idea about the performance of the concern. Though costing is important
but by itself its utility is limited.
4. Budgetary Control: It is a system which uses budgets as a tool for
planning and control. The budgets of all functional departments are
prepared in advance. The budgets are based on historical data and future
possibilities. The actual performance is recorded and compared with the
pre-determined targets. Management is able to assess the performance of
each and every person in the organisation. The timing of budgets and
finding out deviations is an important tool for planning and controlling.
5. Standard Costing: Standard costing is an important technique for cost
control purposes. In standard costing system, costs are determined in
advance. The determination of standard cost is based on a systematic
analysis of prevalent conditions. The actual costs are recorded and
compared with standard costs. The variances, if any, are analysed and their
reasons are ascertained. Standard costing helps to enhance the efficiency
of the concern and also 'management by exception'.
6. Marginal Costing: This is a method of costing which is concerned with
costs resulting from changes in the volume of production. Under this
system, cost of product is divided into marginal (variable) and fixed cost.
The latter part of cost (fixed) is taken as fixed and is recorded over a level
of production and every additional production unit involves only variable
cost. Marginal costing is helpful for measurement of profitability of
different lines of production, different departments and divisions of an
enterprise. The decisions about short term utilisation of capacity are also
assessed with the help of marginal costing.
7. Decision Accounting: An important work of management is to take
decisions. Decision taking involves a choice from various alternatives.
There may be decisions about capital expenditure, whether to make or buy,
what price to be charged, expansion or diversification, etc. Management
accounting calculates financial implications of each alternative course of
action and enables management to select the best course of action.

8. Revaluation Accounting: This is also known a Replacement Accounting.

The preservation of capital in the business is the main object of
management. The profits are calculated in such a way that capital is
preserved in real terms. During periods of rising prices, the value of capital
is greatly affected. According to Batty, "Revaluation accounting is used to
 denote the methods employed for overcoming the problems connected
with fixed asset replacement in a period of rising prices."
9. Control Accounting: Control accounting is not a separate accounting
system. Different systems have their control devices and these are used in
control accounting. Standard costing and budgetary control can be
exercised through variance analysis reports. In control accounting we can
use internal check, internal audit, statutory audit and organisation and
methods for control purposes.
10. Management Information Systems: With the development of electronic
devices for recording and classifying data, reporting to management has
considerably improved. The data relating to planning, co—ordination and
control are supplied to the management. Feedback of information and
responsive actions can be used as control techniques.

NEED AND IMPORTANCE OF MANAGEMENT ACCOUNTING

In the present complex industrial world, management accounting has become an
integral part of management. Management Accountant guides and advises
management at every step. The increase in scale of operations has increased the
significance of management accounting also. Improvement in analytical and
problem solving techniques of management accounting and information needs of
various levels of management are met regularly Management accounting not only
increases efficiency of the management, it also increases efficiency of the
employees. The following are the advantages of management accounting:
1. Increases Efficiency: Management accounting increases efficiency of business
operations. The targets of different departments are fixed in advance and the
achievements of these goals is a tool for measuring their efficiency.
2. Proper Planning: Management is able to plan various operations with the help of
accounting information. The technique of budgeting is helpful in forecasting
various activities. Budgets are prepared department wise firstly and then a master
budget is prepared for the whole organisation. The work load of each and every
individual is fixed in advance. The activities of the concern are planned in a
systematic manner.
3. Measurements of Performance: The systems of budgetary control costing enable
the measurement of performance. In standard costing, standards are determined and
then actual cost is compared with standard cost. It enables the management to find
out deviations between standard cost and actual cost. The performance will be good
 if actual cost does not exceed the standard cost. Budgetary control system too helps
in measuring efficiency of all employees.
4. Maximising Profitability: The thrust of various management techniques is to
control cost of production and increase efficiency of each and every individual in
the organisation. The steps of controlling costs are able to reduce cost of production.
The profits of the enterprise are maximised with the help of management accounting
system. Every unit of the organisation tries to contribute its maximum which enables
the best use of all factors of production. The return on investments also goes up.
5. Improves Service to Customers: The cost control devices employed in
management accounting enable the reduction of prices. All employees in the concern
are made cost conscious. The quality of products becomes good because quality
standards are pre-determined. The customers are supplied good quality goods at
reasonable prices. The increase in production of goods also enhances supply of
goods to consumers.
6. Effective Management Control: The tools and techniques of management
accounting are helpful to the management in planning, co-ordinating and controlling
activities of the concern. The setting of standard and assessing actual performance
regularly enables the management to have "management by exception." Everybody
assesses his own work and immediate actions are taken in case of deviations in
performance.

LIMITATIONS OF MANAGEMENT ACCOUNTING

Though management accounting is helpful in providing guidelines for planning,

directing and controlling functions, still its effectiveness is limited by a number of
reasons. Limitations of management accounting are explained as follows:
1. Based on Accounting Information: Management accounting is based on data
supplied by financial and cost accounting. Historical data is used to make
future decisions. The correctness and effectiveness of managerial decisions
will depend upon the quality of data on which these decisions are based. If
financial data is not reliable then management accounting will not provide
correct analysis. Because management accounting has to depend upon the
information collected by other sources, its effectiveness is limited to the
reliability of those sources.
2. Lack of Knowledge: The use of management accounting requires the
knowledge of a number of related subjects. Management should be conversant
with accounting principles, statistics, economics, principles of management,
 etc., and only then management accounting can be effectively utilised.
Deficiency in knowledge of any of these subjects limits the use of management
accounting. So, the application of management accounting will be useful if
persons connected with decision-making process have proper understanding
not only of management accounting but also of related subjects.
3. Intuitive Decisions: Though management accounting provides scientific
analysis of various situations and enables decision taking based on facts and
figures, there is a tendency to make decisions intuitively. Management may
avoid a lengthy course of deciding things and may take an easy course of
arriving at decisions using intuition. Intuitive decisions limit the usefulness of
management accounting.
4. Not an Alternative to Administration: Management accounting does not
provide an alternative to administration. The tools and techniques of
management accounting provide only information and not decisions.
Decisions are to be taken by the management and their implementation is also
done by management. So, management accounting has supplementary service
function and has no final say either in taking decisions or in their
implementation.
5. Top Heavy Structure: The installation of a management accounting system
needs an elaborate organisational system. A large number of rules and
regulations are also required to make this system workable and effective.
Introduction of management accounting system is a costly affair and can be
used by big concerns only. Smaller units cannot afford to use this system
because of heavy cost.
6. Evolutionary Stage: Management accounting is only in a developmental
stage; it has not yet reached a final stage. The techniques and tools used by
this system give varying and differing results. The conclusions taken from
analysis and interpretation are not the same. It will take some time before
management accounting takes a final shape.
7. Personal Bias: The interpretation of financial information depends upon the
capability of interpreter as one has to make a personal judgement. There is
every likelihood of personal bias in analysis and interpretation. Personal
prejudices and bias affect the objectivity of decisions.
8. Psychological Resistance: The installation of management accounting
involves basic change in organisational set up. New rules and regulations are
 also required to be framed which affect a number of personnel and hence there
is a possibility. of resistance from some quarters or the other.

Difference between Cost Accounting and Management Accounting

Cost Accounting and Management Accounting are two distinct fields of
accounting, both of which serve different purposes in a business.
Cost Accounting: An accounting system that helps in analysing and recording the
costs involved in the production of any product is known as Cost Accounting. It
revolves around cost computation, cost control, and cost reduction. It is an
accounting method for ensuring cost-effectiveness by accumulating, organising,
recording, calculating, analysing, and assessing the overall expenses incurred on a
product, process, or project, etc. It is mostly used in industrial units or factories
where the goods are manufactured.
The main objective of cost accounting is to determine the cost of production and
control the cost. As the management of funds is the most essential part of a company,
cost estimation through cost accounting helps in making the analysis as accurate as
possible.

Management Accounting: An accounting system that helps in collecting,

analysing, and understanding financial, qualitative, and statistical information
ultimately helping the management in making effective decisions regarding the
business is known as Management Accounting. It is also known as Managerial
Accounting. In simple terms, it is concerned with providing information to the
management of a company to assist them in making decisions.
Management accounting uses financial data to generate reports that are tailored to the
needs of specific managers and departments within an organisation. These reports can
include budget forecasts, cost analysis, variance analysis, etc.
Even though management accounting is different than cost accounting and financial
accounting, it takes information from both to produce periodical reports for the
management. Besides, cost accounting is a subset of management accounting.

Basis Cost Accounting Management Accounting

An accounting system An accounting system that

Meaning that helps in analysing helps in collecting,
and recording the costs analysing, and
Basis Cost Accounting Management Accounting

involved in the understanding the

production of any financial, qualitative, and
product. statistical information
ultimately helping the
management in making
effective decisions
regarding the business.

It helps a business It helps a business by

Application prevent it from incurring offering it a big picture of
costs beyond its budget. how it should strategize.

Its objective is to provide

Its objective is to information to the
Objective ascertain the cost of managers so they can set
production. goals and forecast
strategies.

For successful
For successful
implementation,
implementation, cost
management accounting
Dependence accounting does not
depends on cost accounting
depend on management
as well as financial
accounting.
accounting.

Cost accounting is used

Management accounting is
by the vendors,
used only by the
Users shareholders, and
management of an
management of an
organisation.
organisation.
Basis Cost Accounting Management Accounting

Big business houses need There is no statutory

Statutory
to perform a statutory requirement for the audit of
Requirement
audit of cost accounting. management accounting.

The scope of cost The scope of management

Scope
accounting is narrower. accounting is broader.

There is a specific There is no specific

Specific Procedure procedure under cost procedure under
accounting. management accounting.

Historical and estimated

Historical information is
Basis of Decision- (predictive) information is
used as the basis of
making used as the basis of
decision-making.
decision-making.

Cost accounting records Management accounting

Data Recorded past as well as present focuses more on analysing
data. future projections.

Difference between Financial Accounting and Management Accounting

Financial Accounting: An accounting system that helps in classifying,

analysing, summarising, and recording a company’s financial transactions
is known as Financial Accounting. It is concerned with preparing financial
statements for external stakeholders, including investors, creditors, and
regulators. Financial accounting provides a historical record of a company’s
financial performance and position, which can be used to assess its financial
health and make investment decisions.
 Basis Financial Accounting Management Accounting

An accounting system that helps in

An accounting system that collecting, analysing, and
helps in classifying, understanding the financial,
Meaning analysing, summarising, and qualitative, and statistical
recording a company’s information ultimately helps the
financial transactions. management in making effective
decisions regarding the business.

It helps in showing a true

It helps the management in making
and fair picture of the
Application meaningful decisions and
financial position of an
strategizes accordingly.
organisation.

Its objective is to assist the internal

Its objective is to create
Objective management of an organisation in
periodical reports.
making decisions.

There are both internal

(employees, management,
There are only internal users
etc.) and external
Users (management, etc.) of
(customers, creditors, etc.)
management accounting.
users of financial
accounting.

The statements under

Nature of the The statements or reports under
financial accounting are
Statements management accounting are
prepared for general-
prepared prepared for specific-purpose.
purpose.

It is mandatory to prepare
Statutory There is no statutory requirement
the financial statements of a
Requirement for management accounting.
company.

The scope of management

The scope of financial
Scope accounting is broader than financial
accounting is pervasive.
accounting.
 Basis Financial Accounting Management Accounting

There are no fixed rules while

Financial accounting strictly
Rules preparing reports through
follows the rules of GAAP.
management accounting.

Financial statements under

Reports under this accounting
this accounting system are
Time Span system are prepared according to
prepared for a fixed time
their need.
period; i.e., one year.

Basis of Historical information is Historical and estimated

Decision- used as the basis of (predictive) information is used as
making decision-making. the basis of decision-making.

The information presented The information presented in the

Verifiable in the financial statements is reports is predictive; hence, not
verifiable. immediately verifiable.

There is a specific format

There is no specific format for
for presenting and recording
Format presenting information in
information through
management accounting.
financial accounting.