Management Accounting: An Overview

Management Accounting
Meaning:

It comprises of two words, Management +
Accounting i.e., accounts which increase managerial
efficiency or providing all those information and facts
which are necessary for managers.

Definitions:

According to Cost and Management
Accounts, London, “Management Accounting is
concerned with the presentation of professional
knowledge and abilities to reveal accounting information
which may help to the management in policy
formulation, planning and control for the undertakings.”

Meaning & Definition
The American Accounting Association
has defined as follows, “Management
Accounting includes the methods and
concepts necessary for effective planning,
for choosing among alternative business
actions and for control through the
evaluation
and
interpretation
of
performances.”

Definitions continued
According to Anglo-American Council of
Productivity, “ Management Account is the
presentation of accounting information in such a
way as to assist management in the creation of
policy in today‟s operation of undertakings.”
According to Robert Anthony, “ Management
Accounting is concerned with accounting
information that is useful to management.”

Scope of Management
Accounting
1. Financial Accounting: In this transactions
are recorded in the books then they are
classified and summarised. At the end of
the year final accounts and statements are
prepared.

2. Cost Accounting: It explains various
techniques of cost analysis and it is that
branch of accounting in which transactions
related to cost are recorded, measured and
reported.

Scope of Management
Accounting
3. Budgetary Control: under this variances
are measured by comparing actual amount with
budgeted estimates through budgets.

4. Statistical Methods: At present, statistical
figures are extensively used in management
accounting. The main statistical techniques are
Time Series Analysis, Regression analysis,
correlation analysis.

Scope of Management
Accounting
5. Tax Accounting: Management accounting
proves to be useful in conditions of excessive tax
liabilities, in the process of payment of taxes.
6. Data Interpretation: Management accounting
provides various data's and figures to managers,
which assist them in decision making process.
7. Management Information System: is a easy
method of obtaining information, at various levels of
management, in any organization.

Scope of Management
Accounting
8. Capital Budgeting: It is very useful in proper
planning of capital expenditure, development
and expansion.Decisions related to capital
investments are taken in capital budgeting.

9. Reporting: It is an important part of providing
accounting information to managers.

Functions of Management
Accounting
Two types of functions are performed in
Management Accounting:

•

Main or Primary Functions

1.
2.

Providing accounting information
Assistance in managerial activities

•

Secondary Functions

1.
2.
3.
4.
5.

Protection of Assets
Helpful in Financial Planning
Helpful in Tax determination
Strategic Function
Fixation of Accountability

1. Providing Accounting Information: The
main function of management accounting is to
provide necessary information to managers
and other parties related to it: such as
investors, Financers, Shareholders, etc.
(a) Forecasting: This is a primary function of
management accounting, in which forecasts
are made for activities at certain level of
confidence.

(b) Recording Function: All the transactions are
recorded in financial accounts & cost accounts
within a definite period and then management
arrives at conclusion after analyzing them.
(c ) Interpretation and Appraisal Function:
Management accounting evaluates all the
activities in the interest of managers and
organization.
(d) Reporting: Management accounting provides
reports which are required by managers at
different levels.

2. Assistance in Managerial Activities:
Management accounting assists managers in
their operations, management principles and
practices. It includes six functions of
management:
(a)
(b)
(c)
(d)
(e)
(f)

Planning
Organizing
Directing
Co-ordination
Motivating
Controlling

Secondary Functions
1. Protection

of

Assets:

Management
accounting projects a course of action for the
long term viability and continuity of the
enterprise. Under this strategy various
profitable and good tasks are identified and
investments are made in them.

2. Financial

Appraisal:

Management
accounting
uses
various
accounting
techniques such as: Financial planning, cost
control, Ratio analysis, etc. in financial
appraisal.

Secondary Functions
3.

Determination

of

Tax

Policies:

Management accounting formulates favorable
Tax Policy with the proper use of capital. As a
result of these policies efforts are made to make
tax liabilities minimum.

4.

Determination

of

Accountability:

Management
accounting
ensures
accountabilities of people through „Reporting
System‟ so that people are not able to shift their
responsibility on other ignorantly.

Distinction Between Management
Accounting & Financial
Accounting
Basis

1. Objective
2. Users
3.
Importance

FA

MA

Recording , Classifying To deliver
and
Summarizing information
Financial transactions

various
to

managers.
Internal parties
(Managers)

External parties
mainly Investors,
Creditors.
It is less important , It is more important.
as it is related to
As it is related with
operational activities managerial activities.

Accounting
Basis
4. Accounting
Principles

FA

MA

It provides information It does not adhere to
on
the
basis
of any such principle.
“Generally
Accepted
Accounting” Principles.

5. Information It provides historical It provides future
information.

6.
Compulsory

information based
upon historical data.

It is compulsory as It is entirely optional.
per Companies Act.

Accounting
Basis

FA

MA

7.
Methodology

Under
this
transactions
are
recorded on the
basis of double
entry system.

In MA after collection
&
analysis
of
information,
it
is
divided between cost
centres
and
responsibility centre.

8. Accuracy

More accuracy

Less accuracy

9. Reporting

Annual reporting

Reporting as per
requirement.

Accounting & Cost Accounting
Basis
1. Nature

2. Subjectmatter

MA

CA

It is concerned
with formulation
of
policies,
improvement of
productivity and
profitability.

It is concerned
with
cost
ascertainment
and cost control.

It
involves It deals primarily
considerations of with cost data
both cost and
revenue data.

Basis
3. Part

4. Tools

MA

CA

It is not a part of It is a part of
Cost Accounting. Management
Accounting.
It involves- Ratio
analysis , fund
flow and cash
flow statements,
budget,
budgeting, BEP,
standard costing

It involves- unit
cost, job costing,
process costing,
operating costing,
contract costing,
and
standards
costing.

Basis
MA
5. Qualification MBA, CA and

CA
ICWAI (members),
CA

ICWAI

6. Audit

Auditing
is
compulsory
management
accounting.

not Auditing
is
for compulsory
for
cost accounting.

7. Expenses
Allocation

In management
accounting
expenses are
allocated into two
part fixed and
variable.

In Cost accounting
expenses are
allocated as –
Direct cost and
Indirect cost.

Role & Responsibility of
Management Accountant
Consistent with other roles in today's
corporation, management accountants
have a dual reporting relationship. As a
strategic partner and provider of
decision
based
financial
and
operational information, management
accountants are responsible for
managing the business team and at
the same time having to report
relationships and responsibilities to the
corporation's finance organization.

Role & Responsibility of
Management Accountant
• The activities management accountants provide inclusive
of forecasting and planning, performing variance analysis,
reviewing and monitoring costs inherent in the business
are ones that have dual accountability to both finance and
the business team. Examples of tasks where accountability
may be more meaningful to the business management team
vs. the corporate finance department are the development
of new product costing, operations research, business
driver metrics, sales management score carding, and client
profitability analysis. Conversely, the preparation of certain
financial reports, reconciliations of the financial data to
source systems, risk and regulatory reporting will be more
useful to the corporate finance team as they are charged
with aggregating certain financial information from all
segments of the corporation.

The Role of Management
Accountant
• A great variety of accounting information is
available to managers. How does an
accountant know what information should
be reported to managers? The accountant
chooses the information to be reported to a
manager by:
• 1. Identifying the purpose for which the
information is needed.
• 2. Determining the relevance of the
information.

Information is relevant if it:
• Affects the accomplishment of the
objectives of the decision maker.
• Will change as a result of the decisions or
choice made by the decision maker.

Decision Models
The following illustrates the association of
management accounting tools with
specific financial statement items.

Decision Models
Financial Statement Items
Balance Sheet:
Cash
Accounts receivable
Inventory
Fixed assets
Income Statement:
Sales
Expenses
Net income

Management Accounting Tools
Cash budget
Capital budgeting models
Incremental analysis
EOQ models, Safety stock model
Incremental Analysis, Capital
budgeting

C-V-P analysis, Segmental reporting
C-V-P analysis, Incremental analysis
Direct costing

Decision-making and Required
Information
Tools
Flexible budget
Variance analysis
EOQ models

Capital budgeting models
Cost-volume-profit analysis

Required Information
Variable cost rates
Standard costs
Purchasing cost, carrying
cost
Opportunity cost,
escapable costs
Future cash inflows,
future cash outflows
Variable cost percentage,
fixed cost,desired income

Management Accounting: An Overview

More Related Content

What's hot (20)

Similar to Management Accounting: An Overview (20)

Recently uploaded (20)

Management Accounting: An Overview