MANAGEMENT ACCOUNTING

CHAPTER 1

INTRODUCTION TO MANAGEMENT ACCOUNTING

Learning Objectives

After going through this unit, you will be able to:

Explain scope of Management Accounting
Distinguish between:
[Link] Accounting and Financial Accounting,
[Link] Accounting and Cost Accounting,
[Link] Accounting and Financial Management

Structure
1.1 Introduction
1.2 Definition of Management Accounting
1.3 Scope of Management Accounting
1.4 Significance of Management Accounting
1.5 Financial Accounting Vs Management Accounting
1.6 Cost Accounting Vs Management Accounting
1.7 Financial Management Vs Management Accounting
1.8 Summary

1.1 Introduction

In last few years many changes have taken place in global and Indian
economy. Corporate environment is becoming extremely dynamic day by day.
There are many opportunities as well as challenges for every business.
Companies have to continuously improve their products and processes to gain
sustainable competitive advantage. Companies are evolving market driven
strategies so as to give maximum satisfaction to customer and win the market.
Companies are improving their accounting information system so that
information is available for decision making and control. Management
accounting is the use of accounting information to achieve corporate
excellence

1.2 Definition Of Management Accounting

1. International Federation of Accountant (IFAC) has defined Management

Accounting process as “the process of Identification, Measurement,
Accumulation, Analysis Preparation, and Interpretation and Communication of
information both financial and operating used by management to plan,
evaluate and control within an organization and to assure use of and
accountability for its resources.
2. As per International Federation of Accountants “Management Accounting is
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the process of: Identification, measurement, recognition and valuation of

business transactions or other economic events that have occurred or may
[Link] i.e. disciplined and consistent approach to recording and
classifying appropriate business transactions and other economic events.

3. Analysis i.e. identifying the reasons for and the relationship of business
activities with economic events and circumstances.

4. Preparation and Interpretation i.e. meaningful coordination of accounting

and /or planning data to satisfy a specific need of management and present
information in logical format and draw appropriate conclusions drawn from that
data and communication i.e. reporting of pertinent information to management
and other internal and external users.

5. ICWAI published Glossary of Management accounting terms defines

Management Accounting as “a system of collection and presentation of
relevant economic information relating to an enterprise for Planning,
Controlling and Decision making”.

6. Official Terminology of CIMA has defined Management Accounting as “ the

provision of information required by management for following purposes
1. Formulation of policies
[Link] and controlling the activities of the enterprise
[Link] taking on alternative course of action
[Link] to those external to the entity (shareholders and others )
[Link] to employees
[Link] Assets”.

American Accounting Association defines Management Accounting as “the

application of appropriate techniques and concepts in processing historical
and projected economic data of an entity to assist management in establishing
plans for reasonable economic objectives and in the making of rational
decisions with a view towards these objectives.”

Above definitions highlight following features of Management

Accounting:
1) Prepare and communicate financial and operational information to
management for planning, controlling and optimum use of available resources.
2) Accumulation, analysis and communication of accounting information to
managers and others for improving the management process.
3) Collecting , analysis and communicating economic information of company
for:
a. Planning
b. Controlling
c. Decision making
d. Policy formulation

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e. Safeguarding assets of Company.

f. Achieving economic objectives of Company.
g. Increasing organizational effectiveness

1.3 Scope Of Management Accounting

Management Accounting includes:

i. Financial Accounting
ii. Cost Accounting
iii. Financial Management
It ensures both statutory as well as internal control requirements relating to
financial information of a company.

Scope of Management Accounting includes :

A) Management Information System (M.I.S.).
I) To establish and operate Accounting Information System.
ii) To establish and operate Costing Information System.
iii) To establish and operate Management Information System (M.I.S.)
iv) To establish and operate Tax Management System.
v) To compile and maintain Vital Data Required for Planning

B) Management by Exception
This involves installation of effective feedback system which is useful for
controlling various activities of the company. Management accountant
analyses and reports the deviations from expected results, identifies reasons
for such deviations and highlights the corrective measures wherever
necessary. Reporting is done only for those areas which are not giving
expected results.

C) Management by Objective
Every manager must perform his functions and every activity must be carried
out in such a way that it is useful for achieving organizational objectives.
Management accounting provides necessary information system for this.

D) Communication System
To provide appropriate system and procedure for properly communicating
plans of management to various levels of organization. This helps in achieving
coordination of various activities of organization and useful in defining role of
individual activity in overall plans of company. Both these functions are
necessary for directing the efforts of various individuals towards objectives of
organization.

E) Analysis and Interpretation

Management accounting analyses accounting, costing and financial data of
company and interprets this data which is useful for decision making and
control. For this, techniques such as marginal costing, standard costing,

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budgetary control, financial analysis and ratio analysis have been used by
management accountant.

1.4 Significance Of Management Accounting

Management accounting is a powerful tool available to management to

improve efficiency and profitability of organization. It is useful to management
in following areas:
i) Establish, coordinate and administer plans of company to be useful for
profit planning, capital budgeting and financing of business.

ii) It highlights deviations from standards, which can be analyzed for

corrective actions and fixing responsibilities as well as for evaluation of
divisional performance.

iii) Internal audit is useful for protecting business assets.

iv) It provides information relating to external and internal environment of

business. This information is vital for formulating strategies and polices of
company

v) Marginal costing technique is useful for taking many vital decisions such as
product mix, make or buy, continue operations or shut down, and so on.

vi) Financial analysis is useful to know trend of profitability, solvency and

liquidity of company.

vii) Ratio analysis indicates financing pattern, solvency, and liquidity, and
profitability, effective use of available resources, financial strength and market
value of company's shares.

1.5 Financial Accounting Vs. Management Accounting

1. Financial Accounting is governed by statutory framework. Financial

statements must be prepared within the framework of Companies Act. And
Income Tax Act. Management accounting has no statutory requirements
2. Basic function of Financial Accounting is to record the transactions of the
business, to prepare and publish financial statements to be used by internal
as well as external users for their decision making.
3. Basic function of Management Accounting is to prepare M.I.S. reports to be
used by management for decision making and controlling of business.
4. Information given by Financial Accounting is publicly available to anybody
Information given by Management Accounting is confidential and is
available only to management of company.
5. Financial statements given by Financial Accounting are to be made
available as and when required by the Act.

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6. Management Accounting reports are to be made available as and when

required by management of company.
7. Reports generated by Financial Accounting are detailed and accurate but
they are generated slowly.
8. Reports generated by management accounting are fast but approximate.
9. Financial accounting provides the information for entire company.
Management accounting provides the information for various segments of
company.
10. Format of financial accounting reports is standardized as per provisions of
Companies Act.
11. Format of management accounting reports is tailor made as per
requirements of management.

1.6 Cost Accounting Vs. Management Accounting

1. Cost Accounting is concerned more with the ascertainment, allocation,

distribution and accounting aspects of costs.
Management accounting is concerned more with impact and effect aspect
of costs.
2. Cost Accounting data serves as a base to which the tools and techniques of
management accounting can be applied.
The Management Accounting data is derived, both from the cost accounts
and financial accounts.
3. Management Accountant is generally placed at a higher level of hierarchy
than the Cost Accountant.
4. The approach of Cost Accountant is much narrower than that of
Management Accountant, who may have to use certain economic and
statistical data along with the costing data to enable the management to be
more accurate and precise in its functions of planning, decision making and
control.
5. Management Accounting, in addition to the tools and techniques like
marginal costing, break-even analysis, budgetary control, standard
costing, etc. available to cost accounting, also make use of other
techniques like funds flow, cash flow, ratio analysis etc. which are not within
the scope of cost accounting.
6. Cost Accounting does not include financial accounting and has nothing to
do with tax accounting.
Management Accounting includes both financial accounting as well as cost
accounting. It also embraces tax planning and tax accounting
7. Cost Accounting is more concerned with short term planning. Management
Accounting is concerned equally with short range and long range planning.
8. Cost Accounting is concerned merely with assisting in management
functions and does not provide for evaluation and performance of
management. Management Accounting is concerned, both with assisting
management in its functions, as well as evaluating the performance of the
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management as an institution.
9. Cost Accounting is mostly historical in its approach and projects the past.
Management Accounting is futuristic in its approach. Management
Accounting is more predictive in nature than Cost Accounting.

10. Cost Accounting system can be installed without Management Accounting

while Management Accounting system cannot be installed without proper
Cost accounting system.

1.7 Financial Management Vs. Management Accounting

1. Financial Management establishes and executes programmes for the

provision of capital required by the business.
Management Accounting develops plans, budgets for control of existing
operations and, if necessary, to expand / discontinue activities.
2. Main function of Financial Management is to establish and maintain an
adequate market for the company's securities and to maintain adequate
liaison with investment bankers, financial analysts and shareholders. Main
function of Management Accounting is to develop standards for costs and
capacity and to update these standards as necessary.
3. Main concern of Financial Management is to maintain adequate sources
for the company's current borrowing from commercial banks and other
lending institutions. Main concern of management accounting is to develop
a chain of responsibility reporting and to monitor performance against
plans.
4. Financial management monitors credit and collection of accounts due to
company. Management accounting monitors level of dissatisfaction and
people's reaction to and use of accounting information.
4. Financial Management assures protection of company's funds through
appropriate policies and control measures. Management Accounting
assures of business assets protection through internal control, and
internal auditing.

1.8 Summary

1. In the era of liberalization and competitive environment accounting

information should be useful to management for achieving business
excellence and sustainable competitive advantage. This is provided by
management accounting.
2. Management accounting covers financial accounting, cost accounting and
financial management. Tools provided by management accounting
include marginal costing, financial analysis and ratio analysis.
3. Management accounting is useful for planning, controlling, protecting
assets of organization and for taking many vital decisions such as make or
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buy, continue or shut down business and soon.

4. Management accounting is different from financial accounting. While
former is governed by requirements of management, later by statutory
framework.
5. Management accounting is also different from cost accounting. It makes
use of costing as well as financial management techniques.
6. Management accounting differs from financial management. While former
is concerned with only utilization of Company's funds, later covers
procurement, utilization and distribution of funds.

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