ACCT 232 MANAGEMENT AND COST

ACCOUNTING II
LESSON 1 NATURE AND OBJECTIVES OF MANAGEMENT
ACCOUNTING
Management Accounting is that branch of accounting which deals with presenting and
providing accounting information to the management in such a systematic way so that it can
perform its managerial functions of planning, controlling and decision-making in an effective
and efficient manner. It acts as a ‘decision-making support system’ to the management.

1
Introduction to Management Accounting
LEARNING OBJECTIVES

1.1 DEFINITION OF MANAGEMENT ACCOUNTING

Management Accounting is that branch of accounting which deals with presenting and
providing accounting information to the management in such a systematic way so that it can
perform its managerial functions of planning, controlling and decision-making in an effective
and efficient manner. It acts as a ‘decision-making support system’ to the management.

Many distinguished accountants and accounting institutions have defined the term
Management Accounting in different languages. Some of them are enumerated as follows:

According to Robert N. Anthony, ‘Management Accounting is concerned with accounting

information which is useful to the management’.

‘Management Accounting is a term used to describe the accounting methods, system and
techniques which, coupled with special knowledge and ability, assists management in its task
of maximizing profits or minimizing losses’, according to J. Batty.

As per Institute of Cost and Works Accountants of India (ICWAI), ‘Management Accounting
is a system of collection and presentation of relevant economic information relating to an
enterprise for planning, controlling and decision-making’.

According to American Accounting Association (AAA), ‘Management Accounting is the

application of appropriate techniques and concepts in processing historical and projected
economic data of an entry to assist management in establishing plans for reasonable
economic objectives in the making of rational decisions with a view towards these
objectives’.
As per Certified Institute of Management Accountants (CIMA), United Kingdom,
‘Management Accounting is an integral part of management concerned with identifying,
presenting and interpreting information used for formulating strategy, planning and
controlling activities, decision-making, optimizing the use of resources, disclosure to
shareholders and other external to the entity, disclosure to employees, and safeguarding
assets’.

Analysing the above definitions, it can be concluded that Management Accounting is

concerned with collection of data from both internal as well as external sources and
communication of relevant information to the management, after
processing, analysing and interpreting those, to perform its managerial functions of planning,
controlling and decision-making in an effective and efficient manner.

1.2 NATURE OR FEATURES OF MANAGEMENT ACCOUNTING

Management Accounting is basically the most effective tool to the management for the
purpose of its planning, controlling and decision-making. Various distinguished nature or
features of Management Accounting are discussed as follows:

Management Accounting deals with the collection of accounting and other data, and it analyses, interprets and
communicates all relevant information to the management which are effectively required for planning,
controlling and decision-making for the organization. Hence, in a nutshell, one of the most important nature of
Management Accounting is to analyse and interpret accounting and other data to make them understandable and
usable to the management.

It interprets the analysed data as obtained from the operational and non-operational activities of the enterprise
and makes necessary comments and conclusions on them.

It provides necessary information to the management to judge the effectiveness of its managerial functions.

It provides necessary information to the management to perform its managerial functions of decision-making,
planning and controlling.

It provides necessary information to the management to review whether the performance of the enterprise has
been achieved towards its goals and objectives.

It acts as a yardstick for measuring the level of performance of the operational and non-operational activities of
the enterprise.

It serves as a yardstick for measuring the effectiveness of managerial performance of the different activities of
the enterprise.

It is a forward-looking tool to the management. It analyses and interprets historical data for projecting the future
trends of the different activities of the enterprise.

It prepares necessary plans to implement various financial decisions of the management. It also develops a
system of feedback reporting and monitoring performance against the plan of the management.

1.3 SCOPE OF MANAGEMENT ACCOUNTING

Management Accounting has a very widespread scope. It covers a very wide area of
accounting system, which is discussed as follows:
Financial Accounting: Financial Accounting provides the basic historical data to the Management Accounting
which analyses and interprets those data and provides necessary information to the management for its planning,
controlling and decision-making. As Management Accounting does not maintain the basic financial records, the
success of an effective and efficient Management Accounting System depends on the existence of an effective
Financial Accounting System. Therefore, Management Accounting System can be introduced into an
organization where there exists a well-designed Financial Accounting System. Management Accounting applies
the principles and practices of Financial Accounting.

Cost Accounting: On the one hand, Cost Accounting provides cost-related basic data to the Management
Accounting, which analyses and interprets those costing data and provides necessary information to the
management for the purpose of its controlling and decision-making. On the other hand, most of the Cost
Accounting techniques like Standard Costing, Budgetary Control, Marginal Costing, Cost–Volume–Profit
(CVP) Analysis, Differential Cost Analysis and Inventory Controlling, are used by Management Accounting in
its process of planning, controlling and decision-making. Management Accounting uses the principles and
practices of Cost Accounting.

Forecasting and budgeting: Management Accounting exercises the tool of forecasting and budgeting in the
process of planning, controlling and decision-making. Forecasting makes an estimate of the probable event with
a set of given or assumed information. Budgeting prepares a number of plans for any future project by setting
definite goals. Forecasting helps to prepare the budget and budgeting helps to exercise the budgetary control
technique on future projects. Both these tools are frequently used in Management Accounting.

Statistical tools: Various statistical tools like graphs, charts, diagrams, time series, sampling, index numbers
and Regression Analysis are used in Management Accounting in the process of planning, controlling and
decision-making.

Operational research techniques: Various operational research techniques like Linear Programming,

Transportation Theory, Games Theory and Simulation Method are used in Management Accounting to resolve
various problems prevailing under the existing situation in the process of decision-making.

Financial analysis and interpretation: Various financial analysis techniques such as Ratio Analysis, Fund
Flow Analysis, Cash Flow Analysis, Comparative Financial Statement, Common-Size Statement and Trend
Analysis are widely used in Management Accounting to analyse and interpret financial data to make them easily
understandable and useable to the management. Successful application of Management Accounting depends a
lot on these financial analysis and interpretation works.

Tax accounting and tax planning: Determination of taxable income and tax liability of the enterprise fall
within the purview of the Management Accounting. In the process of decision-making, the analysis of
implication of tax provisions on future projects also falls within the purview of Management Accounting. On the
other hand, the management accountant must have a vast knowledge of tax laws and their accounting
procedures, and also tax planning, to minimize the tax burden of the enterprise.

Management Information System (MIS): Management Information System (MIS) is a modern computerized

information system, by which accurate processing and analysis of a large volume of data can be done within a
very short time. This information system is used in Management Accounting to provide necessary and relevant
information to the management in the process of its planning, controlling and decision-making.

Internal control and internal audit: Management Accounting highly depends on internal control system
existing in the organization, like internal check and internal audit, to appraise the targeted performance and to
identify the weaker area of the organization.

Office system: Management Accounting System should also be well conversant with the modern office
management system like filing, indexing, copying, electronic data processing, information network system, and
email and fax system.

Legal provisions: Management Accounting System should also be well informed about relevant and necessary
legal provisions like Companies Act, Foreign Exchange Act, Securities Act, and Direct and Indirect Tax Laws.
In the process of decision-making, management accountants should restrict their plan and action within the
periphery of such legal provisions.

Other areas: Apart from the aforementioned areas, Management Accounting also includes various newly
developed areas of accounting like Human Resource Accounting, Social Accounting, Environmental
Accounting and Inflation Accounting, within the purview of its scope.

1.4 OBJECTIVES OF MANAGEMENT ACCOUNTING

The prime objective of Management Accounting is to provide necessary information to the

management for an effective and efficient execution of managerial functions. Various
objectives of Management Accounting are enumerated as follows:

Analysis and interpretation of financial statements: Management Accounting collects, analyses and

interprets the necessary data from the results shown by the Financial and Cost Accounting System, and also
provides necessary and relevant information to the management in a systematic and useful manner which are to
be applied by the management in the process of its planning, controlling and decision-making. Various tools like
Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, Comparative Financial Statement, Common-Size
Statement and Trend Analysis are widely used in Management Accounting for analysing and interpreting those
data so as to make them easily understandable and useable to the management.

Planning and policy-making: Management Accounting provides necessary and relevant information to the
management in the process of its planning and policy-making to achieve organizational goals. Various statistical
forecasting techniques like Time-Series Analysis and Regression Analysis are used in Management Accounting
to guide proper planning and policy-making.

Decision-making: Management Accounting provides necessary and relevant information to the management in

the process of its decision-making. The success of the management highly depends upon a perfect decision-
making. Such decision-making broadly depends on the effectiveness of information network. Management
Accounting provides the above information to the management by applying Marginal Costing Technique,
Differential Costing Technique and Absorption Costing Technique, for an effective and accurate decision-
making.

Controlling: Management Accounting applies various useful techniques such as Standard Costing, Budgetary
Control, Responsibility Accounting and Management Audit, to ensure an effective managerial control over the
use of resources of the enterprise. Management control is a control system which assures that the resources of
the enterprise are effectively and efficiently used for achieving its goals and objectives. Management
Accounting plays a significant role to the management in ensuring the existence of a proper managerial control
system.

Communicating: Proper communication of the performance of various sections of an enterprise to different

levels of management is essentially required for planning, controlling and decision-making. Management
Accounting does such communication by preparing reports of performance of various sections of the enterprise
with the help of management information system.

Coordinating: Management Accounting helps in coordinating various business activities of an enterprise. Its

techniques of planning make a very good coordination between various activities of a concern. A master budget
of the concern for a given period is prepared through coordination between various business activities of the
concern. Proper reporting of different business activities are also made through coordination between various
sections of the enterprise.

Tax planning: Determination of tax liability of the enterprise after availing various tax rebates and reliefs falls
within the purview of Management Accounting System. Management Accounting helps the management in the
process of tax planning by availing various tax rebates and reliefs and, thus, reduces the burden of tax of the
enterprise, on the whole.
Advisory Service: Management Accounting renders valuable advice to the management for resolving any
financial or other problems of the enterprise. To overcome any existing financial and other problems, various
Management Accounting techniques are applied according to the nature of the problem.
Management Accounting also plays a very important role as an advisor to the management.

1.5 ROLE OR FUNCTIONS OF MANAGEMENT ACCOUNTING

The function of Management Accounting is to assist the management to perform its functions
of planning, organizing, directing, controlling and decision-making. The major functions of
Management Accounting are as follows:

Collection of data: Management Accounting does not maintain records of financial and cost data but it collects
the basic financial data mainly from the records as maintained by financial and Cost Accounting for the purpose
of preparing plans and actions of the management.

Supply of modified data: It modifies the collected raw data by classifying and compiling them for making
them suitable for the purpose of their analysis and interpretation. It extracts the necessary and effective
information from those basic data for the purpose of their analysis and interpretation.

Analysis and interpretation of data: It analyses and interprets those modified data and extracts the necessary
and effective information for making them understandable and useable to the management in the process of its
planning, controlling and decision-making. After analysing and interpreting all those data, it presents the results
with necessary comments to the management.

Planning and forecasting: It formulates some definite plans for implementing policies of the management. It
helps the management for formulating different short- and long-term policies by providing necessary and
relevant information in relation thereto. In the process of formulating policies and for their proper execution, it
makes the forecasting of some probable future happenings.

Communication: It provides a means of communicating plans and actions of the management over all areas of
activities of the organization. It provides necessary and relevant information to all levels of management.

Ensuring control: It ensures a control over the performance of different sections of an enterprise. It uses
various techniques like Budgetary Control, Standard Costing and Responsibility Accounting, and to identify the
weaker areas of performance of activity and suggests appropriate remedial measures to overcome the prevailing
problems.

Helping in decision-making: It helps the management in the process of its effective decision-making by
providing necessary and relevant information in the relation thereto.

Performance evaluation: It evaluates the performance of activities of different divisions as well as the business
as a whole of an enterprise by using its various tools and techniques.

Preparation of reports: It prepares reports of performances of different activities of the enterprise and provides
to the management on regular intervals. These managerial reports are prepared as per the requirement of the
management.

1.6 USES OF MANAGEMENT ACCOUNTING

Management Accounting provides very valuable services to the management in the course of
its functioning. Different utilities of Management Accounting are discussed as follows:

Planning: It formulates policies and programmes by setting definite goals and prepares a systematic plan for
achieving these goals. It makes such plans for achieving organizational goals and targets.
Controlling: It plays a most significant role in the process of controlling. Management Accounting, in the
process of controlling, involves framing of budgets, comparison of actual results with budgeted estimates,
ascertainment of any deviation of actual results from budgeted estimates by computation of variances and
adoption of necessary remedial measures against such deviation.

Coordinating: It plays the most vital role in the process of coordinating of different divisions of an enterprise.
Its techniques of planning make a very good coordination between the various activities of a concern. Proper
reporting of different business activities are also made by Management Accounting through coordination
between the various sections of the enterprise.

Performance Evaluation: It plays a very important role in the process of evaluation of performance of the
different activities of an enterprise. It evaluates the performances of different divisions and employees of the
organization by comparing the target estimates with the actual performances of the divisions and employees.

Organizing: It plays an important role in the process of organizing of the different activities of an enterprise. It
divides the whole organization into suitable cost or profit centres. A sound system of internal control and
internal audit is assigned to each cost or profit centre for ensuring a planned organizing system.

Motivating: It helps the management in the process of motivating the employees by setting various targets to
achieve the organizational goals.

Communicating: It communicates the performances of the various divisions and employees of the enterprise
with the help of the management information system to the different levels of its management by preparing
reports of performance of those sections and employees of the enterprise. Such communication is essentially
required for planning, controlling and decision-making of the enterprise.

Decision-making: It plays the most important role in the process of decision-making of a concern. The success
of the management highly depends upon the perfect decision-making and such decision-making broadly
depends on the effectiveness of information network. It provides necessary and relevant information to the
management for effective and accurate decision-making.

1.7 LIMITATIONS OF MANAGEMENT ACCOUNTING

Despite the fact that Management Accounting acts as a very useful tool to the management in
the process of performing its managerial functions, it suffers from the following limitations:

Reliance on accounting data: Management Accounting collects the basic data mainly from the records as
maintained by financial and Cost Accounting. Hence, it starts to work on the basis of the data as supplied by the
other branches of accounting. If those basic data are incorrect, then the entire effort of the management
accountant becomes useless.

Based on historical data: It guides the management in the process of decision-making for the future activities
on the basis of the historical data as supplied by Financial Accounting and Cost Accounting. Therefore,
Management Accounting uses historical data for making future decisions, which may not always result in a
correct decision.

Wide scope: It covers a very vast area and also includes a number of related fields such as Financial
Accounting, Cost Accounting, Statistics, Operational Research, Law and Economics, to become more effective
to the management. It is really very difficult to develop such a Management Accounting System where all the
related people are not well-equipped with full knowledge of all these related areas.

Highly expensive: The installation of a sound Management Accounting System in a concern is highly

expensive as it essentially requires a wide network of management information system. Moreover, the operating
expense of the Management Accounting department is also very high. As a result, small concerns generally
cannot afford to install this system.
Complicated application: It is such a system where a number of different tools and techniques are applied. It
also uses a number of accounting and non-accounting subjects for analysis and interpretation of data.
Accordingly, its proper application is really complicated when compared to other branches of accounting. A
management accountant may try to avoid such a complicated approach of decision-making.

Lack of objectivity: It uses both quantitative as well as qualitative data for analysis and interpretation, and also
prepares reports on the basis of such interpretation. The interpretation of information as provided by
Management Accounting in the form of reports may be influenced by a personal bias of the interpreter, which
may reduce the utility of Management Accounting.

Not a substitute of management: It merely provides necessary and relevant information to the management to
perform their managerial functions of planning, controlling and decision-making in an effective and efficient
manner, but certainly is not a substitute for the management itself. It acts only as a decision-making tool to assist
the management, but cannot take the ultimate decision on its own.

Developing stage: It is still in its developing stage as it is relatively a recent area in the field of accounting. It
follows some concepts and conventions which are not yet generally accepted. Many experiments have been still
in progress on this area of accounting.

1.8 TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING

Management Accounting uses various tools and techniques for providing necessary and
effective information to the management for performing its managerial functions. Various
tools and techniques that are commonly used in Management Accounting are discussed as
follows:

Financial Statement Analysis: It is a methodical and systematic analysis and interpretation of the data as
disclosed in the balance sheet and income statement with a view to extract necessary and relevant information
for proving them to the management for determining liquidity, solvency, profitability, activity and the
managerial performance of the enterprise. Various tools of Financial Statement Analysis such as Ratio Analysis,
Comparative Financial Statement, Common-Size Statement and Trend Analysis are frequently used in
Management Accounting for analysis and interpretation of financial statements.

Fund Flow Analysis: It is a detailed analysis of inflows and outflows of fund (i.e., the working capital) of an
enterprise during a particular accounting period. Such analysis is done by preparing a Fund Flow Statement at
the end of an accounting period. The Fund Flow Statement exhibits inflows and outflows of fund from various
activities of the enterprise during an accounting period. As working capital is considered as the life-blood of
every business concern, efficient management of working capital is highly effective for the smooth running of
all operating activities of the concern. For an effective and efficient management of the working capital of a
concern, Fund Flow Analysis is frequently used as a tool of the Management Accounting.

Cash Flow Analysis: It is a detailed analysis of inflows and outflows of cash and cash equivalents (i.e., cash in
hand, cash at bank and short-term investments) of an enterprise during a particular accounting period. Such
analysis is done by preparing a Cash Flow Statement at the end of an accounting period. The Cash Flow
Statement so prepared exhibits the inflows and outflows of cash from various activities of the enterprise during
an accounting period. As the movement of cash is very much significant to every business concern, an efficient
management of cash is highly effective for the liquidity planning of the concern. For an effective and efficient
management of cash of a concern, Cash Flow Analysis is frequently used as a tool of Management Accounting.

Costing techniques: Various costing techniques such as Marginal Costing, Standard Costing and Differential
Costing are frequently used as tools of Management Accounting in its process of cost control and decision-
making.

Budgetary control: Budgetary control involves framing of budgets, comparison of actual results with budgeted
estimates, ascertainment of any deviation of actual results from budgeted estimates by computation of variances
and adoption of necessary remedial measures against such deviation. It is an essential tool widely used in the
Management Accounting in the process of its controlling, planning and performance evaluation of an enterprise.
Statistical and operational research techniques: Various statistical and operational research techniques such
as charts, graphs, index number, sampling, time series, Regression Analysis, Linear Programming, Games
Theory, and Programme Evaluation and Review Technique (PERT) are frequently used as tools of Management
Accounting in its process of performance evaluation and decision-making.

Responsibility Accounting: It involves preparation of budget for various responsibility centres and assignment

of specific responsibilities to the concerned individual managers for carrying out the budget directions. In the
process of cost control, responsibility accounting is widely used as a tool of Management Accounting.

Management Reporting: It involves preparation and submission of reports of performance of various activities
of a concern to the management on regular intervals for its effective planning, controlling, performance
evaluation and decision-making. Management Reporting is widely used as an essential tool in Management
Accounting.

1.9 REQUISITES FOR INSTALLATION OF MANAGEMENT ACCOUNTING SYSTEM

Following are the requisites for installation of an effective and efficient Management
Accounting System in an organization:

Introduction of appropriate organization manual defining therein power, functions, responsibilities and scope of
the employees of the organization.

Recruitment of adequate number of employees and arrangement of time-to-time proper training for those
employees.

Classification and codification of accounts.

Introduction of sound systems of internal control and internal audit in the organization.

Setting up of suitable systems of budgetary control and standard costing technique.

Setting up of a suitable system for integrating cost and financial data.

Setting up of suitable cost centres and profit centres.

Setting up of a suitable system of responsibility accounting.

Developing of a sound management information system.

Developing of an operational research system in the organization.

Preparation of an effective proforma for feedback receiving and managerial report.

1.10 HOW DOES MANAGEMENT ACCOUNTING DIFFER FROM THE OTHER

BRANCHES OF ACCOUNTING

Management Accounting differs significantly from the other branches of accounting such as
Financial Accounting and Cost Accounting. Factors that distinguish Management Accounting
from Financial Accounting and Cost Accounting are separately discussed as follows:

1.10.1 Management Accounting and Financial Accounting

Financial Accounting records all monetary transactions in the books of accounts and
ascertains the results of the financial activities of the concern for an accounting period by
preparation of financial statements at the end of every accounting period. On the other hand,
Management Accounting collects the basic data mainly from the Financial Accounting
System and provides necessary information to the management after analysing and
interpreting those data. Points of difference between the Management Accounting and
Financial Accounting are enumerated as follows:

Management Accounting Financial Accounting

1. Management Accounting is primarily based 1. Financial Accounting is based on the
on the data as obtained from Financial monetary transactions of the enterprise.
Accounting.
2. Its main function is to assist the management 2. Its main functions are recording and
in the process of its planning, controlling, classifying monetary transactions in the
performance evaluation and decision-making books of accounts and preparation of
by proving necessary information to the financial statements at the end of every
management. accounting period.
3. Reports as prepared in Management 3. Reports as prepared in Financial
Accounting may contain both objective as well Accounting should always be supported by
as subjective figures. relevant figures. It lays emphasis on the
objectivity of the data.
4. Reports as prepared in Management 4. Reports as prepared in Financial
Accounting are exclusively meant for the Accounting are meant for the management
management of the concern. as well as for shareholders and creditors of
the concern.
5. Reports are prepared as per the requirement 5. Reports are prepared at the end of every
of the management. accounting period.
6. Reports as prepared in Management 6. Reports as prepared in Financial
Accounting are not subject to statutory audit. Accounting are always subject to statutory
audit.
7. It evaluates the sectional as well as the entire 7. It ascertains the results and exhibits the
performance of the business. financial strength of the business as a whole.
8. Its success depends on the existence of a 8. Its success does not depend, in any way,
sound Financial Accounting System. on the existence of a sound Management
Accounting System.
1.10.2 Management Accounting and Cost Accounting

Management Accounting collects the basic data from the Financial Accounting and Cost
Accounting systems and provides necessary information to the management
after analysing and interpreting those data. On the other hand, Cost Accounting records all
cost data in the cost book as obtained from the Financial Accounting, ascertains costs and
reveals all cost-related information of the concern at the end of every accounting period.
Points of difference between Management Accounting and Cost Accounting are stated as
follows:

Management Accounting Cost Accounting

1. The main objective of Management 1. The main objective of Cost Accounting is
Accounting is to assist the management in the to ascertain, allocate and do accounting for
process of its planning, controlling, costs and to assist the management in the
performance evaluation and decision-making process of its cost control and cost-related
by providing necessary information on time. decision-making.
2. It uses both quantitative as well as qualitative 2. It uses only quantitative cost data
data, measurable and even not measurable in measurable in monetary terms.
monetary terms.
3. Primary emphasis given in Management 3. Primary emphasis given in Cost
Accounting is on effective and efficient Accounting is on cost determination and
performance of the business. cost control of the business.
4. Its success depends on the existence of a 4. Its success does not depend, in any way,
sound Cost Accounting System. on the existence of a Management
Accounting System.
5. It is based on the data as obtained from 5. It is based on the cost-related data as
Financial Accounting and Cost Accounting. obtained from Financial Accounting.
6. Management Accounting provides historical 6. Cost Accounting provides historical cost
as well as predictive information for future information for future cost-related decision-
decision-making. making.
7. Reports as prepared in Management 7. Reports as prepared in Cost Accounting
Accounting are exclusively meant for the are mainly meant for the management, but
management of the concern. also useful to the shareholders and creditors
of the concern.
8. It uses the principles and practices of 8. It uses the principles and practices of Cost
financial as well as Cost Accounting. Accounting alone.
9. Reports as prepared in Management 9. Reports as prepared in Cost Accounting
Accounting are not subject to statutory audit. are subject to statutory audit (i.e., cost audit)
in many countries.
10. It deals with cost- as well as finance-related 10. It deals only with cost-related data of an
data of an enterprise. enterprise.
CHAPTER REVIEW SUMMARY

Management Accounting is concerned with the collection of data from both internal as well as external sources
and communicates relevant information to the management, after processing, analysing and interpreting those,
to perform their managerial functions of planning, controlling and decision-making in an effective and efficient
manner.

Nature or features of Management Accounting are as follows: (a) It deals with the collection of accounting and
other data, analysing them, interpretting them and communicating all relevant information to the management;
(b) It provides necessary information to the management to perform their managerial functions of decision-
making, planning and control; (c) It acts as a yardstick for measuring the effectiveness of
managerial performance of the different activities of the enterprise; and (d) It prepares necessary plans to
implement the various financial decisions of the management.

Management Accounting has a very wide spread scope. It covers the following areas: (a) Financial Accounting;
(b) Cost Accounting; (c) forecasting and budgeting; (d) statistical tools; (e) operational research techniques; (f)
financial analysis and interpretation; (g) tax accounting and tax planning; (h) management information system;
(i) internal control and internal audit; (j) office system; (k) legal provisions; and (l) other areas like social
accounting, human resource accounting, inflation accounting, and environmental accounting.

Objectives of Management Accounting are: (a) analysis and interpretation of financial statements; (b) planning
and policy-making; (c) decision-making and controlling; (e) communicating; (f) coordinating; (g) tax planning;
and (h) advisory service.

Role or functions of Management Accounting are: (a) collection of data; (b) supply of modified data; (c)
analysis and interpretation of data; (d) planning and forecasting; (e) communication; (f) ensuring control; (g)
helping in decision-making; (h) performance evaluation; and (i) preparation of managerial reports.

Utilities of Management Accounting are: (a) planning; (b) controlling; (c) coordinating; (d) performance
evaluation; (e) organizing; (f) motivating; (g) communicating; and (h) decision-making.

Limitations of Management Accounting are: (a) reliance on accounting data; (b) based on historical data; (c)
vast area coverage; (d) highly expensive; (e) complicated application; (f) lack of objectivity; (g) not a substitute
of management; and (h) developing stage.

Tools and techniques of Management Accounting are: (a) Financial Statement Analysis; (b) Fund Flow
Analysis; (c) Cash Flow Analysis; (d) costing techniques; (e) budgetary control; (f) statistical and operational
research techniques; (g) Responsibility Accounting; and (h) Management Reporting.

Requisites for installation of Management Accounting System are: (a) introduction of appropriate organization
manual; (b) recruitment of adequate number of employees; (c) introduction of systems of internal control and
internal audit; (d) setting up of suitable systems of budgetary control and standard costing; (e) development of a
management information system; (f) setting up of a suitable system for integrating cost and financial data; and
(g) setting up suitable cost centres and profit centres.

Distinctions between Management Accounting and Financial Accounting are: (a) Management Accounting is
primarily based on the data from Financial Accounting whereas Financial Accounting is based on the monetary
transactions of the enterprise; (b) the main function of Management Accounting is to assist the management in
its planning, controlling, performance evaluation and decision-making whereas the main function of Financial
Accounting is recording of monetary transactions and preparation of financial statements; (c) Management
Accounting evaluates both sectional as well as the whole performance of the business whereas Financial
Accounting ascertains the results and exhibits the financial strength of the business as a whole; and (d) success
of Management Accounting depends on the existence of a sound Financial Accounting System whereas the
success of Financial Accounting does not depend, in any way, on the existence of Management Accounting
System.

Distinctions between Management Accounting and Cost Accounting are as follows: (a) the main objective of
Management Accounting is to assist the management in the process of its planning, controlling, performance
evaluation and decision-making whereas the main objective of Cost Accounting is to ascertain, allocate and do
accounting for costs, and to assist the management in the process of cost control; (b) primary emphasis given in
Management Accounting is on the effective and efficient performance of the business whereas the primary
emphasis given in Cost Accounting is on cost determination and cost control of the business; (c) the success of
Management Accounting depends on the existence of a sound Cost Accounting system whereas the success of
Cost Accounting does not depend, in any way, on the existence of Management Accounting System; and (d)
Management Accounting is based on the data as obtained from Financial Accounting and Cost Accounting
whereas Cost Accounting is based on the cost-related data as obtained from Financial Accounting.

QUIZ
 State whether the following statements are true or false:

Various statistical and operational research tools are used in Management Accounting in the
process of planning, controlling and decision-making.

Management Accounting interprets the analysed data as obtained from the non-operational

activities alone of the enterprise.

Management Accounting prepares the necessary plans to implement various financial

decisions of the management.

Management Accounting is a backward-looking tool to the management.

Management Accounting helps in coordinating various business activities of an enterprise.

Management Accounting System should be well conversant with the modern office
management system.

Management Accounting is a branch of Financial Accounting.

Cost Accounting does not provide cost-related basic information to the Management
Accounting.

Installation of Management Accounting System is highly expensive to every concern.

Ans.: True: (a), (c), (e), (f), (i); False: (b), (d), (g), (h).

Fill in the blanks in the following statements:

Success of the management highly depends upon perfect__________.

Management Accounting System can be introduced into an organization where there exists a
well-designed__________system.

Management Accounting analyses and interprets__________for projecting the future trends

of different activities of the enterprise.

Management Accounting acts as a yardstick for measuring of__________of the enterprise.

Management Accounting is concerned with the accounting information which is useful to

the__________.

Management Accounting communicates relevant information to the management to perform

their managerial functions of__________, __________and__________.
 Ans.: (a) decision-making; (b) Financial Accounting; (c) historical data; (d) level of
performance; (e) management; (f) decision-making; planning; controlling.

EXERCISE

I. Theoretical Questions

Short Answer Type Questions

What is Management Accounting?

Write any two features of Management Accounting.

Write any two objectives of Management Accounting.

Write any three utilities of Management Accounting.

Write any three limitations of Management Accounting.

Give any two points of differences between Management Accounting and Financial
Accounting.

Give any two points of differences between Management Accounting and Cost Accounting.

Essay Type Questions

Define Management Accounting. Discuss its nature.

Discuss the scope of Management Accounting.

Discuss the objectives of Management Accounting.

Discuss the role of Management Accounting.

Discuss the advantages of Management Accounting.

Discuss the limitations of Management Accounting.

Discuss the various tools and techniques used in Management Accounting.

Enumerate various requisites for installation of Management Accounting System.

Distinguish between

Management Accounting and Financial Accounting.

Management Accounting and Cost Accounting.