Management Accounting

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. In contrast to financial accountancy information, management accounting information is:

primarily forward-looking, instead of historical; model based with a degree of abstraction to support decision making generically, instead of case based;

designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators;

usually confidential and used by management, instead of publicly reported; computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards.

Definition
According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology). The Institute of Management Accountants(IMA)[1] recently updated its definition as follows: "management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems,and providing expertise in

financial reporting and control to assist management in the formulation and implementation of an organizations strategy."

Nature of management accounting: Managerial personnel are entrusted with authority and responsibility of operating business activities. Management accounting provides information to the personnel are entrusted with authority and responsibility of operating business activities. Management accounting provides information to the managerial personnel at three levels of management viz., top, middle and lower levels of management. It provides the management with the tools for an analysis of its administrative action that can lay suitable emphasis on the possible alternatives in terms of costs, prices and profits. The decisions made by management are based on quantitative information and common sense, foresight, knowledge and experience. Management accounting includes financial accounting information and raw material from several other disciplines such as costing, statistics, mathematics, political science, sociology, psychology, management economics, law etc. With all these data he can ensure optimum utilization of all the resources including employees by maintaining sound morale of the employees, maximization of output and minimization of inputs, analyze the managerial questions in terms of costs, revenues, profits and growth. It is thus a highly personalized service with the help of which management can explore and exploit business opportunities and take sound and correct decisions. It is not a precise science as it uses its own conventions rather than standardized principles. Therefore the inferences drawn from the facts provided, depends on the skill, judgment and common sense of different management accountants. Thus it is said that management accounting serves as a management information system which enables the effective management of an enterprise. Scope of management accounting: Management accounting is a wide and diverse subject. As stated earlier it includes various branches of knowledge such as psychology, sociology, economics, laws, political science, mathematics, statistics, finanacial accounting, cost accounting etc. It is thus very difficult to

define its scope, as it is a dynamic and ever growing discipline of knowledge. The important techniques and systems used by management accounting are briefly stated below. 1. Historical cost accounting: Maintenance of books of cost accounting enables to know the actual costs incurred by the firm. 2. Standard costing: The standard costs laid down by experts are compared with the natural costs in order to know the deviations 3. Marginal costing: The costs are divided into fixed and variable costs which help is making vital decisions. 4. Decision accounting: Decisions are made after studying the impact of decisions in terms of costs, resource, profits, growth etc. 5. Budgetary control: It is a system of controlling the cost with the help of budgets. 6. Control accounting: It includes the techniques such as standard costing, budgetary control, control reports, internal check, internal audit and reports. 7. Revaluation accounting: It is based on current costs to ensure that the investment is intact and profits from investment are kept in mind. 8. Financial planning & policies: It consists of raising the long term and short term finance and invest it on optimum basis and enhance the profitability of the firm. 9. Capital expenditure: The large amounts of future capital expenditure and future profits are analysed to take important decisions. 10. Break even analysis: This is an important technique which is used to analyse the behavior of costs viz., fixed and marginal costs, indicating the level of activity at which the total costs would equal the total revenue and also the margin of safety. 11. Inter-period comparison: It is a technique of comparing the present performance with the past performance. 12. Techniques of forecasting: Some techniques like decision tree, probability and sensitivity analysis are used by management accountants for forecasting which forms a base for planning. 13. Operations research: It consists of statistical and mathematical techniques that are increasingly used in decision making process.

14. Statistics: The statistical techniques used by management accountant are correlation, regression, probability, time series, standard deviation, linear programming, control charts etc. 15. Other techniques: Other techniques employed are: Financial reporting, data processing, project management and appraisal, management audit, efficiency audit, cost audit, performance budgeting, tax planning, social accounting & audit, human resource accounting, responsibility accounting and divisional performance.

Management accounting tasks/ services provided

Rate & Volume Analysis Business Metrics Development Price Modeling Product Profitability Geographic vs. Industry or Client Segment Reporting Sales Management Scorecards Cost Analysis Cost Benefit Analysis Cost-Volume-Profit Analysis Life cycle cost analysis Client Profitability Analysis IT Cost Transparency Capital Budgeting Buy vs. Lease Analysis Strategic Planning Strategic Management Advise Internal Financial Presentation and Communication

Sales and Financial Forecasting Annual Budgeting Cost Allocation