UNIT-1: INTRODUCTION TO MANAGEMENT ACCOUNTING

Meaning, objectives, nature and scope of management accounting,

Difference between different forms of accounting- Cost, Financial and
Management accounting, Cost control and Cost reduction.
MEANING AND DEFINITIONS OF MANAGEMENT ACCOUNTING
Management Accounting is the presentation of accounting information
in such a way as to assist management in the creation of policy and day-to-
day operation of an undertaking. Thus, it relates to the use of accounting data
collected with the help of financial accounting and cost accounting for the
purpose of policy formulation, planning, control and decision-making by the
management. Some important definitions of Management Accounting are
given below;
“Management Accounting is concerned with accounting information that
is useful to management”-R.N.Anthony
“Management Accounting is a system of collection and presentation of
relevant economic information relating to an enterprise for planning,
controlling and decision-making” -ICAI
CONCEPT OF MANAGEMENT ACCOUNTING
Management Accounting is one of the branches of accounting. It
provides the relevant information to the management for decision-making. It
provides necessary information to the management for discharging its
function. These functions are; planning, organising, staffing, directing and
controlling.
Further, it provides necessary data for management for effective and
efficient control of the business. Management Accounting is not mere recoding
and compiling of income and expenditure but also an effective tool of
forecasting, planning and regulating business or economic activity of a
concern. It helps the management in budgeting and budgetary control,
production planning and control.
CHARACTERISTICS OR NATURE OF MANAGEMENT ACCOUNTING

It is clear from the definitions of management accounting that it is

concerned with accounting data that is useful in decision making. The main
characteristics of management accounting are as follows:
1. Useful in decision making: The essential aim of management
accounting is to assist management in decision making and control. It
is concerned with all such information which can prove useful to
management in decision making.
2. Financial and cost accounting information: Basic accounting
information useful for management accounting is derived from financial
and cost accounting records.
3. Internal use: Information provided by management accounting is
exclusively for use by management for internal use. Such information
is not to be given to parties external to the business viz., shareholders,
creditors, banks, etc.
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 4. Purely optional: Management accounting is a purely voluntary
technique and there is no statutory obligation. Its adoption by any firm
depends upon its utility and desirability.
5. Concerned with future: As management accounting is concerned with
decision making, it is related with future because decisions are taken
for future course of action and not the past.
6. Flexibility in presentation of information: Unlike financial
accounting, in management accounting there are no prescribed formats
for presentation of information to management. The form of
presentation of information is left to the wisdom of the management
accountant who decides which is the most useful format of providing
the relevant information, depending upon the utility of each type of form
and information.
SCOPE OF MANAGEMENT ACCOUNTING
Management accounting has a very wide scope. It includes not only
financial accounting and cost accounting but also all types of internal financial
controls, internal audit, tax accounting, office services, cost control and other
methods and control procedures. Thus, scope of management accounting,
inter alia includes the following:

Financing Cost
Accounting Accounting

Office
Services
Budgeting &
Forecasting

Scope of
Management
Financial Accounting Tax
Analysis & Planning
Interpretation

Reporting to
Internal Management
Financial
Control

Cost control
Statistical Procedures
Tools

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 1. Financial accounting: Financial accounting provides basic historical
data which helps management to forecast and plan its financial activities
for the future period. Thus, for an effective and successful management
accounting, there should be a proper and well-designed financial
accounting system.
2. Cost accounting: Many of the techniques of cost control like standard
costing and budgetary control and techniques of profit planning and
decision-making like marginal costing, CVP analysis and differential cost
analysis are used by the management accounting.
3. Budgeting and forecasting: In order to plan business activities for
the future, forecasting and budgeting play a very significant role.
Forecasting helps in the preparation of budgets and budgeting helps
management accountant in exercising budgetary control.
4. Tax planning: In order to take advantage of various provisions of tax
laws, management accountant has to depend upon tax accounting and
planning to minimise its tax liabilities and save more funds for the
business.
5. Reporting to management: For effective and timely decisions, there
should be a system of prompt and intelligent reporting to management.
Both routine and special reports are prepared for submission to top
management, middle order management and operating level
management depending on their requirements.
6. Cost control procedures: Any system of management accounting is
incomplete without effective cost control procedures viz., inventory
control, labour control, overhead control, budgetary control, etc.
7. Statistical tools: Various tools of analysing and presenting statistical
data like graphs, tables, charts, etc., are used in preparing reports for
use by the management.
8. Internal control and internal audit: Management accountant heavily
depends on internal financial controls viz., internal audit and internal
check to plug loop holes in the financial system of the concern.
9. Financial analysis & interpretation: Management accountant
employs various techniques to analyse and interpret financial data to
make it understandable and useable to the management. Such analysis
helps management to achieve objectives of management in a more
efficient manner.
10. Office services: Management accountant is expected to maintain and
control office routines and procedures like filing, copying,
communicating, electronic data processing and other allied services.

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FUNCTIONS (OR OBJECTIVES) OF MANAGEMENT ACCOUNTING
Main functions of management accounting are as follows:

Planning

Co-ordinating

FUNCTIONS OF MANAGEMENT
Controlling
ACCOUNTING

Communication

Financial Analysis &

Interpretation

Qualitative
Information

Tax Policies

Decision-Making

1. Planning: Information and data provided by management accounting

helps management to forecast and prepare short-term and long-term
plans for the future activities of the business and formulate corporate
strategy. For this purpose, management accounting techniques like
budgeting, standard costing, marginal costing, probability, correlation
and regression, etc., are used.
2. Co-ordinating: Management accounting techniques of planning also
help in coordinating various business activities. For example, while
preparing budgets for various departments like production, sales,
purchases, etc., there should be full coordination so that there is no
contradiction. By proper financial reporting, management accounting
helps in achieving coordination in various business activities and
accomplishing the set goals.
3. Controlling: Controlling is a very important function of management
and management accounting helps in controlling performance by control
techniques such as standard costing, budgetary control, control ratios,
internal audit, etc.
4. Communication: Management accounting system prepares reports for
presentation to various levels of management which show the
performance of various sections of the business. Such communication
in the form of reports to various levels of management helps to exercise
effective control on various business activities and successfully running
the business.
5. Financial analysis and interpretation: In order to make accounting
data easily understandable, the management accounting offers various
techniques of analysing, interpreting and presenting this data in non-
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 accounting language so that everyone in the organisation understands
it. Ratio analysis, cash flow and funds flow statements, trend analysis,
etc., are some of the management accounting techniques which may be
used for financial analysis and interpretation.
6. Qualitative information: Apart from monetary and quantitative data,
management accounting provides qualitative information which helps in
taking better decisions. Quality of goods, customers and employees,
legal judgements, opinion polls, logic, etc., are some of the examples of
qualitative information supplied and used by the management
accounting system for better management.
7. Tax policies: Management accounting system is responsible for tax
policies and procedures and supervises and coordinates the reports
prepared by various authorities.
8. Decision-making: Correct decision-making is crucial to the success of
a business. Management accounting has certain special techniques
which help management in short-term and long-term decisions. For
example, techniques like marginal costing, differential costing,
discounted cash flow, etc., help in decisions such as pricing of products,
make or buy, discontinuance of a product line, capital expenditure, etc.
DIFFERENCE BETWEEN FINANCIAL ACCOUNTING Vs. MANAGEMENT
ACCOUNTING
Financial accounting and management accounting are two major sub-
systems of accounting information system. Both are concerned with revenues
and expenses, assets and liabilities and cash flows. But the major differences
between the two arise because they serve different audiences. The main
points of difference between the two are as follows:

Basis Financial Accounting Management Accounting

External & Financial accounting Management accounting
internal users information is mainly information is mainly meant for
intended for external users internal user, i.e., management,
viz., investors, shareholders, employees.
creditors, Govt. authorities,
etc.
Accounting It is based on double entry It is not based on double entry
method system for recording business system.
transactions.
Statutory Financial accounting is Management accounting is
Requirements mandatory. Under company optional though its utility makes it
law and tax laws, financial highly desirable to adopt it.
accounting is obligatory to
satisfy various statutory
provisions.

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Analysis of cost Financial accounting shows Management accounting provides
and profit the profit/loss of the business detailed information about
as a whole. It does not show individual products, plants,
the cost and profit for departments or any other
individual products, processes responsibility centre.
or departments, etc.
Past and future It is concerned with recording It is future oriented and
data transactions which have concentrates on what is likely to
already taken place, i.e., it happen in future though it may use
represents past or historical past data for future projections.
records.
Periodic & Financial reports, i.e., Profit & Management accounting reports
continuous Loss Account and Balance are prepared frequently, i.e., these
reporting Sheet are prepared usually on may be monthly, weekly or even
a year-to-year basis. daily depending on managerial
requirements.
Accounting Companies are required to Management accounting is not
standards prepare financial accounts bound by accounting standards. It
according to Accounting may use any practice which
Standards issued by the ICAI. generates useful information to
management.
Types of Financial accounting prepares In management accounting special
statements general purpose statements purpose reports are prepared,
Prepared Profit and Loss Account and e.g., performance report of sales
Balance Sheet which are used manager or any other department
by external users. manager which are used by top
level management.
Publication and
Financial statements, i.e., P&L Management accounting
audit A/c and Balance Sheet are statements are for internal use
published for general public and thus neither published for
use and also sent to general public use nor these are
shareholders. These are required to be audited by
required to be audited by the Chartered Accountants.
Chartered Accountants.
Monetary and Financial accounting provides Management accounting may
non-monetary information in terms of money apply monetary or non-monetary
measurements only. units of measurement. For ex:
information may be expressed in
terms of Rupees or units of
quantity, machine hours, labour
hours, etc.
DIFFERENCE BETWEEN COST ACCOUNTING Vs. MANAGEMENT
ACCOUNTING
An examination of the meaning and definitions of cost accounting and
management accounting indicates that the distinction between the two is
quite vague. Thus, managerial aspects of cost accounting are inseparable from
management accounting. However, distinction between cost accounting and
management accounting may be made on the following points:
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 Basis Cost Accounting Management Accounting
Scope Scope of cost accounting is Scope of management accounting is
limited to providing cost broader than that of cost accounting
information for managerial as it provides all types of information,
uses. i.e., cost accounting as well as
financial accounting information for
managerial uses.
Emphasis Main emphasis is on cost Main emphasis is on planning,
ascertainment and cost controlling and decision-making to
control to ensure maximum maximise profit.
profit.
Techniques Various techniques used by Management accounting also uses all
employed cost accounting include these techniques used in cost
standard costing and variance accounting but in addition it also uses
analysis, marginal costing and techniques like ratio analysis, funds
cost volume profit analysis, flow statement, statistical analysis,
budgetary control, uniform operations research and certain
costing and inter-firm techniques from various branches of
comparison, etc. knowledge like mathematics,
economics, etc., whichsoever can help
management in its tasks.
Evolution Evolution of cost accounting is Evolution of management accounting
mainly due to the limitations is due to the limitations of cost
of financial accounting. accounting. In fact, management
accounting is an extension of the
managerial aspects of cost
accounting.
Statutory Maintenance of cost records Management accounting is purely
requirements has been made compulsory in voluntary and its use depends upon its
selected industries as notified utility to management.
by the Govt. from time to
time.
Data base It is based on data derived It is based on data derived from cost
from financial accounts. accounting, financial accounting and
other sources.
Status in In the organisational set up, Management accountant is generally
organisation cost account-ant is placed at a placed at a higher level of hierarchy
lower level in hierarchy than than the cost accountant.
the management accountant.
Installation Cost accounting system can Management accounting cannot be
be installed without installed without a proper system of
management accounting. cost accounting.
COST CONTROL
Cost control is an essential component of any system of cost accounting.
It is exercised through comparing actual costs with predetermined standard
costs so that the difference between the two can be measured and then
analysed according to reasons for taking corrective action.

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Definition of Control
According to Institute of Cost and Management Accountants London,
“Cost control means the guidance and regulation by executive actions of the
cost of operating an undertaking”.
Features of Cost Control
Cost control process involves setting targets and standards,
ascertaining the actual performance, comparing the actual performance with
standard, investigating the variance and taking corrective action. Some of the
important features of cost control are:
 It aims at achieving the standards
 It is a preventive function
 It is generally applicable to items which have standards
 It contains guidelines and directive management such as how to
do a thing
Advantages of Cost Control
Some of the advantages of cost control are discussed as below:
 It helps the firms to improve its profitability and competitiveness
 It helps the firms in reducing its cost
 It is helpful in achieving greater productivities
 It helps in increasing sales and employment of work force
Disadvantages of Cost Control
Some of the disadvantages of cost control are discussed as below:
 It reduces the flexibility and process improvement in a company
 It restricts innovation of product
 It may compromise in quality of a product
Techniques of Cost Control
Some of the techniques which are generally applied in cost controlling
techniques are:
 Budgetary Control
 Standard Costing
 Ratio Analysis
 Variance Analysis
 Inventory Control
COST REDUCTION
The process of identifying and eliminating unnecessary costs to improve
the profitability is known as cost reduction. It refers to bringing down the cost
of production. Cost reduction is possible only when the business firms makes
the optimum utilisation of resources. It is possible by incorporating internal
and external economics.

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Definition of Cost Reduction
According to the Charted Institute of Management Accounts, London,
“Cost reduction means the achievement of real and permanent reduction in
the unit cost of goods manufactured or service rendered without imparting
their suitability for the use intended”.
Features of Cost Reduction
Some of the important features of cost reduction are:
 It is not concerned with setting targets and standards
 It is final result in the cost control process
 It is continuous, dynamic and innovative in nature and alternative to
reduce costs
 It is a corrective function
 This is applicable to every activity of the business
 It adds thinking and analysis to actions at all levels of management
Techniques of Cost Reduction
The various techniques used for cost reduction are as follows:
 Organisation and methods
 Work study
 Material handling
 Automation
 Labour and overhead control
 Material control
 Quality control
 Production control and designing
 Value analysis

ESSAY TYPE QUESTIONS

1. Define management accounting and explain its objectives
2. What are the functions or objectives of management accounting?
3. Explain the nature and scope of management accounting
4. What is management accounting? In what respects it is different from
financial accounting?
5. In what respects cost accounting is different from management
accounting?
6. What is meant by cost control and cost reduction?
7. Write a brief note on cost control
8. Write a brief note on cost reduction

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