Management Accounting Final

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Management Accounting

Management accounting is the process of identification, measurement, accumulation, analysis,


preparation, interpretation and communication of financial information used by management to plan,
evaluate and control within an organization and to assure appropriate use of and accountability for its
resources. It also comprises the preparation of financial reports for management groups such as
shareholders, creditors, regulatory agencies and tax authorities
The Institute of Cost and Works Accountants of India defines Management Accounting as “a system
of collection and presentation of relevant economic information relating to an enterprise for planning,
controlling and decision-making”
Thus Management Accounting may be defined as the application of accounting techniques to the
provisions of information designed to assist all levels of management in planning and controlling the
activities of the firm.

NATURE OR CHARACTERISTICS OF MANAGEMENT ACCOUNTING

1. Both as a Science and an art: In management accounting data are collected systematically and
they are analysed with the help of various formulae and techniques and on this basis it is a science.
On the other hand, subjective judgment of management and various needs of the organization are
also taken into account while taking decisions and on this basis it is an art. On the whole,
management accounting is both- a science as well as an art.
2. Accounting Service: Management accounting is a function of accounting service towards
management. Under this service necessary information are provided to various levels of
management.
3. Integrated System: Management accounting is an integrated system in which technique related to
various subjects are used in the process of data collection, analysis and decision-making.
4. More concerned with Future: Management accounting is more concerned with „future‟. No
doubt, analysis and interpretation are made on the basis of historical data, but the important
objective of management accounting is to determine policies for future.
5. Selective Nature: Management accounting is selective in nature. It selects only those plans or
alternative which seems to be more attractive and profitable.
6. More Emphasis on the Nature of Element of Cost: Management accounting lays more emphasis
on the recognition and study of the nature of various elements of costs. In this context the total cost
is divided into fixed, variable and semi-variable components.
7. Cause and Effect Analysis: Management accounting lays emphasis on the analysis of „cause‟ and
effect „effect‟ of different variables.
8. Rules not Precise and Universal: In management accounting no set of rules or standards are
followed universally. Though the tools of management accounting are the same, their use differs
from concern to concern.
9. Supplies Information and not decision: An important nature of management accounting is that its
provides requisite information and not decisions. However, decisions are taken by management
with the help of these informations.
10. Achieving of Objectives: In management accounting, the accounting information is used in such a
way so that organizational objectives and targets may be achieved and efficiency of business may
be improved.

DSM @ Management Accounting


Objectives of Management Accounting
The fundamental objective of management accounting is to enable management to maximize profits or
minimize losses. Following are the important objectives or purposes of management accounting:
1. Policy formulation- Policy formulation and planning are the primary functions of management.
The object of management accounting is to supply necessary data to the management for
formulating plans. The figure supplied and opinion given by the management accountant helps
management in policy formulation.
2. Helpful in decision making- The management is required to take various important decisions.
Management accounting techniques help in collecting and analyzing data relating to cost, volume
and profit which provide a base for taking sound decision.
3. Helpful in controlling- Management accounting is a useful device of managerial control. Various
accounting techniques such as standard costing and budgetary control are helpful in controlling
performance. The actual results are compared with pre-determined targets to know the deviations.
4. Motivation- Another important objective of management accounting is to help the management in
selecting best alternatives of doing the things. Delegation of authority as well as responsibility
increases the job satisfaction of employees and encourages them to look forward.
5. Interpretation of financial information- Financial information is of technical nature and must be
presented in such a way that it can be easily understood. It is the duty of management accountant
who uses statistical devices like charts, diagrams etc. so that the information can be easily
understandable.
6. Reporting- One of the primary objectives of management fully informed about the latest position
of the concern. Management accounting provides data as well as different alternative plans before
than management for comparative study. The performance of various departments is also
communicated regularly to the also communicated regularly to the top management.
7. Helpful in co-ordination- Management accounting provides tools which are helpful for this
purposes. Co-ordination is maintained through functional budgeting. It is the duty of management
accounting to act as a coordinator and reconcile the activities of different department.

SCOPE OF MANAGEMENT ACCOUNTING:


The scope of management accounting covers all the tools and techniques which help the management
in effective discharge of their functions. The scope, therefore is very wide and broad based, covering
mainly the following aspects of management accounting.
(i) Financial Accounting : Financial accounting provides the data base on the basis of which
management accounting processes information to management to serve their needs. Proper
designed financial accounting system forms the very base on which management accounting
prepares relevant and analytical report to facilitate management decision making. Management
accounting assembles and presents the financial accounting data in meaningful terms for
resolution of managerial issues. Hence, without the back up by Financial Accounting feeding
system, management accounting functions are not possible.
(ii) Cost Accounting : Cost accounting provides the most sophisticated techniques of Marginal
Costing, Budgetary Control, Standard Costing, Inter firm comparison which enables Management
Accounting to provide necessary information for effective decision making and control. Costing
accounting helps in performance appraisal and formulation of pricing policies with costing
information. It is in fact the integral arm of management without the support system of costing
accounting, the inefficiencies in various operations can not be highlighted to management.
(iii) Tools and Techniques of Management control : Management accounting makes an detailed
analysis and interpretation of financial statements through the tools of comparative statements,
trend ratios, ratio analysis and fund flow statement. Accounting Ratios help in the evaluation of

DSM @ Management Accounting


operating performance and in judging the liquidity and solvency of the enterprise. Fund flow
statement focuses on the management of funds in the operations of the business variance analysis
aims at controlling the various elements of costs, reporting the adverse variation for management
action.
(iv) Statistical and Quantitative Techniques : A number of statistical tools and technique is like
linear programming, regression analysis facilitates in providing information in a meaningful
manner for effective control and decision making. Hence management accounting also includes
these techniques in its scope.
(v) Inflation Accounting : This is also referred as revaluation accounting which is concerned in
maintaining capital in real terms and accordingly profit is calculated. This involves the exercise of
revaluing the assets at current prices and shows the increase/decrease in the value of capital. On
the assumption that the monetary unit value is unstable; the impact on capital is ascertained as a
result of changes in value of money. This is therefore another technique which falls within the
orbit of management accounting.
(vi) Tax Accounting : Tax planning is another important area which has a serious impact on the
profitability of the concern. Without proper planning of tax, the profits of the enterprise are
hijacked which affects adversely the business operations. Hence, it an important activity of
management accounting.
(vii) Management Reporting : Management report forms the integral aspect of management
accounting system. They identify the areas where management attention is desired for corrective
action. Decision making is facilitated based on the information provided by the report. The
reports should portray all the relevant aspects concerning the operative efficiency of the business.
Report have to be well designed and frequent to help the management. This is an essential part of
management accounting.

FUNCTIONS OF MANAGEMENT ACCOUNTING :


The basic functions of management accounting is to furnish relevant information along with analytical
data to the management to enable timely decisions for appropriate actions. It helps in the effective
discharge of management functions of planning, organizing, directing and controlling. The following
are the main functions of management accounting.
(a) Furnishing of relevant and vital data : Relevant and vital data is collected from concerned
sources and presented through meaningful reports to management which facilitates decision
making. Accounting data provides a strong base for furnishing financial figures to management to
enable appropriate and timely action.
(b) Compilation of data in suitable form : Accounting data as it is may not serve a meaningful and
useful purpose to management for decision making. This data is required to be suitably modified
and amended in manner that suits the management purpose. Hence the data is classified and
rearranged in a way that helps the management to gain insight into the situation.
(c) Analysis and Interpretation : Management accounting provides the tools and techniques for
analysis and interpretation of data. Information is furnished in a comparable and analytical manner
for easy grasp of the situation. This facilitates planning and decision making.
(d) Means of communication and reporting : Management accounting system constitutes an
important segment of the management communication system providing information and guidance
for prospective planning and control. Reports well prepared sand presented makes the management
more effective in controlling business operations. It helps in co-coordinating the operations of
various department.
(e) Facilitates control function : Management accounting helps in control function through the
techniques of budgeting control and standard costing. These techniques enable comparison of actual

DSM @ Management Accounting


performance with the targets and standards set analysis of the deviations from such standards taking
corrective action as a result of analysis and follow up to appraise the effectiveness of corrective
action.
(f) Planning : Planning involves determination of different courses of actions based on the purpose
facts and considered estimates. It helps in planning the strategy to be adopted in achieving the
targets. It renders necessary help in planning for future the business goals and objectives.
(g) Guides the management in judgment: It assists the management in forming its judgment about
the financial condition or the profitability of the business operation. Suitable action can be taken in
laying down future plans and policies for improvement and advancement.
(h) Decision – making : Decision making is a management process of making right choices from
amongst the various courses of action. Decision can be taken only when the data is assembled and
presented in meaningful terms and the areas requiring management attention are highlighted.
Management accounting makes this decision making more effective.
Differences between financial accounting and management accounting:
Financial Accounting and Management accounting both are the main branches of Accounting. Both are
very necessary for better business decision. All the data which is used in management accounting are
taken from financial accounting. But there are many differences between financial accounting and
management accounting. Following are the main differences of financial accounting and management
accounting:-
Financial Accounting Management Accounting
In financial accounting, we record all the In management accounting, we analyze the financial
transactions. We make financial statements. statement through ratio analysis, fund flow statement
and other tools.
Financial accounting is related to record of Management accounting is the presentation of data
historical transactions. for future planning. We can also use estimated data in
it.
In financial accounting, we find the financial In management accounting, we tries to best for
statement of whole organization. finding each department's financial results and
performance.
As per law, to make the financial statement by There is not any law compulsion for analyze the
follow the financial accounting rules is financial statement by following management
necessary for companies. accounting rules. It is just need for management
planning.
Financial accounting's reports are very useful Management accounting's reports are useful for
outside interested parties like inside management team for better decision making.
investors, bankers, govt. org. and creditors.
All the transaction which we can measure in the All the records and events which are useful
money, will be recorded in financial for managerial decision making, will be used for
accounting. analyze.
There are common GAAP in financial There is not any common GAAP for management
accounting which any accountant should accounting. Recently, management accountants are
follow. starting to follow rule of thumb.
Financial statements in financial accounting are There is not necessary for making analyze on the
made for one financial period. basis of one year data. We can use more than one year
data in management accounting. For example trend
analysis, we use 5 years or more data.
As per law, there is necessity to publish the Management Accounting's reports are personal and

DSM @ Management Accounting


financial statements in newspaper. confidentially used for management's planning.
As per law, audit of financial statements are As per law, there is not need of audit of management
necessary which are made in financial accounting reports.
accounting.

ROLE OR IMPORTANCE OR SIGNIFICANCE OF MANAGEMENT ACCOUNTING OR


MANAGEMENT ACCOUNTING AS A TOOL OF MANAGEMENT
In the present complex business world, management accounting has become an integral part and useful
tool of management system. The report prepared and data edited on the basis of management
accounting become the foundation of successful operation of managerial activities. The role of
management accounting as a tool of management can be studied under following headings:
1. Increase in Efficiency: Management accounting increases efficiency of various business activities.
The targets of different departments are fixed in advance on the basis of forecasting and planning
and later on actual performance is compared with them. This process helps in measuring and
increasing the efficiency of the enterprise.
2. Proper Planning: Planning is a primary function of management and management accounting has
an important role in making it proper. Management is able to plan various activities with the help of
accounting information. On the basis of information provided by management accountant, the
work-load of each and every individual is fixed in advance and the activities of the concern are
planned in a systematic manner.
3. Measurement of Performance: Management accounting also plays an important role in
measurement and management of work performance through the techniques of standard costing and
budgetary control.
4. Effective Management Control: Efficiency of management depends upon its effective control and
from this point of view also management accounting has its specific role. Nowadays the function of
control has become a continuous process.
5. Improved Services to Customers: The installation of various types of control through
management accounting leads to reduction in cost and price and maintenance of standard level of
quality of goods produced and services rendered.
6. Maximizing Profits: The thrust of various techniques of management accounting is to control cost
of production and to increase operational efficiency. It all results in maximizing the profits.
7. Prompt and Correct Decision: Management accounting provides continuous information and
analysis is to various levels of management in respect of various aspects of business operations. It
helps in prompt and correct decision by management.
8. Reduction in Business Risks: The collection and analysis of historical information in management
accounting provides knowledge to the management in respect of nature of fluctuations and their
causes and effects. Management can prepare such plans which may minimize the impact of trade
cycle or seasonal fluctuations and consequently reduction in various types of business risks.
Limitations of management accounting:
Management accounting is not free from limitations limits its effectiveness:
1. Data Base: Management accounting depends for data on the financial and cost records. If the
financial and cost accounting contains incorrect and inaccurate information; management
accounting also gets affected to that extent. Discrepancies of financial and cost accounting
penetrates into the management accounting system giving unreliable results. Therefore,
effectiveness of management accounting system depends upon the efficiency of system followed
for recording and compiling financial and cost records.

DSM @ Management Accounting


2. Intuitive Decision making: Many times management is prone to take decisions without reference
to information provided by management accounting system. They are tempted to take decision in an
easy and short cut manner rather than on scientific basis. They may base their decision on mere
guess work and ignore the information provided by management accounting system.
3. Absence of Objectivity: Management accounting provides both qualitative and quantitative
information which offers scope for subjective element. The reports are therefore influenced by
opinion judgment based on personal bias and prejudice. These make the reports more subjective
rather than objective.
4. Developing discipline: Management accounting is still a new and developing. It has yet to sharpen
its tools and techniques and seek perfection in its application. As a evolving discipline it is subject
to certain obstacles and impediments which are to be cleared before it emerges as a fully developed
science.
5. Expensive proposition: It is an expensive proposition to install the system with necessary facilities
and highly skilled persons. Therefore, small concerns cannot afford to adopt it. Only large concerns
can taken advantage of it; where the benefits outweigh the cost in many ways.
6. Wide scope: Management accounting embraces many disciplines and its scope is very wide. Hence
it requires a through knowledge and understanding of many subjects to make the data more
meaningful and informative. This makes the task of management accounting difficult.
7. Resistance: This subject demands a change in the method and style of working which may meet
opposition and non co-operation from certain vested interests. If may be construed by some persons
as tool for their exploitation. They dislike being guided in decision making through scientific
approach. Proper education of the system is necessary to help them break away from the traditional
style of working.
8. Cannot replace Management: Management accounting with all its tools and techniques can only
facilitate decision making process for the management. It cannot be treated as an alternative or
substitute for management. Ultimately it depends on the management for execution. Therefore, it is
only a tool in the hands of management and cannot replace management. Management accounting
processes quantitative data and collaborates with qualitative data. Only qualitative and unquantified
data cannot be easily processed by management accounting.
Role and duties of management accountant
Management Accountant, otherwise called Controller, is considered to be a part of the management
team since he has the responsibility for collecting vital information, both from within and outside the
company. The functions of management accountant are:
1. To establish, coordinate and administer, as an integral part of management, an adequate plan for the
control of operations. Such a plan would provide, to the extent required in the business cost
standards, expense budgets, sales forecasts, profit planning, and programme for capital investment
and financing, together with necessary procedures to effectuate the plan.
2. To compare performance with operating plan and standards and to report and interpret the results of
operation to all levels of management, and to the owners of the business. This function includes the
formulation and administration of accounting policy and the compilations of statistical records and
special reposts as required.
3. To consult withal segments of management responsible for policy or action conserving any phase of
the operations of business as it relates to the attainment of objective, and the effectiveness of
policies, organization strictures, procedures.
4. To administer tax policies and procedures.

DSM @ Management Accounting


5. To supervise and coordinate preparation of reports to Government agencies.
6. The assured fiscal protection for the assets of the business through adequate internal; control and
proper insurance coverage.
7. To continuously appraise economic and social forces and government influences, and interpret their
effect upon business.
Duties and Responsibilities of Management Accountant
The primary duty of Management Accountant is to help management in taking correct policy-decisions
and improving the efficiency of operations. He performs a staff function and also has line authority
over the accountants.
The duties and responsibilities of Management Accountant or controller are as follows:
1. The installation and interpretation of all accounting records of the corporative.
2. The preparation and interpretation of the financial statements and reports of the corporation.
3. Continuous audit of all accounts and records of the corporation wherever located.
4. The compilation of costs of distribution.
5. The compilation of production costs.
6. The taking and costing of all physical inventories.
7. The preparation and filing of tax returns and to the supervision of all matters relating to taxes.
8. The preparation and interpretation of all statistical records and reports of the corporation.
9. The preparation as budget director, in conjunction with other officers and department heads, of an
annual budget covering all activities of the corporation of submission to the Board of Directors
prior to the beginning of the fiscal year. The authority of the Controller, with respect to the veto of
commitments of expenditures not authorized by the budget shall, from time to time, be fixed by the
board of Directors.
10. The ascertainment currently that the properties of the corporation are properly and adequately
insured.
11. The initiation, preparation and issuance of standard practices relating to all accounting, matters and
procedures and the co-ordination of system throughout the corporation including clerical and office
methods, records, reports and procedures.
12. The maintenance of adequate records of authorized appropriations and the determination that all
sums expended pursuant there into are properly accounted for.
13. The ascertainment currently that financial transactions covered by minutes of the Board of Directors
and/ or the Executive committee are properly executed and recorded.
14. The maintenance of adequate records of all contracts and leases.
15. The approval for payment(and / or countersigning ) of all cheques, promissory notes and other
negotiable instruments of the corporation which have been signed by the treasurer or such other
officers as shall have been authorized by the by-laws of the corporation or form time to time
designated by the Board of Directors.
16. The examination of all warrants for the withdrawal of securities from the vaults of the corporation
and the determination that such withdrawals are made in conformity with the by-laws and /or
regulations established from time by the Board of Directors.
17. The preparation or approval of the regulations or standard practices, required to assure compliance
with orders of regulations issued by duly constituted governmental agencies.

DSM @ Management Accounting

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