Unit 1- Management Accounting

Dr. Ramanpreet Singh

 Accounting
“ Accounting may be defined as a system of
collecting, summarizing, analyzing and
reporting information about the business
enterprise, in financial (monetary) terms”
Users of Accounting Information
Internal users (Management)
They use information for short- term
planning and controlling routine
operations. Uses information for making
non routine decisions and formulating
overall policies and long range plans
External parties ( Investors, Government
authorities)
Uses information for making decisions
about the company
 Branches of Accounting
Financial Accounting
Cost Accounting
Management Accounting
Social Responsibility Accounting
 Financial Accounting
According to American Institute of
Certified Public Accountants “Accounting
is the art of recording, classifying and
summarising in a significant manner and
in terms of money, transaction and events,
which are in parts at least, of a financial
character, and interpreting the results
thereof”
 Financial Accounting
“ It refers to that part of accounting which
is employed to communicate the financial
information of a business unit developed
for the use of external parties such as
Stock holders, suppliers, banks and
Government regulatory agencies”
Function of Financial Accounting
 Recording the financial transactions: the primary function of financial accounting
is recording the transactions. The transactions are first recorded in a book called
Journal and from the Journal it is transferred to other books which are called
subsidiary books (Ledger).
 Classification: The recorded transactions in the journals are classified according to
the nature of transactions. The classified transactions are properly recorded in the
name of different accounts. This process of recording in different account is done in a
book named ledger.
 Summarising: The classified transactions which are recorded in ledger are
represented in the form of many accounts. This should be brought into summarised
account form. The summarisation process is carried out through a statement called
Trial Balance. From the trail balance, the summarised accounts are prepared as (i)
Profit and Loss account and (ii) Balance Sheet.
 Concerned only with financial transaction: Financial account is concerned only
with the financial transactions. The non financial transactions like motivational
factors, communication etc will not be recorded in the books of accounts.
 Interpretation: The financial data recorded in the books are properly interpreted so
that it can be used by the owners, financial institutions, creditors, Government and
public. The parties interested should have an idea about the company through proper
interpretation.
Limitations of Financial Accounting
Provides only historical data
Provides only limited information
Provides only quantitative information.
It will not help in price fixation
It will not provide tools for cost control.
It is not possible to measure the comparative
performance
 It will not provide information to management
for planning and decision making:
It is possible to manipulate accounts.
 Cost Accounting
According to ICMA London defined Cost
Accounting as “the process of accounting
for cost from the point at which
expenditure is incurred or committed to
the establishment of its ultimate
relationship with the cost centres and cost
units
 Cost Accounting
“ It refers to recording, measuring and reporting
information about costs. A cost is a sacrifice of
resources. Costs are reflected in the accounting
system by outlays of cash, promise to pay cash
at future date and the expiration of the value of
an assets. The primary purpose of cost
accounting is cost ascertainment and its uses in
decision making and performance evaluation”
 Management Accounting
.
According to Chartered Institute of Management Accountants, London
defined Management Accounting as “The Application of
professional knowledge and skills in the preparation of accounting
information in such a way as to assist management in the formation
of policies and planning and control of the operations of the
undertaking”

According to American Accounting Association defines,

“Management Accounting is the application of appropriate
techniques and concept in processing historical and projected
economic data of an entity to assist management in establishing
plans for reasonable economic objectives in the making of rational
decision with a view towards achieving these objectives”.
 Management Accounting
“ It is concern with accounting information
that is useful to managers. It is the process
of identifying, measuring, accumulating,
analyzing, preparing, interpreting and
communicating information that managers
use to fulfil organizational objectives”
Nature of Management Accounting
 Provide Accounting information:
 Cause and effect analysis
 Use of special techniques and concepts
 Taking important decision
 Achieving of objectives
 Increase in efficiency:
 Supplies information and not decision
 Concerned with forecasting
 Short term reports
 Limitation of Management Accounting

Management Accounting is providing information to management. In spite of its many advantages.

It has few limitations and important limitations are stated as follow:

Management accounting is based on Financial Accounting: All the analysis carried in the
Management Accounting is based on Financial Accounting information i.e Profit and loss Account
and Balance Sheet. Any manipulation and error committed in these statements will affect the results
of the analysis of the management accounting.
 It is considered only as a tool: Management Accounting is only a tool and it will not prepare any
statutory documents except cash flow statement. Cash flow statement is required for listed
companies only.
It can be adopted only by big companies: The adoption of Management Accounting needs more
expenditure towards maintain additional staff for this purpose.
Personal judgements: Management accounting information is mostly based on personal
judgements about the projection of costs and revenue about future. If the Management Accountant
is not efficient the judgement may not efficient the judgement may not be correct and accurate.
Personal bias: There is possibility of showing personal bias in Management Accounting.
Evolutionary stage: Management Accounting was recently originated. The companies are
adopting the system only from 1950’s onwards.
Opposition to changes: There is possibility of opposition from the employees of the company for
introduction of Management Accounting system.
Scope of Management Accounting
Financial Accounting: Management Accounting is based on the data of Financial Accounting. It analysis
the Profit and Loss and Balance sheet at various periods and give more meaning for the information in the
Financial Accounting.
Cost Accounting: Cost Accounting is concerned with ascertainment of coat at various levels of activities.
Hence, the cost data are more required for the Management Accounting for further analysis so that
relevant information can be provided to management.
Statistical Methods: In Management Accounting the statistical techniques like tabulations, diagrams and
graphs are mostly applied for analysing the financial data.
Revaluation Accounting: Revaluation Accounting is concerned with the effective representation of
capital in fixed assets. The fixed assets should be revalued to represent the real worth in order to ascertain
the correct measurement of return on capital employed.
Budgetary Control: Management Accounting helps to prepare the budget for various activities in an
organisation. It also suggests various methods for controlling deviations in the actual values with
budgetary values for different activities.
Inventory Control: Inventory control is the most important factor for the concern. High inventory or low
inventory is not good for the concern. The optimum inventory which is most required is done
management accounting.
Interim reporting: Management Accounting provides interim reports to the owner of the business and
management often so that they can know the progress of the business.
Internal Audit: For internal audit relevant reports are provided by the management accounting.
Taxation: Correct valuation of fixed assets and inventory are done through management accounting
principles.
 Tools and technique of Management Accounting

Financial Statement Analysis: Financial Statement Analysis is concerned with analysis of Profit and loss
account and Balance sheet of different periods. It helps to ascertain the rate of growth of a concern. This
analysis is done through comparative financial statements, common size statement and ratio analysis.
Fund flow statement: Fund Flow Statement is an analysis to find out the movement of fund from one period
to another. It helps to find out whether the funds is properly used or not in the year when compared to the
previous year.
Cash flow Statement: It is an analysis about the movement of cash from one period to another. It helps to
find out the reason for difference in cash balance between two periods.
Marginal Costing: Marginal Costing is a technique to fix the selling price and for other managerial decisions
like acceptance or rejection of bulk orders, to produce or to purchase etc. it is an analysis based on the fixed
cost, variable cost and contribution.
Standard Costing: Standard Costing is one of the tools of Management Accounting. It facilitates for fixing
the standard for all the activities and to measure the variance of the actual from the standard. Hence, the
unfavourable variance can be controlled through the technique.
Budgetary control: Budgetary control is an important technique of Management Accounting. It is concerned
with the preparation of different types of budgets like, Cash budget, Sales Budget, Production Budget, and
Maintenance Budget etc. it is possible to compare the actual figure with budgetary figures and take necessary
actions.
Revaluation Accounting: Revaluation accounting is a method adopted to revalue the assets of a company so
that capital is properly represented with the assets.
Management Information System: It is an information system adopted by the management to provide
information to management in a meaningful manner. The information is prepared by applying computer skills
so that management can early understand the information.
 Difference between Management Accounting and Financial Accounting

Management Accounting Financial Accounting

Purpose Management accounting is essential for management Purpose of financial accounting is to

in formulating policies and plan records various transactions and to
know the financial position of the
firm.
Accounting rules Not governed by any principles Financial accounting is governed by
Generally Accepted Accounting
Principles(GAAP)
Actuals /estimates In management accounting no emphasis is given to In financial accounting only actual
actual figures rather it is based upon estimated figures figures are recorded
Levels of details Often presents segments of an organization Presents overall company information
in accordance with US GAAP
Information Non monetary Monetary

Users Internal External

Mandatory Preparation of management accounting records is not Preparation of financial statements is

compulsory compulsory under companies act 1956
Published Management accounting is done for management and Financial accounts are to be published
is not published under companies act
Audited Management accounting records are not audited Financial accounting are to be audited
under companies act
Difference between Management accounting and Cost accounting

Purpose Management accounting Cost Accounting

Objective The primary objective of management accounting is The main objective of cost accounting
to provide necessary information to the management is to assist the management in cost
in the process of its planning, controlling and ascertainment and cost control
decision making
Data Management accounting uses both quantitative and Cost accounting system uses
qualitative data. It also uses those data that cannot
quantitative cost data that can be
be measured in terms of money measured in monitory terms
Audit No statutory requirement of audit for reports Statutory audit of cost accounting
reports are necessary in some cases
specially big business houses
Scope Management accounting has a wider area of The scope of cost accounting is
operation limited to cost data
Nature Management accounting is generally concerned with Cost accounting uses both past and
projections of figures for future present figures
Interdependence Management accounting is dependent on cost and Cost accounting is not dependant on
financial accounting management accounting
 Role of Management Accountant

Management Accountant is responsible for preparation of

Management Accounting. He works with few subordinates. He
has to assign work to them for effective preparation of accounts
related to management. On the basis of the information provided
by Management Accountant the management fixes the standard
and responsibility of all the employees of the organisation. His
main work is preparation of Budgets, Standard Costing, Marginal
Costing and Financial Statement Analysis. On the basis of
Financial Statement Analysis, he has to prepare the Fund Flow
Statement and Cash Flow Statement. These statement help to
ascertain whether the fund of the company is effectively utilised
or not. Moreover, accounting ratio are also calculated based on
the financial statements. Hence, the Management Accountant
plays an important role in an organisation which is planning, co-
ordinating, directing and controlling of all activities, through
various information he provides to the management.
 Functions of Management Accountant

Planning: Planning is an important function of Management Accountant.

Planning is done through budgeting and costing. Proper planning based on
Management Accounting helps in the efficient functioning of an
organisation.
Coordinating: The objective of a concern can be achieved through proper
co-ordination. It is the duty of the Management Accountant to Co-ordinate
all the activities of an organisation.
Motivating: The employees of an organisation are properly motivated by
fixing the standard of performance. The curiosity to perform more than the
standard automatically motivated the employees to produce more goods.
Directing: Management Accountant takes step to direct the employees to do
different work efficiently through standard costing, marginal costing and
budgetary control techniques. Each employee is directed to accomplish his
responsibilities.
Controlling: Controlling is concerned with the control of cost for various
activities. If the actual cost is greater than the standard costing, it requires
some controlling mechanism. Management Accountant takes various steps
for controlling costs at different stages.
