Management Accounting

Introduction

Accounting information is a statement which provides quantitative

information about the effect of transactions and other events of an accounting
entity.

Accounting information is used for predicting, comparing and

evaluating the earning power and financial position of a business enterprise.
It also serves the needs of users who rely on accounting statements as their
main source of information for decision making.
Contd.,

Accounting information must possess certain attributes that make

the information provided in financial statements useful to users. The 4
main qualitative characteristics are:
(1). Reliability
(2). Relevance
(3). Understandability &
(4) Comparability.
Users of Accounting Information

Proprietors – A business’s profitability and financial soundness are matters of prime

importance to proprietors who have invested their money in the business.
Managers – Accounting information helps managers assess outcomes and the actions
needed to improve the financial position of the enterprise.
Creditors –Financial statements help creditors to ascertain whether the enterprise will be
able to meet its commitment towards them regarding repayment of principal and interest.
Users of Accounting Information

Prospective investors – will like to know a business’s profitability and financial position. A study of the

financial statements will help them in this respect.

Government – is interested in financial statements of businesses on matters of taxation, labour and

corporate laws. Such information is available from financial statements.

Employees – are interested in knowing the various profit sharing and bonus schemes. Their interest

maybe more if they purchase shares of the companies where they work.

Citizen – An ordinary citizen maybe interested in accounting records of institutions which he contacts

in his daily life. Examples banks and public utility companies.

Branches of Accounting

Financial Accounting
Financial accounting is primarily concerned with record-keeping directed towards the preparation of profit
and loss account and balance sheet.

This deals with recording, classifying of business events which have already occurred. So this is historical
in nature. This provides about financial results and financial position.

According to Kohler, “financial accounting is the accounting for revenues, expenses, assets and liabilities
that is commonly carried on in the general office of a business.
Branches of Accounting

Cost Accounting
Cost accounting is the process of accounting for costs. It is a systematic procedure for determining the unit

cost of output produced or services rendered. The primary function of cost accounting is to ascertain the cost of a

product and help the management in the control of cost of a product and to help the management in the control of cost.

It deals with detailed study of cost with reference to cost ascertainment, cost reduction and cost control.

This emphasis is on historical costs as well as future decision-making costs.

Both financial accounting and cost accounting are concerned with the accumulation and presentation of

information to serve the need of management and outsiders.

Branches of Accounting

Management Accounting
Management accounting is primarily concerned with the supply of information which is useful to
management in decision making for the efficient running of the business and, thus, in maximizing profit.

Management accounting is the reproduction of final accounts in such a way as will enable the
management to take decisions and to control activities.
Characteristics of Management Accounting

• Providing Accounting Information

• Cause & Effect Analysis
• Use of Special Techniques & Concepts
• Taking important decisions
• Increase in Efficiency
• Supplies information not decision
• Concerned with forecasting
Advantages of Management Accounting
Better Decision Making
Management accounting helps in effective decision making for an organization. It supplies all
required information in the form of charts, tables, and forecasts to the management team. All this
information enables managers in performing detailed analysis and taking correct decisions.
Increase Business Efficiency
It aims at increasing the overall efficiency of the business. Management accounting using
scientific techniques evaluates the performance of the business and detects deviations and problems. It
takes corrective measures accordingly to remove defects that enhance business productivity.
Simplify Financial Statements
This accounting branch simplifies the information contained in financial statements.
Management accountant properly studies financial statements and presents all data to managers in the
forms of simplified tables or charts for better understanding.
Advantages of Management Accounting
Raises Profitability
Management accounting assists in increasing business profitability. It enables in cutting the
extra expenditure involved in business activities using capital budgeting and budgetary control.
Companies are able to reduce the cost of their products and earn better profits on them.
Motivates Employees
Management accounting serves as a tool for motivating employees. It prepares and presents
periodic reports regarding operations of the business to the management team. Managers are easily able to
evaluate the performance of employees and takes decision regarding promoting or demoting them
accordingly.
Cost Transparency
Transparency of cost is another important role played by management accounting. It properly
monitors all cash inflows and outflows of business and ensures that there is no misuse of money.
Management accounting works closely with the IT department to ensure that all expenses are within
budget.
Limitations of Management Accounting
Based on Records
The management accountant takes into consideration the past records provided by the financial
and cost accounting while making decisions for the future. The accuracy and utility of past records will
limit the dependence of the management accountant for future decisions. If the past data is not reliable,
the decisions suggested by management accountant may be misleading.
Lack of Knowledge and Understanding of the Related Subjects
For taking a sound decision it is necessary that the management must have knowledge of
various fields like accounting, statistics, economics, taxation, production, engineering and so on. But it
has been observed that the person who is taking the decisions may not have comprehensive knowledge of
all such subjects.
Intuitive Decisions
Though it has been realized that scientific decisions must take into consideration the
quantitative techniques yet because of simplicity and personal factors, the management has a tendency to
persistence intuitive decision-making.
Limitations of Management Accounting
Lack of Continuity and Coordination
In order to make the conclusions drawn by management accountant meaningful, they
must be implemented in the organization at various levels. But in actual practice they lose their
significance because it is not feasible to implement such conclusions.
No Substitute of Administration
The techniques and tools suggested by the management accountant are not alternatives
or substitutes of good administration but in fact these are only to supplement the sound
management and administration.
Lack of Objectivity
There is every possibility of personal bias and manipulation from the collection of
data to the interpretation stage in financial accounting. Thus, it losses objectivity and validity.
Limitations of Management Accounting
Unquantifiable Variables
There are various problems in business which cannot be expressed in monetary terms. Such
problems cannot be interpreted for the future.
Costly
The installation of management accounting system in a concern requires large organization and
a wide network of rules and regulations and thus requires a heavy investment. Therefore, it cannot be
utilized by a small organization profitably.
Not in Final Stage
Management accounting has not reached the final stage and is in the process of development.
That is why its techniques suffer from fluidity of concepts, diversity in opinions and various
interpretations.
Psychological Resistance
For introduction and operation of management accounting system in any organization, it
requires a lot of changes in the organization structure, rules and regulations. These changes are resisted by
the management itself as it creates difficulties in its successful operations.