B.Com/M.

Com/BBA/MBA

Management Accounting

Introduction Every one contracts with different types of organizations in everyday life. Manufacturers, retailers, service providers, non-profit organizations and government enterprises provide us with a vast set of goods and services. These organizations look very different, but they have three things in common. First, every organization should have a declared purpose and objectives. Second, in pursuing objectives managers need to make many decisions, and for this they need information. Finally, to help achieve the organizations objectives, managers need to manage their resources effectively and efficiently. Management accounting information helps to satisfy the information needs of managers so that they can manage resources effectively and add value for customers and the organization as a whole. Definition According to Broad and Carmichael, All those services by which the accounting department can assist the top management and other departments in the formation of policy, control of execution and appreciation of effectiveness are falls under management accounting. This definition points out the primary task of planning, execution and control of the operating activities of an enterprise. It constantly needs accounting information on which to base its decision. A decision based on data is usually correct and the risk of erring is minimized. According to T.G. Rose, Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management. It is here that the role of management accounting comes in. It supplies all sorts of accounting information in the form of such statements as may be needed by the management. Therefore, management accounting is concerned with the accumulation, classification and interpretation of information that assists individual executives to fulfill organizational objectives. Characteristics of Management Accounting The features of Management Accounting are given below. 1. The Management Accounting data are derived from both, the financial accounting and cost accounting. 2. The main thrust in management accounting is towards determining policy and formulating plans to achieve desired objectives of management.
1 Dr. Ravi Vyas

3. Management Accounting makes corporate planning and strategy effective and meaningful. 4. It is concerned with short and long range planning and uses highly sophisticated techniques like sensitivity analysis, probability techniques, decision tree, ratio analysis etc for planning, control and evaluation. 5. It is futuristic in approach and predictive in nature. 6. Management accounting system cannot be installed without proper cost accounting system. 7. Management Accounting systems generate various reports which are extremely useful from the Management point of view. Management Accounting Information and their use A. Measurement: For measurement of total costs, the management accounting system focuses on the measurement of total costs. This cost is divided into (1) Direct Cost: direct costs are identifiable or traceable to the products or services offered. (2) Indirect Cost: indirect costs are not traceable to the products or services. Total cost accounting measures not only the total costs (direct plus indirect costs) required for producing products or services but also the full costs required to run other activity like conducting a research project or running a welfare scheme and so on. Thus full cost accounting is not restricted to solely to measure the cost of manufacturing. B. Control: An important aspect of the management accounting information is to provide information, which can be used for Control. The management accounting system is structured in such a manner that information is generated for each Responsibility Center. A responsibility center is an organization unit headed by a manager who is responsible for its operations and performance. Management accounting helps to prepare budget for each responsibility center and also facilitates comparison between the budgeted and actual results. A report is prepared for each responsibility center, which shows the budgeted and actual performance and also the difference between the two. This enables the performance analysis of each responsibility center so that proper corrective action can be taken in this respect. C. Decision Making: Management accounting generates useful information for decision making. Management has to take several decisions in the course of business. Some of the major decisions are make or buy, accepting or rejecting of an export order, working of second shift, fixation of selling price, capital expenditure decisions, increasing
2

Dr. Ravi Vyas

production capacity, decision over product-mix, reviewing sales-mix and so on. For all these decisions, providing of information is necessary and the management accounting generates this information, which enables the management to take such decisions. Scope of Management Accounting Management accounting has a vast area which includes financial accounting and extends to the functions of a system of cost accountancy, budgetary control and statistical methods. The scope of management accounting includes:1. The management accounting is likely to evaluate the variation by reasons and the accountability and to put forward suitable corrective measures. 2. Analyzing and interpreting accounting and other figures to craft it logically and usable to management. 3. Configuration, installation and operation of accounting cost accounting and information systems, as a result it has to utilize these systems to get together the altering needs the of the management functions. 4. Provide system and techniques to estimate the recital of the right managements in the beam of the objectives of the firm. 5. The management accounting presents the history the figures in such a way as to reproduce the trends of events to the management. 6. Providing mean of communicating management plans to the various levels of the organization and assists the management in directing their activities 7. It is support management in decision making by: a) Providing significant accounting data, b) Analyzing the outcome of alternative proposals on the profits and the situation of the enterprise. 8. Serve Management Needs: Management accountings main function is to assist the management. It presents comprehensive accounting information to the management to the facilitate them to keep useful control over stores and stock, to increase efficiency of the organization and check wastage and losses. The various advantages resulting by the management from a high quality system of accounting are as follows:a) Management accounting helps in organizational efficiency. b) Management accounting check and remover wastages. c) Management accounting formulates comparisons. d) Helps in price fixing. e) Management accounting helps in maximizing profitability.
3

Dr. Ravi Vyas

f) Management accounting protects against Seasonal fluctuations and trade Cycle. g) Management accounting helps in growth of National Economy. h) Management accounting helps in performance appraisal of business. Functions of Management Accounting 1. Provides data: Management accounting serves as a vital source of data for management planning. The accounts and documents are a repository of a vast quantity of data about the past progress of the enterprise, which are a must for making forecasts for the future. 2. Modifies data: The accounting data required for managerial decisions is properly compiled and classified. For example, purchase figures for different months may be classified to know total purchases made during each period product-wise, supplier-wise and territory-wise. 3. Analyses and interprets data: The accounting data is analyzed meaningfully for effective planning and decision-making. For this purpose the data is presented in a comparative form. Ratios are calculated and likely trends are projected. 4. Serves as a means of communicating: Management accounting provides a means of communicating management plans upward, downward and outward through the organization. Initially, it means identifying the feasibility and consistency of the various segments of the plan. At later stages it keeps all parties informed about the plans that have been agreed upon and their roles in these plans. 5. Facilitates control: Management accounting helps in translating given objectives and strategy into specified goals for attainment by a specified time and secures effective accomplishment of these goals in an efficient manner. All this is made possible through budgetary control and standard costing which is an integral part of management accounting. 6. Uses also qualitative information: Management accounting does not restrict itself to financial data for helping the management in decision making but also uses such information which may not be capable of being measured in monetary terms. Such information may be collected form special surveys, statistical compilations, engineering records, etc. Management Accounting and other subjects Management accounting is concerned with presentation of accounting information in the most useful way for the management. Its scope is, therefore, quite vast and includes within its fold

Dr. Ravi Vyas

almost all aspects of business operations. However, the following areas can rightly be identified as falling within the domain of management accounting: 1. Financial Accounting: Management accounting is mainly concerned with the rearrangement of the information provided by financial accounting. Hence, management cannot obtain full control and coordination of operations without a properly designed financial accounting system. 2. Cost Accounting: Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost techniques play a useful role in operation and control of the business undertaking. 3. Revaluation Accounting: This is concerned with ensuring that capital is maintained intact in real terms and profit is calculated with this fact in mind. 4. Budgetary Control: This includes framing of budgets, comparison of actual performance with the budgeted performance, computation of variances, finding of their causes, etc. 5. Inventory Control: It includes control over inventory from the time it is acquired till its final disposal. 6. Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other statistical methods make the information more impressive and intelligible. 7. Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income statements and the related reports, cash flow and funds flow statements, scrap reports, etc. 8. Taxation: This includes computation of income in accordance with the tax laws, filing of returns and making tax payments. 9. Office Services: This includes maintenance of proper data processing and other office management services, reporting on best use of mechanical and electronic devices. 10. Internal Audit: Development of a suitable internal audit system for internal control.

Nature of Management Accounting 1. No Fixed Norms Followed: In financial accounting, we follow different norms and rules for creating ledgers and other account books. But there is no need to follow fixed norms in management accounting. Management accounting tool may be different from one organization to other organization. Using of different tools of management

Dr. Ravi Vyas

accounting is fully dependent on the persons who are using it. So, business policy of each organization affects rules and regulation of applying management accounting. 2. Increase in Efficiency: It is the nature of management accounting that it is used for increasing in the efficiency of organization. It scans the points of inefficiency through analysis of accounting information. By taking action for improving, organization can increase the efficiency. 3. Supplies Information not Decisions: Management accountant supplies accounting facts and information and also provides interpretation, but decision making is fully dependent on higher authorities. Management accounting is just guide. 4. Concerned with Forecasting: It is the temperament of management accounting that it is fully concerned with forecasting. In management accounting, historical accounting information is analyzed through common size financial statement, ratio analysis, fund flow analysis and accounting data tendency for knowing the probability of next fact. So, all these things are especially useful for forecasting. These forecasting may be related with following things a) Sales forecasting b) Production forecasting c) Profitability forecasting d) Cost forecasting Limitations of Management Accounting Management accounting, being comparatively a new discipline, suffers from certain limitations, which limit its effectiveness. These limitations are as follows: 1. Limitations of basic records: Management accounting derives its information from financial accounting, cost accounting and other records. The strength and weakness of the management accounting, therefore, depends upon the strength and weakness of these basic records. In other words, their limitations are also the limitations of management accounting. 2. Persistent efforts. The conclusions draws by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas. 3. Management accounting is only a tool: Management accounting cannot replace the management. Management accountant is only an adviser to the management. The decision regarding implementing his advice is to be taken by the management. There is

Dr. Ravi Vyas

always a temptation to take an easy course of arriving at decision by intuition rather than going by the advice of the management accountant. 4. Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers both monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the conclusions obtained through it. 5. Top-heavy structure: The installation of management accounting system requires heavy costs on account of an elaborate organization and numerous rules and regulations. It can, therefore, be adopted only by big concerns. 6. Opposition to change: Management accounting demands a break away from traditional accounting practices. It calls for a rearrangement of the personnel and their activities, which is generally not like by the people involved. 7. Evolutionary stage: Management accounting is still in its initial stage. It has, therefore, the same impediments as a new discipline will have, e.g., fluidity of concepts, raw techniques and imperfect analytical tools. This all creates doubt about the very utility of management accounting. Functions of Management Accountant It is the duty of the management accountant to keep all levels of management informed of their real position. He has, therefore, varied functions to perform. His important functions can be summarized as follows: 1. Planning: He has to establish, coordinate and administer as an integral part of management, an adequate plan for the control of the operations. Such a plan would include profit planning, programmes of capital investment and financing, sales forecasts, expenses budgets and cost standards. 2. Controlling: He has to compare actual performance with operating plans and standards and to report and interpret the results of operations to all levels of management and the owners of the business. This is done through the compilation of appropriate accounting and statistical records and reports. 3. Coordinating: He consults all segments of management responsible for policy or action. Such consultation might concern any phase of the operation of the business having to do with attainment of objectives and the effectiveness of the organizational structures and policies. 4. Other functions: a) He administers tax policies and procedures. b) He supervises and coordinated the preparation of reports to governmental agencies.
7

Dr. Ravi Vyas

c) He ensures fiscal protection for the assets of the business through adequate internal control and proper insurance coverage. d) He carries out continuous appraisal economic and social forces and the government influences, and interprets their effect on the business.

Dr. Ravi Vyas