Meaning and Definitions of Management Accounting

Management accounting may be defined as an art and science to provide information to the management so that they can perform their functions efficiently or simultaneously improve their operating efficiency. In the words of J. Batty, Management Accounting is the term used to describe the accounting methods, systems and techniques, which compiled with special knowledge and ability assist management in its task of maximizing profits or minimizing losses. Other important definitions of management accounting are as follows: Any form of accounting which enables a business to be conducted more efficiently. -Institute of Charatered Accountants of England &Wales Management accounting is concerned with accounting information, that is useful to management. -Robert N. Anthony Management Accounting can be defined as the art of presenting to management such figures, whether in terms of money or other units, as will assist management to do its job. -Bostock Accounting which serves management by providing information as to cost or profit associated with some portion of firms total operations is called management accounting. -Shellinglaw Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for:
1. 2. 3. 4. 5. 6. 7.

Formulating strategy, Planning and controlling activities, Decision-taking, Optimizing the use of resources, Disclosure to shareholders and other external to the entity, Disclosure to the employees, and Safe-guarding assets. CIMA London

It is clear from the above definitions that management accounting is concerned with acquiring data from different sources, classifying, analyzing, interpreting and communicating them to the management so that management can perform its various functions more effectvely and efficiently, i the integral part of management accounting is processing of accounting information and presenting it in such a way so as to assist management in proper functioning of the interprise. The scope of management accounting is not confined to the cost accounting, product pricing and financial accounting. It may include any information that management may require like the information

regarding cost of capital, capital budgeting, adequacy of cash inflows to meet current obligations or trading cycle etc. Management accounting provides accounting information in more systematic and presentable manner to the management so that it may analyse the effects of past on present and future, and on the basis of this, may take strategic decisions for the future. To analyse and show past, present and future trends in most effective manner one should have deep understanding of various subjects viz. economics, psychology, statistics, business and commercial law etc. Thus, the most suitable definition of management accounting may be give as follows: Management accounting is analyzing, interpreting, presenting and communicating the results of financial and cost accounting to the management to enable them in performing various managerial functions. Such as formulation of plans, decision-making, implementation of plan, directing activities of the subordinates and effective controlling of the operations.

Introduction ..
Financial Accounting Accounting is the art of recording, classifying and summarizing in a significant manner and interms of money, transactions and events, which are in part at least, of a financial character, andinterpreting the results thereto. Functions of Financial Accounting 1. Recording the financial transactions 2. Classification 3. Summarizing 4. Concerned only with financial transactions 5. Interpretation Principles of financial accounting A. Accounting Concepts B. Accounting Conventions 1. Business Entity Concept 1. Convention of Disclosure 2. Going concern concept 2. Convention of consistency 3. Cost Concept 3. Convention of Conservation 4. Concept of Dual Aspect 4. Convention of Materiality 5. Money Measurement Concept 6. Accounting Period Concept 7. Realisation Concept 8. Matching of Cost and Revenue Concept Limitations of Financial Accounting

1. Provides only historical data 2. Provides only limited information 3.Provides only quantitative information 4. It will not help for price fixation 5. It will not provide tools for cost control 6. It will not possible to measure the comparative performance 7. It will not provide information to management for planning and decision making. 8. It is possible to manipulate accounts COST ACCOUNTING Cost Accounting emerged as an accounting system to face high competition in the business.In order to withstand competition the concerns have to supply goods at low prices.Companies could be able to supply goods at low prices only be reducing the cost ofproduction. Cost Accounting as a subject is designed to provide many methods andtechniques to reduce the cost of production through various stages of production. 1. Costing 2. Cost Accounting 3. Cost Accountancy Classification of Costs 1. Element wise classification 2. Functional wise classification 3. On the basis of identifiability 4.Behaviour wise classification 5. On the basis of Controllability 6.On the basis of time 7. On the basis of relevancy Element Wise Classification a. Material Cost b. Labour Cost c. Expenses Functional wise Classification a. Production Cost b. Administration Cost c. Selling and Distribution Cost On the basis of Identifiability a. Direct Cost b. Indirect Cost Behaviour wise Classification of Costs a. Fixed Cost b. Variable Cost c. Semi-Variable Cost On the basis of Controllability a. Controllable Costs b. Uncontrollable Costs On the basis of Time a. Historical Costs

b. Pre-determined Costs On the basis of Relevancy a. Relevant Costs b. Irrelevant Costs III MANAGEMENT ACCOUNTING Management Accounting is concerned with the accounting to management. F inancialAccounting and Cost Accounting are not able to provide the relevant information to managementfor managerial planning and decision making. Financial Accounting is providing the historicaldata in account form of Profit and Loss Account and Balance Sheet. Cost Accounting analysesthe different elements related to the cost of production. But these information are not sufficientfor managerial planning and control. Hence, a new accounting system called ManagementAccounting. According to Anglo-American Council on Productivity:Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking. Functions of Management Accounting 1. Provision of Data 2. Modification of Data 3. Analysis and interpretation of Data 4. Communication Function 5. Fix standards at all level 6. Function of Control 7. Provides Qualitative information Scope of Management Accounting 1. Financial Accounting 2. Cost Accounting 3.Statistical Methods 4.Revaluation Accounting 5.Budgetary Control 6.Inventory Control 7.Interim Reporting 8.Internal Audit 9. Taxation 10. Financial Management Utility of Management Accounting 1. Planning 2. Organising 3.Co-ordinating 4.Motivating 5.Communicating 6. Controlling Tools and techniques of Management Accounting 1. Financial Statement Analysis 2. Fund Flow Analysis 3. Cash Flow Analysis 4. Marginal Costing 5. Standard Costing 6.Budgetary Control 7. Revaluation Accounting 8. Management information System

9. Management Reporting Installation of Management Accounting System 1. Preparation of Organisational Manual 2. Appointment and Training of Employees 3. Preparation of forms and Returns 4. Classification and codification of accounts 5. Formulating a suitable system for integration of cost and financial data 6.Setting up of suitable budgetary control system 7.Formulating suitable techniques for standard costing 8. Formulating suitable operational research techniques Limitations of Management Accounting 1. Management Accounting is based on Financial Accounting 2. It is considered only as tool 3. It can be adopted only big concerns 4. Personal judgement 5. Personal Bias 6. Evolutionary Stage 7. Opposition of Change Management Accounting and Financial Accounting 1. Management Accounting is concerned with the preparation of various statement meant fir managerial planning, control and decision making. Hence, it is future oriented. But financial Accounting is concerned with the recording the past events only. 2. Management Accounting aims at providing information for the management. Financial Accounting aims at providing information external to the management, like shareholders, debenture holders, creditors, Government etc. 3. There is no limit in the preparation of accounts and statements in ManagementAccounting. It may be prepared for 15 days or 1 month, 2 months,3 months, etc., as perthe requirements of the management. But, Financial Accounting is prepare only for oneyear. The profit and los account and the balance sheet are prepare at the end of thefinancial year. 4. Management accounting is concerned with quantitative and qualitative information. But Financial Accounting is concerned only with quantitative information. 5. There is no compulsion for the preparation of Management Accounting. Financial Accounting is compulsory according to the companies act 1956. 6. Reports of the Management Accounting are not circulated to external parties. It only provided for the management to take managerial decisions. But the reports of theFinancial Accounting including the Profit and Loss Account and Balance Sheet arecirculated to the external parties also. Management Accounting and Cost Accounting 1. The purpose of Management Accounting is to provide information to the management for decision making. The purpose of cost accounting is ascertainment of cost of each stages for production. 2. Management Accounting purely aims at the future on the basis of past information. Cost Accounting is prepared mainly on the basis of past and less emphasis is given for the future. 3. Management Accounting is prepared without adopting any specific and rigid rules. It may be prepared according to the will of the managerial personnel. But cost Accounting is prepared on the basis of some rules and regulations prescribed by the ICWAI 4. The reports of the Management Accounting are not subject to statutory audit. But the report of the cost accounting is subject to statutory audit. 5. The reports of the Management Accounting are useful only for the internal parties. But the reports of the Cost Accounting are useful both to the internal and external parties.