MANAGEMENT ACCOUNTING

Accounting
Accounting is a business language. Accounting is defined as a system for collecting, summarizing, analyzing, presenting and reporting, in monetary terms, any relevant information about the enterprise. As a business language, accounting communicates about business transactions and its results on various interested parties.

Branches of Accounting

The three main branches of accounting are : (1) Financial Accounting ; (2) Cost Accounting; and (3) Management Accounting.

Financial Accounting
Financial Accounting records monetary transactions, accounts, prepares and necessary interprets analyses

financial statements.

It reveals the

financial position of a business over a particular period of time.

Cost Accounting
Cost Accounting may be regarded as a specialized branch of accounting which involves classification, accumulation, assignment and control of costs.

Management Accounting
Management
accounting assist them in Accounting information their is to

concerned with the presentation of management in such a way as to

managerial

functions

of

decision-making,

planning and control.

Management accounting Defined

Management accounting is a system

of to

collection an

and

presentation for

of

relevant economic information relating

enterprise

planning,

controlling and decision-making.

[I.C.W.A.I., India]

The main purposes of Management Accounting

To provide management with financial data, cost data and other qualitative information for planning and decisionmaking; To express financially the plans in terms of individual responsibilities for all levels of management; To get an insight into the profitability, solvency, liquidity, etc., of the organisation; To measure and interpret the results of operations at all levels of management with necessary comments and conclusions; To report on the effectiveness of the organisation as regards utilization of resources; To meet the changing needs of management functions.

Nature of Management Accounting

The nature of management accounting can be enumerated as follows : Advisory nature : It provides relevant information to the management to achieve an organization's strategic, tactical and operating objectives. It gets an insight into the profitability, solvency, liquidity, etc., of the organisation and renders advise to the management on these matters.

 Analytical in nature : Management accounting is analytical in nature. It analyses and interprets accounting and other data to make them understandable and usable to the management. Such an in-depth analysis assists the management in pinpointing responsibilities and to effect necessary changes in the organizational set up. Interpreting results of operation : It measures and interprets the results of operations to all levels of management with necessary comments and conclusions. Aid to the management : It provides both quantitative and qualitative information to the management to assist them in their managerial functions of decision making, planning and control.

contd..

Contd..
Feedback control : It expresses financially the plans in terms of individual responsibilities for all levels of management. It develops a chain of responsibility reporting and monitors performance against plans. Future-oriented : Management accounting is forwardlooking and dynamic. It processes historical data for projecting future trends in order to take better decisions. Absence of standard format : There is no standard format to present management accounting information. Management accountant prepares formats according to the demands of a situation. Thus, the style of presentation of information is tailored to the requirement of a situation. Selective approach : It takes into account only relevant information which affects decision-making from voluminous financial and cost data. It provides useful and understandable information to the management for their proper decisionmaking.

Scope of Management Accounting

Financial Accounting : Management accounting data is mostly derived from financial accounting. Management accounting has its roots in financial accounting. Management accounting uses the principles and practices of financial accounting. Cost Accounting : Management accounting involves the application of appropriate techniques and concepts drawn from cost accounting. Management accounting can be viewed as an extension of managerial aspects of cost accounting. However, the scope of management accounting is broader than the scope of cost accounting.

cont..
Management Information System (MIS) : MIS provides relevant information to the management for its decision-making. Computers have added a new dimension to MIS by facilitating the processing of large volumes of data with great speed and accuracy. MIS is expected to supply information as needed at different levels in the organization. Quantitative Techniques : Operations research (OR) technique is used by management accountants to solve the existing problems in the decision-making process. In a decision-making situation, all variables are quantified for the purpose of analysis. Capital Budgeting, Ratios Analysis, FFS & CFS are important techniques applied for decision-making.

cont
Benchmarking Technique : Benchmarking is the process of studying and adapting the best practices of competing organisations to improve the organisation's own performance. Benchmarking helps to understand one's own performance against the best practice in the industry. Benchmarking is a modern technique for strategic improvement. Total Quality Management (TQM) : Total quality is an approach to a continuous improvement in products, services, people, processes and environment. This approach is used in management accounting to maximise an organisations' competitiveness.

cont
Management By Objectives (MBO) : MBO is a technique which helps a manager to achieve his objectives in an efficient manner. MBO leads to effective management by integrating the goals of an organisation and individuals. It increases the organisational capability of achieving goals at all levels through a high degree of satisfaction of employees. Management Reporting : It provides relevant information to various levels of management in the forms of reports at regular intervals. It supplies data for policy making and operating decisions. It is the instrument for making decisions and controls effective. Management reports are used internally and are the subject matter of management accounting.

Objectives of Management Accounting

Interpretation of financial results : Management accounting analyses and interprets the financial results of the concern. Various tools (such as ratio analysis, fund-flow statement, etc.) are used by the management accountant for analysing and interpreting the financial position of the organisation. Proper planning : Management accounting helps in the preparation of plans and policies of an organisation. Management accountant uses various forecasting techniques (such as Regression analysis, Time series analysis, etc.) to predict future trends. Forecasting is necessary for a planning process.

cont..1.
Proper control : Management control is a process that assures resources are used effectively and efficiently for achieving the objectives of the organisation. The management accountant uses various techniques for ensuring efficient managerial control (such as standard costing, budgetary control, internal audit, responsibility accounting, management audit, etc.). Proper communication : Communication has become an essence of management. Management functions cannot be performed efficiently without an effective network of communication in the organisation.

 Making decisions : Decision-making is necessary for the effective functioning of management. The success of management depends upon the quality of any decision. The management accountant helps the management in taking various decisions (by applying marginal costing, differential costing, etc.). Tax planning : The management accountant helps the management in determining various tax reliefs and rebates. He assists the management in tax planning, computation of different tax liabilities and reduction of burden of tax.

Objectives of Management Accounting cont..2.

Differences between Management Accounting and Financial Accounting

Differences between Financial A/cting and Management A/cting

Points of Distinction

Financial Accounting

Management Accounting

Basic function

Recording of monetary transactions and publication of financial statements.

Supporting decisions of the management by providing relevant information. For use of internal parties only.

Party to be served

For use of external parties (may also be used by internal parties).

Format of reports

Format is specified by the relevant provisions of the Companies Act.

Format is tailored to the requirement

Differences between Financial A/cting and Management A/cting

Points of Distinction

Financial Accounting

Management Accounting

Objectivity of Report is supported by reports relevant figures. It lays emphasis on objectivity of data. Auditing of reports Financial reports are subject to statutory audit.

Reports may contain both the objective and subjective figures. Management reports are not subject to statutory audit.

Publication of Annual reports are to be reports published for circulation among external parties.

Management reports are meant for internal use only.

Differences between Financial A/cting and Management A/cting

Points of Distinction

Financial Accounting

Management Accounting

Period of coverage
Availability of reports

Usually one year.

Publicly available.

As required by the management.

Confidential in nature. Detailed study of a segment.

Unit of study Overall performance of the organisation. Governed by

Companies Act.

Needs of managers.

Differences between Cost Accounting and Financial Accounting

Differences between Cost Accounting and Financial Accounting

Points of Distinction

Financial Accounting

Cost Accounting

Applicability Financial Accounting is applicable to all types of accounting entities. Principles followed It adheres to Generally Accepted Accounting Principles (GAAP).

Cost Accounting is applicable to manufacturing concerns. It adheres to costing concepts and principles. It measures the cost of each product line, department, process, etc.

It measures the financial Scope of measuremen performance of the entity as a whole during a t particular period.

Differences between Cost Accounting and Financial Accounting

Points of Distinction

Financial Accounting

Cost Accounting

Periodicity of Financial reports are prepared periodically, reporting usually at the end of an accounting period. Financial Accounts are Requirement prepared according to the served requirements of the Companies Act and Income Tax Act.

Cost reporting is a continuous process and it may be prepared as and when desired (either weekly or monthly, etc.) Cost Accounts are kept as per the requirement of Management.

System of control

It does not attach importance to control during transactions.

It provides for a detailed system of controls with the help of certain special techniques (like Standard Costing, Budgetary Control, etc.)

Differences between Cost Accounting and Financial Accounting

Points of Distinction

Financial Accounting It does not bring out areas which need correction and improvement. It is mainly meant for providing information to shareholders, creditors, government, employees, etc. It deals mainly with actual figures and, thus, it is historical in approach.

Cost Accounting It measures the cost of each product line, department, process, etc. Cost Accounts are kept as per the requirement of Management.

Scope of correction Party to be served

Nature of approach

Valuation of stock

Cost reporting is a continuous process and it may be prepared as and when desired (either daily or weekly or monthly, etc.) Stocks are always valued at cost.

Stocks are valued at cost or market price, whichever is lower.

Differences between Cost Accounting and Financial Accounting

Points of Distinction

Financial Accounting

Cost Accounting

Statutory need

Analysis of Profit
Control aspect

Nature of analyses

It is not compulsory It is compulsory to meet the requirements of the Companies It helps in the measurement of Act, Income Tax Act, etc. shortfall and failure which need immediate management It fails to show profit for each product, department, process,, action. etc. It is mainly meant for providing It does not provide for adequate detailed cost information to the management. Therefore, control on expenses. cost information are not meant for outsiders. It is concerned with historical It deals partly with actual transactions only (i.e. postfigures (i.e., historical data) and mortem analysis). partly with estimates.

Differences between Cost Accounting and Management Accounting

Differences between Cost Accounting and Management Accounting

Points of Distinction

Cost Accounting

Management Accounting

Principles followed

It uses the principles and practices of Cost Accounting.

It uses the principles and practices of both Cost and Financial Accounting. It looks ahead through long-term planning apart from current operations. It is an extension of managerial aspects of Cost Accounting. The primary object is to provide the relevant information to the management to take an appropriate decision.

Nature of approach
Scope of study Primary objective

It generally deals with current operations.

It is a complement of Management Accounting. The primary object is to ascertain the cost of a product (or service) and to control the cost after careful analysis.

Differences between Cost Accounting and Management Accounting

Points of Distinction

Cost Accounting

Management Accounting

Main emphasis

Contents of report

System of recording

Basis of work

The main emphasis is on cost determination and cost control. Cost Accountant compares Actual Cost with Standard Cost and submits reports to the management regarding variances for appropriate action. Double entry system of recording transactions can be adopted. Cost accountant is to work through set routines, budgets and standards.

The main emphasis is on the efficient operation of business. Management Accountant not only makes variance analysis but also suggests the ways and means for improving operations. Double entry system is not adopted while submitting reports to the management. Management accountant concentrates on matters relating to finance, profitability and productivity.

Differences between Cost Accounting and Management Accounting

Points of Distinction

Cost Accounting

Management Accounting

Statutory verification

Cost accounts and reports are Management reports are subject to statutory not subject to any statutory verification (i.e. cost audit). audit. Cost reports are meant for Management reports are management and even useful useful only to the to external parties. management. It uses quantitative cost data only.

Utility of reports

Type of data used

It uses both quantitative and qualitative data.

Accounting period

It is done for a specific accounting period.

It does not follow any specific accounting period as such.

Differences between Cost Accounting and Management Accounting

Points of Distinction

Cost Accounting

Management Accounting

Coverage of data

It uses quantitative cost data only. It is done for a specific accounting period. It deals with cost data only. It derives data from financial records. It is concerned with shortterm planning.

It deals with both cost and finance-related data.

Derivation of data Term of Planning

It derives data from both financial records and cost records. It is equally concerned with short-term and long-term planning. It cannot be installed without a proper cost accounting system.

Installation of the

It can be installed without management accounting system.

Needs Determine the Form of Accounting Data

Managers need changing information to meet changing needs!
Types of Accounting Systems
Financial Accounting Rules and procedures Accounting information systems and internal controls Auditing Cost Accounting Product costing Activity-based costing

 Management Accounting

Decision support Organizational control Cost management Profit management Investment management Tax Accounting
Individuals Partnerships and corporations Estate and trusts International taxation Special tax issues and topics

New Management Trends to Create Value

Encourage Management Accounting Systems Redesign, for example.
Customer focus Quality focus Delivery focus Outsourcing and the virtual company Communications Shortening product life cycles Team development Deregulation in the service sector