introduction to management accounting

INTRODUCTION OF MANAGEMENT AND COST ACCOUNTING

Concept & Meaning of Management Accounting:-

In the simplest form, Management Accounting refers to accounting for management. Top level management has to take a number of decisions for smooth and effective administration and management of the business enterprise. These decisions cannot be taken only on the basis of the whims and fancies of the top level executives. Management accounting helps in taking these decisions by providing the adequate information and analysis necessary to take a good decision.  

Thus, we can say that management accounting is the accounting for top level management to assist them in decision making. We can also say that Management Accounting provides information to the management so that planning, organizing, directing and controlling of the business enterprise can be done in an orderly manner.

Definition of Management Accounting:-

1.      When accounting assumes the function of providing adequate information for management needs, it is called management accounting.

2.      Management accounting is the presentation of the accounting information in such a way to assist management in creation of policy and day to day operation of the business enterprise.

3.      “Management Accounting is the term used to describe accounting methods, systems and techniques which, coupled with special knowledge and ability assist management in its task of maximizing profits and minimizing losses.” – J. BATTY

4.      “Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting.” – THE INSTITUTE OF CHARTERED ACCOUNTANTS OF ENGLAND & WHALES

5.      Management accounting includes the methods and concepts necessary for effective planning for choosing among the alternative business actions and for control through the evaluation and interpretation of performances.” – THE AMERICAN ACCOUNTING ASSOCIATION

Concept & Meaning of Cost Accounting:-

Cost accounting is the process of ascertaining cost from the point at which expenditure is incurred to the ultimate relationship with cost centre. Financial accounting does not provide information relating to the cost aspect of the product and cannot be used to judge the operational efficiency of the organization. Cost accounting makes this judgment easily by analysis of cost. Hence, cost accounting refers to use of accounting information to solve the cost volume and profit related issues of the management. Management Accounting includes cost accounting in itself because it is concerned with overall efficiency of the firm. Thus, we can say that in a way, management accounting is the extension of cost accounting.

Definition of Cost Accounting:-

“Costing is the classifying, recording and appropriate allocation of expenditures for the determination of costs products or services and presenting information in the most suitable manner for proper control and guidance of management.”

Nature or Characteristic of Management Accounting:-

1.      Future Oriented:-

It helps in planning for the future based on the past data and results because decisions are always taken for the future course of action. All the techniques of management accounting are futuristic.

2.      Only Supply Information:-

It only supplies the information to the management. Managers have to apply their skill and capability to take decisions. It is thus, just a mean and not an end. It cannot prescribe future course of action, it depends on the decision making ability of the management.

3.      Increases Efficiency:-

It increases the efficiency in decision making because it has a proper base. All the possible alternatives are analyzed and deeply studied. On the basis of this study only the decisions are taken so they tend to be accurate.

4.      Helps in Decision making:-

Various tools and techniques of management accounting helps in creating proper information bank for the managers to analyze the pros and cons of the problem at hand. Thus, it provides the useful information based on which management can easily take their decisions in due time.

5.      Assist Management:-

It provides all assistance to management in all its functions. By providing the accounting information in the required form and at required time, it enables management to perform its functions efficiently.

6.      Uses accounting data:-

It uses the information contained in the financial accounting and by applying certain tools and techniques makes the accounting data useful.

7.      Art and Science:-

It is an art because extracting only the necessary information from financial accounting requires deep understanding of financial statements and talent. It is a science because before applying any tool or technique it tries to find out the cause and effect relationship of different variables.

8.      Open ended:-

It is open ended because though tools of management accounting are the same their use differs from person to person. Analysis of data depends upon the person using it.

Scope of Management Accounting:-

From understanding of the various definition of management accounting we can say that it is concerned with presenting accounting information to the management in taking important decisions. Its scope s very wide and broad based. It includes within its scope a variety of aspects of business operations. The following are some of the areas of specialization included in management accounting:

1.      Financial Accounting:

Financial accounting is a pre requisite for management accounting. In financial accounting, all the business transactions are recorded and posted in ledger. Thereafter at the end of the year, after preparation of trial balance, financial statements are prepared. Management accounting is the accounting for top level executives to assist them in taking timely decisions. The information in management accounting is extracted from financial data only. Thus, we can say that where financial accounting ends, management accounting begins.

2.      Cost Accounting:

Management accounting borrows certain concepts and systems of cost accounting. Without the use of costing systems such as marginal costing, standard costing, marginal costing and concepts of opportunity cost & differential cost, the management accounting would be incomplete.

3.      Budgeting & Forecasting:

Budgeting means to make an estimate of future activities in advance. Actual actions are taken. Management accounting makes use of budgetary control in taking decisions. Similarly, forecasting refers to prediction of future events well in advance. This will help managers to be prepared for the future happenings. In a way we can say that budgeting and forecasting are the integral part of management accounting. 

4.      Statistics & Mathematics:

Statistical tools such as graphs, charts, diagrams, index numbers, test of significance, tabulation, sampling, correlation analysis, regression analysis etc are helpful in managerial decision making. Similarly certain concepts of mathematics are also used for proper presentation of the information and decision making.

5.      Inventory Control:

It includes control over inventory or stock right from the time the raw material is procured till the finished goods are dispatched for delivery. Concepts of inventory control such as determination of re ordering level, maximum level, minimum level, danger level etc can be used for decision making also.

6.      Reporting:

Management accounting is resorted to generate reports for the top level executives. Proper, accurate and timely reports lead to a good decision. Thus, management accounting is also concerned with proper reporting through proper channel of communication in such a manner that the information contained in the reports becomes easy to understand.

Objectives of Management Accounting:-

1.      To enable management maximize profits and minimize losses.

2.      To assist management in their function of formulating policies, making decisions, planning activities and controlling business operations.

3.      To provide for an information base to the management.

4.      To help in taking strategic decisions.

5.      To help the management in organizing and coordinating various business operations.

Functions of Management Accounting (Role of management accounting):-

The basic function of management accounting is to assist management in performing its functions effectively. Management accounting plays a very important role in decision making. It performs the following functions:

1.      Modification of data: Accounting data as such are not directly useful to manager in taking decision. Management accounting modifies the available information in such a way that they become useful in decision making.

2.      Planning & Forecasting: Management accounting greatly help in planning and formulation of strategy by supplying a logical base on which future decisions can be taken. Management accounting provides necessary information and data for forecasting. It uses various techniques such as budgeting, standard costing, marginal costing, trend, correlation etc. Thus, it helps in planning and forecasting.

3.      Financial Analysis & Interpretation: Management accounting selects useful data, analyses it and presents the interpretation before management in a non technical manner along with comments and suggestions. Thus, analysis and interpretation becomes easy on the part of the management.  

4.      Communication: Management accounting establishes communication within the organization and with outside world. It provides the various levels of management with the information necessary to take decisions. Thus, it enhances the quality of communication.

5.      Controlling: Management accounting is very useful in controlling performance. Management accounting uses the techniques of standard costing and budgeting to ensure proper control of all the activities of the business.

6.      Qualitative Aspects: All the decisions of the business enterprise are not related to finance. There are other areas of decision making also where financial data is inadequate for taking decisions. Management accounting does not restrict itself to financial data only. Other areas are also analyzed and deeply researched. Thus, management accounting uses both qualitative as well as quantitative data for decision making.

7.      Decision making: Management accounting supplies analytical information regarding various alternatives and the choice of management is made easy.

Advantages of Management Accounting:-

1.      It increases the efficiency of various business functions.

2.      It helps management in taking policy decisions at each and every step.

3.      All the activities of the business enterprise are planned in a systematic manner.

4.      The tools and techniques of management accounting provide validity, objectivity and reliability in business management.

5.      It helps in maintaining proper control over business on the whole.

6.      Correction measures can be undertaken in case of any discrepancies observed.

7.      It helps in proper communication of information at all the levels.

8.      It increases the efficiency of the entire organization.

Limitations of Management Accounting:-

1.      The correctness of the management accounting depends on the correctness of the basic records which are used.

2.      There is a need for continuous and coordinated efforts of each management level to execute the result of management accounting.

3.      It is very costly.

4.      Interpretation of financial data depends upon the expertise and capacity of the interpreter so personal prejudices might hamper the decision making process.

5.      Management accounting as a discipline is still in its preliminary phase and is still evolving.

6.      It can only inform not prescribe.

7.      Since the scope of management accounting is very wide and information and data are collected from numerous places inexactness and subjectivity might creep in.

8.      The results obtained from management accounting are only tentative and the decision taken on the basis might fail. Decisions are not full proof.

Advantages of Cost Accounting:-

1.      It helps in ascertainment of cost.

2.      It helps in determination of selling price.

3.      It helps in controlling cost.

4.      It helps in decision making. Specially the decision directly pertaining to production aspects.

Limitations of Cost Accounting:-

1.      It lacks uniform procedure.

2.      There are widely recognized cost concepts but understood and applied differently by different industries.

3.      It can be used only by large manufacturing units.

4.      It is very costly.

Difference between Financial Accounting and Management Accounting:-

SR.	POINT	FA	MA
1	Objective	To make periodical reports to owners, creditors & government.	To assist management in taking strategic decisions.
2	Type of report	External reporting to the outsiders i.e. to shareholders, creditors, government & employees	Internal reporting to the insiders i.e. the board of directors and other managers
3	Data used	Historical, quantitative, monetary & objective	Descriptive, statistical, subjective & futuristic
4	Subject matter	Position & overall performance of the business	Feasibility and significance of the task at hand
5	Legal compulsion	Statutory for all the businesses	Adopted voluntarily to increase the efficiency
6	Period covered	Generally a year	Depends upon the decision to be taken
7	Communication of result	Comparatively slow	Immediate and prompt
8	Precision	Compulsory to record perfect and accurate figures	Approximate and rounded off figures can also be used
9	Coverage	Covers entire range of business activities	Considers only part of activities relevant for decision making
10	Publication	Accounts are published for general public and circulated freely	Accounts are revealed only to the top level management
11	Accounting principles	It is governed by generally accepted accounting principles and conventions	No such set of principles are followed.

Difference between Management Accounting and Cost Accounting:-

SR	POINT	CA	MA
1	Object	To determine and record the cost of producing a product or providing service	To provide information to the management for taking efficient business decision.
2	Nature	Based on past data and present facts and figures	Deals with future projection and plans on the basis of past and present data
3	Principles	Certain principles and procedures are followed like preparation of cost sheet etc	No stereotype or tailor made procedures are followed
4	Data used	Only quantitative	Both qualitative as well as quantitative
5	Parties	Used by both internal as well as external parties	Used only by management personnel

Installation of Management Accounting System:-

Following steps should be undertaken to install management accounting system in the business organization:

1.      Organizational manual should be drafted and adopted for the entire organization. It should contain explanations of the duties and responsibilities of each level of management.

2.      Pro forma or formats of various types of statements and reports must be designed and used uniformly.

3.      Financial accounting and cost accounting should be integrated.

4.      Responsibility centers should be set up for assignment of responsibilities.

5.      Techniques of standard costing should be adopted to measure the actual performance and then compare it with the standards set.

6.      The system of budget and budgetary control should be introduced.

7.      Appropriate staff should be hired and trained to work efficiently.

8.      Knowledge and preparation for operational research techniques is must.

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