Management Accounting Definition

• Management accounting is the study of the managerial aspect of financial accounting, relating accounting to management function.
• It re-orients the accounting function to fit within management activity, redesigning the accounting system to serve the firm's operational needs.
• Management accounting furnishes definite accounting information, past, present, or future, used as a basis for management decision.
• Financial data are devised and systematically developed into a unique tool for management decision.

Definition of Management Accounting

• The Anglo-American Council of Productivity (1950) defines management accounting as the presentation of accounting information to assist management in policy creation and daily operations.
• R.N. Anthony states that management accounting is concerned with accounting information useful to management.
• J. Batty defines management accounting as the accounting methods, systems, and techniques that, with special knowledge, help management maximize profits or minimize losses.
• According to ICWAI, management accounting is a system of collecting and presenting relevant economic information for planning, controlling, and decision-making.
• The American Accounting Association (AAA) defines management accounting as the application of techniques and concepts to process economic data to assist management in establishing plans for economic objectives to make rational decisions.
• CIMA in the UK defines management accounting as an integral part of management, concerned with identifying, presenting, and interpreting information for strategy, planning, controlling, decision-making, resource optimization, and disclosures.

Scope of Management Accounting

• Management accounting has a widespread scope covering a wide area of accounting system.

Financial Accounting

• Financial accounting provides basic historical data to management accounting.
• Management accounting analyzes and interprets data, providing necessary information for planning, controlling, and decision-making.
• Management Accounting requires an effective Financial Accounting System, but does not maintain financial records directly.

Cost Accounting

• Cost accounting provides cost-related data to management accounting, which then analyzes and interprets it for controlling and decision-making.
• Techniques like Standard Costing and Budgetary Control are used by management accounting in planning, controlling, and decision-making.

Forecasting and Budgeting

• Management accounting uses forecasting and budgeting for planning, controlling, and decision-making.
• Forecasting estimates probable events, and budgeting prepares plans with definite goals.

Statistical Tools

• Management accounting uses tools like graphs, charts, time series, and Regression Analysis for planning, controlling, and decision-making.

Operational Research Techniques

• Techniques like Linear Programming and Simulation Method are used to resolve problems in decision-making.

Financial Analysis and Interpretation

• Techniques like Ratio Analysis, Fund Flow Analysis, and Trend Analysis are used to analyze financial data for management.

Tax Accounting and Tax Planning

• Management accounting involves determining taxable income and tax liability.
• Knowledge of tax laws and tax planning helps minimize the enterprise's tax burden.

Management Information System (MIS)

• Management Information System (MIS) enables quick processing and analysis of large data volumes and provides relevant information for planning, controlling, and decision-making.

Internal Control and Internal Audit

• Management accounting depends on internal control systems to appraise performance and identify weak areas.

Office System

• Management Accounting System should be well-versed with modern office management systems.

Legal Provisions

• Management Accounting System needs to be informed about legal provisions like the Companies Act and Tax Laws.

Other Areas

• Management accounting includes areas like Human Resource Accounting, Social Accounting, Environmental Accounting, and Inflation Accounting.

Role/Function of Management Accounting

• The function is to assist management in planning, organizing, directing, controlling, and decision-making.

Collection of Data

• Management accounting collects basic financial data from financial and cost accounting records.

Supply of Modified Data

• Management accounting modifies raw data by classifying and compiling it for analysis and interpretation.

Analysis and Interpretation of Data

• Analyzing, interpreting, and extracting necessary information to make it understandable for management during planning, controlling, and decision-making occurs.

Planning and Forecasting

• Management accounting formulates plans and supports policy creation by providing relevant information.

Communication

• Management accounting provides a means of communicating plans and actions across the organization.

Ensuring Control

• Ensures control over sections of an enterprise, uses techniques like Budgetary Control, and suggests remedial measures.

Helping in Decision Making

• Management accounting supports effective decision-making by providing relevant information.

Performance Evaluation

• Management accounting evaluates the performance of activities of different divisions as well as the business.

Preparation of Reports

• Management accounting prepares performance reports for management.

Tools and Techniques of Management Accounting

• Management accounting uses various tools and techniques to provide necessary information for managerial functions.

Financial Statement Analysis

• Financial Statement Analysis is a systematic analysis and interpretation of data in financial statements to determine liquidity, solvency, and profitability.
• Tools like Ratio Analysis are commonly used.

Fund Flow Analysis

• Fund Flow Analysis analyzes inflows and outflows of funds during an accounting period.
• It is prepared as a Fund Flow Statement.

Cash Flow Analysis

• Cash Flow Analysis analyzes inflows and outflows of cash and cash equivalents during an accounting period and is prepared as a Cash Flow Statement.

Costing Techniques

• Techniques such as Marginal Costing are used.

Budgetary Control

• Budgetary control involves framing budgets, comparing actual results with budgeted estimates, and taking remedial measures.

Statistical and Operational Research Techniques

• Techniques include charts, graphs, sampling, time series analysis, linear programming, Program Evaluation and Review Technique (PERT).

Responsibility Accounting

• Responsibility accounting involves preparing budgets for responsibility centers and assigning specific responsibilities to managers.

Management Reporting

• Management reporting involves preparing and submitting performance reports to management regularly.

Principles of Management Accounting

• Conventions/principles are regarded as essential in management accounting.

Designing and Controlling

• Accounting information should be designed to meet the needs of the business or specific problems and systems must be flexible.

Management by Exception

• "Principles of Management by Exception" are followed when presenting information to management.
• This assumes plans are predetermined and actual results are compared with expected results.

Control at Source Accounting

• Costs are best controlled at the points at which they are incurred "control at source accounting".

Accounting for Inflation

• A part cannot be said to be earned unless capital is maintained intact in real terms, recognizing that the monetary unit is not stable.

Use of ROI

• Return on capital employed is used as the criterion for measuring the efficiency of the business.

Utility

• Management accounting systems and related forms should only be used if they serve a useful purpose.

Integration

• There should be integration of all management information for maximal use, and accounting services should be provided at a minimum cost.

Absorption of Overhead Cost

• Overhead cost should be apportioned to cost centers and absorbed to production on the basis of benefit received.

Utilisation of Resources

• Management accountancy should endeavour to show utilization of the resources of the business are being used effectively.

Controllable and Uncontrollable Costs

• A clear distinction should be made between controllable and uncontrollable costs.

Forward-Looking Approach

• Management accountants should anticipate problems and prevent them and actual costs should be employed only as measures of achievements realised.

Appropriate Means

• Accountants should make effort to accumulate, record and present the accountancy information in a clear manner.

Personal Contacts

• Personal contacts with departmental managers are important

Differences Between Financial Accounting, Cost Accounting, and Management Accounting

Meaning

• Financial Accounting systematically records transactions with the aim of making profits and financial position.
• Cost Accounting determines the total production cost, cost per unit, and involves cost control and reduction.
• Management Accounting presents accounting in a way that helps management in planning, organizing, controlling, and decision-making.

Scope

• Financial accounting is limited to financial transactions.
• Cost accounting is wider, including more transactions.
• Management accounting is the widest, including all monetary transactions.

Qualification

• Financial accounting work is done by a Chartered Accountant (CA).
• Cost accounting needs a qualification recognized by ICWAI.
• Management accounting is performed by senior management with accounting knowledge.

Period

• Financial and cost accounting collect all transaction information for a year where as management accounting prepares data as per the management of the management which can be less than a year.

Usefulness

• Financial accounting is useful for knowing profit/loss and financial position.
• Cost accounting knows production cost and cost per unit.
• Management accounting useful in various management functions.

Legal Position

• Financial accounting is a necessity whereas cost and management accounting are optionally used.

Status

• Status depends on the type of accounting and the type of work carried out.

Accuracy of Amount

• Financial accounting requires accurate figures.
• Cost accounting to a certain extent requires accurate figures.
• Management accounting is approximated and can use less accurate figures.

The Management Accountant

• The management accountant provides economic and financial data and aids the management team.
• They design and implement a management information system and educate executives in the use of control information.
• Mr. P.L. Tandon compares the management accountant to the spokes in a wheel.
• Dr. Don Barker sees a bright future and opportunities for innovation in the global economic environment for management accountants.

Functions of Management Accountant

• Management accountants has an important role in keeping all levels of management informed.
• Key functions are to establish a plan for controlling operations, to compare performance, coordinate management segments, administer tax policies, protect business assets, and assess economic conditions.

Limitations of Management Accounting

• It relies accounting data and guides managing the future activities based on historical data, with a wide scope including fields with varying levels of information and may be expensive to start.

Advantages of Management Accounting

• Advantages include that accounting assist by making decisions (Pricing, product), planning (profit budget) and by organizing as well as facilitating performance.

Decision Making

• Decision making involves selecting the best among different alternatives.
• Decision-making process includes defining the problem, analyzing the problem, developing alternative solutions, selecting the best solution, converting the decision into action, and ensuring feedback.