Introduction To Management Accounting PDF

1 1 INTRODUCTION TO MANAGEMENT ACCOUNTING Unit Structure : 1.0 Objectives 1.1 Introduction 1.2 Meaning and Nature of Management Accounting 1.2.1 Meaning and Definition 1.2.2 Nature of Manag...

1 1 INTRODUCTION TO MANAGEMENT ACCOUNTING Unit Structure : 1.0 Objectives 1.1 Introduction 1.2 Meaning and Nature of Management Accounting 1.2.1 Meaning and Definition 1.2.2 Nature of Management Accounting 1.3 Function of Management Accounting 1.4 Scope of Management Accounting 1.5 Difference between Management Accounting and Financial Accounting 1.6 Exercise 1.0 OBJECTIVES After studying the unit the students will be able to:  Define the term Management accounting.  Explain the nature and functions of Management Accounting  Discuss the role of management accountant.  Explain the difference between Management accounting and financial accounting.  Understand the limitations of MA. 1.1 INTRODUCTION Management accounting can be viewed as Management-oriented Accounting. Basically it is the study of managerial aspect of financial accounting, "accounting in relation to management function”. It shows how the accounting function can be re-oriented so as to fit it within the framework of management activity. The primary task of management accounting is, therefore, to redesign the entire accounting system so that it may serve the operational needs of the firm. If furnishes definite accounting information, past, present or future, which may be used as a basis for management action. The financial data are so devised and systematically development that they become a unique tool for management decision.  2 1.2 MEANING AND NATURE OF MANAGEMENT ACCOUNTING 1.2.1 Meaning and Definition The term "Management Accounting”, observes Broad and Carmichael covers 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. The Report of the Anglo-American Council of Productivity (1950) has also given a definition of management accounting, which has been widely accepted. According to it, "Management accounting is the presentation of accounting information in such a way as to assist the management in creation of policy and the day to day operation of an undertaking". The reasoning added to this statement was, "the technique of accounting is of extreme importance because it works in the most nearly universal medium available for the expression of facts, so that facts of great diversity can be represented in the same picture. It is not the production of these pictures that is a function of management but the use of them." An analysis of the above definition shows that management needs information for better decision-making and effectiveness. The collection and presentation of such information come within the area of management accounting. Thus, accounting information should be recorded and presented in the form of reports at such frequent intervals, as the management may want. These reports present a systematic review of past events as well as an analytical survey of current economic trends. Such reports are mainly suggestive in approach and the data contained in them are quite up to date. The accounting data so supplied thus provide the informational basis of action. The quality of information so supplied depends upon its usefulness to management in decision-making. 1.2.2 Nature of Management Accounting Following points explains the nature of Management Accounting: 1. The term management accounting is composed of 'management' and 'accounting'. The word 'management' here does not signify only the top management but the entire personnel charged with the authority and responsibility of operating an enterprise. 2. The task of management accounting involves furnishing accounting information to the management, which may base its decisions on it. 3. It is through management accounting that the management gets the tools for an analysis of its administrative action and can lay suitable stress on the possible alternatives in terms of costs,  3 prices and profits, etc. but it should be understood that the accounting information supplied to management is not the sole basis for managerial decisions. 4. Along with the accounting information, management takes into consideration or weighs other factors concerning actual execution. For reaching a final decision, management has to apply its common sense, foresight, knowledge and experience of operating an enterprise, in addition to the information that is already has. 5. The word 'accounting' used in this phrase should not lead us to believe that it is restricted to a mere record of business transactions i.e., book keeping only. 6. Management accounting has no set principles such as the double entry system of bookkeeping. In place of generally accepted accounting principles, the philosophy of cost benefit analysis is the core guide of this discipline. It says that no accounting system is good or bad but is can be considered desirable so long as it brings incremental benefits in excess of its incremental costs. 1.3 FUNCTIONS OF MANAGEMENT ACCOUNTING The basic function of management accounting is to assist the management in performing its functions effectively. The functions of the management are planning, organizing, directing and controlling. Management accounting helps in the performance of each of these functions in the following ways: 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  4 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. 1.4 SCOPE OF MANAGEMENT ACCOUNTING 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 almost all aspects of business operations. However, the following areas can rightly be identified as falling within the ambit 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.  5 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. CHECK YOUR PROGRESS 1. “The basic function of management accounting is to assist the management in performing its functions effectively”. Discuss. 2. Enlist the points explaining the scope of Management Accounting. 1.5 DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING Financial accounting and management accounting are closely interrelated since management accounting is to a large extent rearrangement of the data provided by financial accounting. Moreover, all accounting is financial in the sense that all accounting systems are in monetary terms and management is responsible for the contents of the financial accounting statements. In spite of such a close relationship between the two, there are certain fundamental differences. These differences can be laid down as follows: