Ma unit 1

Introduction to Management Accounting
Definition
Management Accounting is that branch of accounting which deals with presenting and providing
accounting information to the management in a systematic way so that it can perform its
management functions of planning, controlling and decision-making in an effective and efficient
manner. It acts as a ‘decision-making support system’ to the management.
It assists the management in creation of policy and day-to-day operation of an undertaking. Thus,
it relates to the use of accounting data collected with the help of financial accounting and cost
accounting for the different purposes such as:
1) Formulation & setting up of plans/ strategies.
2) Planning & controlling the operations of the firm.
3) Taking decisions & selecting the best course of action.
4) Communicating information to the employees.
5) Optimizing the use of resources.
According to American Accounting Association, Management Accounting is “the application
of appropriate techniques and concepts in processing historical and projected economic data of
an entity to assist management in establishing plans for reasonable economic objectives and in
the making of rational decisions with a view towards these objectives”.
Nature of Management Accounting
Management Accounting is the most effective tool of the management for planning and decision-
making. The features of management accounting are as follows:
1) Analysis & Interpretation of data: It deals with the collection of accounting and other
data and analyses, interprets and communicates the relevant information to the
management which is effectively required by the organization for taking decisions on
various aspects of the business.

2) Future-oriented: It is a forward-looking tool of the management. It analyses and
interprets historical data for projecting the future trends of the different activities of the
enterprise.
3) Serves as a yardstick: It acts as a yardstick for measuring the effectiveness of
managerial performance as well as the level of performance of various operational and
non-operational activities of the business.
Scope of Management Accounting
The scope of management accounting covers the following areas:
1) Financial Accounting: Financial Accounting provides historical information useful for
future planning and financial forecasting. Designing a proper financial accounting system
is must for obtaining full control and coordination of operations of the business.
2) Cost Accounting: It provides various techniques of costing like marginal costing,
standard costing, budgetary control, cost-volume-profit analysis etc which play a vital
role in the operation and control of business undertakings and are used in the process of
planning and decision-making.
3) Forecasting and budgeting: Management Accounting exercises the tool of forecasting
and budgeting in the process of planning, controlling and decision-making. Forecasting
makes an estimate of the probable event with a set of given information. Budgeting
prepares a number of plans for any future project by setting definite goals. Forecasting
helps to prepare the budget and budgeting helps to exercise the budgetary control
techniques on future projects.
4) Tax accounting and tax planning: In the process of decision-making, the analysis of
implication of tax provisions on future projects comes under management accounting. In
order to take advantages of various tax provisions, management accountant should have
vast knowledge of tax laws and their accounting procedures to minimize the tax burden
of the enterprise.

5) Internal Control & Audit: Management Accounting highly depends on internal control
system existing in the organization like internal check and internal audit to identify the
weaker sections of the organization.
6) Cost Control Procedures: These procedures are the integral part of the management
accounting process and include inventory control, cost control, budgetary control,
variance analysis etc.
7) Financial Analysis and Interpretation: Various financial analysis techniques such as
Ratio Analysis, Fund Flow Analysis, Trend analysis, Cash Flow Analysis, Comparative
Financial Statement etc are widely used in Management Accounting to analyze and
interpret financial data to make them easily understandable and usable to the
management.
8) Reporting to Management: The Management Accountant is required to submit reports
to the top management, middle management and operating level management depending
upon their requirements on various aspects of the organization.
9) Office Services: Management Accountant is expected to maintain and control office
routines and procedures like filing, copying, communicating, data processing etc.
10) Statistical Tools: Various statistical tools like graphs, charts, diagrams, time series,
regression analysis etc are used in Management Accounting in the process of planning,
controlling and decision-making.
Objectives of Management Accounting
The prime objective of Management Accounting is to provide necessary information to the
management for an effective and efficient execution of managerial functions. Various
objectives of Management Accounting are as follows:
1) Analysis and Interpretation of Financial Statements: Management Accounting
collects analyses and interprets the necessary data from the results shown by financial
and cost accounting system and provides necessary and relevant information to the
management in a systematic and useful manner which is to be applied by the

management in the process of its planning, controlling and decision-making. Various
tools like Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, Comparative
Financial Statement, Common-size Statement and Trend Analysis are widely used in
Management Accounting for analyzing and interpreting those data to make them easily
understandable and usable to the management.
2) Planning and policy-making: Management Accounting provides necessary and relevant
information to the management in the process of its planning and policy-making to
achieve organizational goals. Various statistical forecasting like Time Series Analysis
and Regression Analysis are used in Management Accounting to guide proper planning
and policy- making.
3) Decision-Making: Management Accounting provides necessary and relevant information
to the management in the process of its decision-making. The success of the management
highly depends upon a perfect decision-making. Such decision-making broadly depends
on the effectiveness of information network. Management Accounting provides the above
information to the management by applying Marginal Costing Technique, Differential
Costing Technique and Absorption Costing Technique for effective and accurate
decisions such as pricing of products, make or buy, discontinuance of product line etc.
4) Controlling: Management Accounting applies various useful techniques such as
Standard Costing, Budgetary Control, Responsibility Accounting and Management Audit
to ensure an effective managerial control over the use of resources of the enterprise.
Management control is a control system which assures that the resources of the enterprise
are effectively and efficiently used for achieving its goals and objectives. Management
Accounting plays a significant role to the management in ensuring the existence of a
proper managerial control system.
5) Coordinating: Management Accounting helps the management in coordinating the
activities of the concern by getting prepared functional budgets and then coordinating the
whole activities of the concern by integrating all functional budgets into one known as
master budget. Thus, management accounting is a useful tool in coordinating the various
operations of the business.

6) Communicating: Management Accounting assists the management in communicating
the financial facts about the enterprise to the persons who are interested in these facts so
that they may be guided to a line of action to be pursued. Management needs information
for taking decisions and for evaluating performance of the business. The required
information can be made available to the management by means of reports which are an
integral part of the management accounting. Reports are means of communication of
facts which should be brought to the notice of various levels of management so that they
may be guided for taking suitable action for the purposes of control.
7) Helps in evaluating the efficiency and effectiveness of policies: Management
Accounting also lays emphasis on management audit which means evaluating the
efficiency and effectiveness of management policies. Management policies are reviewed
from time to time to make an improvement in them so that maximum efficiency may be
achieved.
Tools & Techniques of Management Accounting
Management Accounting uses various tools and techniques for providing necessary and effective
information to the management for performing its managerial functions. Various tools and
techniques that are commonly used in Management Accounting are as follows:
1) Financial Statement Analysis: It is a methodical and systematic analysis and
interpretation of the data disclosed in the balance sheet and income statement with a view
to extract necessary and relevant information for proving them to the management for
determining liquidity, solvency, profitability, activity and the managerial performance of
the enterprise. Various tools of financial statement analysis such as Ratio Analysis,
Comparative Financial Statement, Common Size Statement and Trend analysis are
frequently used in Management Accounting for analysis and interpretation of Financial
Statements.
2) Fund Flow Analysis: It is a detailed analysis of inflows and outflows of fund (working
capital) of an enterprise during a particular accounting period. The Fund Flow exhibits
inflows and outflows of fund from various activities of the enterprise. As working capital
is considered as life-blood of every business concern, efficient management of working

capital is highly effective for smooth working of all operating activities of the concern.
For an effective and efficient management of working capital of a concern, Fund Flow
Analysis is frequently used as a tool of Management Accounting.
3) Cash Flow Analysis: It is a detailed analysis of inflows and outflows of cash and cash
equivalents (i.e cash in hand, cash at bank and short-term investments) of an enterprise
during a particular accounting period. Such analysis is done by preparing a Cash Flow
Statement at the end of an accounting period. The Cash Flow Statement so prepared
exhibits the inflows and outflows of cash from various activities of the enterprise. As the
movement of cash is very significant to every business concern, an efficient management
of cash is highly effective for the liquidity planning of the concern. For an effective and
efficient management of cash of a concern, Cash Flow Analysis is frequently used as a
tool of Management Accounting.
4) Budgetary Control: Budgetary Control involves framing of budgets, comparison of
actual results with budgeted estimates, ascertainment of any deviation of actual results
from the budgeted by computation of variances and adoption of necessary remedial
measures against deviations. It is an essential tool widely used in Management
Accounting in the process of its controlling, planning and performance evaluation of an
enterprise.
5) Standard Costing: It is the establishment of standard costs under most efficient
operating conditions, comparison of actual with the standard, calculation and analysis of
variance in order to know the reasons and to pin point the responsibility and to take
remedial action so that adverse things may not happen again. This aspect is necessary to
have cost control.
6) Marginal Costing: The management accountant uses the technique of marginal costing,
differential costing and break-even analysis for cost control, decision making and profit
maximization.
7) Management Reporting: It involves preparation and submission of reports of
performance of various activities of a concern to the management on regular intervals for

its effective planning, controlling, performance evaluation and decision-making.
Management Reporting is widely used as an essential tool in Management Accounting.
8) Statistical and Operations Research techniques: Various statistical and operational
research techniques such as charts, graphs, index numbers time series, trend analysis,
regression analysis etc are frequently used a stools of Management Accounting in its
process of performance evaluation and decision-making.
Advantages of Management Accounting
Management Accounting provides very valuable services to the management in the course of its
functioning. Various advantages of management accounting are as follows:
1) Planning: It formulates policies and programmes by setting definite goals and prepares a
systematic plan for achieving these goals. It makes such plans for achieving
organizational goals and targets.
2) Controlling: It plays a most significant role in the process of controlling. Management
Accounting in the process of controlling involves framing of budgets, comparison of
actual with budgeted estimates, ascertainment of any deviation of actual results from
budgeted estimates by computation of variances and adoption of necessary remedial
measures against such deviation.
3) Coordination: It plays the most vital role in the process of coordinating of different
divisions of an enterprise. Its techniques of planning make a very good coordination
between the various activities of a concern. Proper reporting of different business
activities are also made by Management Accounting through coordination between
various sections of the enterprise.
4) Performance Evaluation: Management Accounting evaluates the performance of
employees of the organization by comparing target estimates with the actual
performances of the employees.
5) Organizing: Management Accounting divides the whole organization into suitable cost or
profit centers. A sound system of internal control and internal audit is assigned to each
cost or profit center for ensuring a planned organizing system.

6) Motivating: It helps the management in the process of motivating the employees by
setting various targets to achieve organizational goals.
7) Communicating: Management Accounting communicates the performances of various
divisions and employees of the enterprise with the help of management information
system to the different levels of the management by preparing reports of performance of
those sections and employees of the enterprise. Such communication is essentially
required for planning, controlling and decision-making of the enterprise.
8) Decision-making: The success of the management highly depends upon the perfect
decision-making and such decision-making depends on the effectiveness of information
network. It provides necessary and relevant information to the management for effective
and accurate decision-making.
Limitations of Management Accounting
Management Accounting suffers from the following limitations:
1) Reliance on accounting data: Management Accounting collects the basic data from
the records maintained by financial and cost accounting, If those basic data are
incorrect, then the entire effort of management accountant becomes useless.
2) Based on historical data: It guides the management in the process of decision-making
for the future activities on the basis of the historical data as supplied by the Financial
Accounting and Cost Accounting. Therefore, the future decisions made on the basis
of historical data may be incorrect.
3) Highly Expensive: the installation of sound Management Accounting System in a
concern is highly expensive as it essentially requires a wide network of management
information system. Moreover, the operating expense of the department is so high
that a small concern cannot afford to install this system.
4) Complicated application: The proper application of management accounting system is
complicated when compares to other branches of accounting because of the usage of
various tools and techniques and also because a number of accounting and non-
accounting subjects are required to be analyzed and interpreted.

5) Lack of objectivity: It uses both quantitative and qualitative data for analyses and
interpretation and prepares reports on the basis of such interpretation. The
information may be influenced by a personal bias of the interpreter, which may
reduce the utility of management accounting.
Limitations of Financial Accounting
1) Financial accounting does not provide timely information: Financial accounting is
designed to supply information in the form of statements (Balance Sheet and Profit and
Loss Account) for a period normally one year. So the information is, at best, of historical
interest and only 'post-mortem' analysis of the past can be conducted. The business
requires timely information at frequent intervals to enable the management to plan and
take corrective action. For example, if a business has budgeted that during the current
year sales should be Rs. 12,00,000 then it requires information whether the sales in the
first month of the year amounted to Rs. 1,00,000 or less or more?
2) Financial accounting ignores important non-monetary information: Financial
accounting does not consider those transactions of non- monetary in nature. For example,
extent of competition faced by the business, technical innovations possessed by the
business, loyalty and efficiency of the employees; changes in the value of money etc. are
the important matters in which management of the business is highly interested but
accounting does not take into account such matters.
3) Financial Accounting does not provide detailed analysis: The information supplied by
the financial accounting is in reality aggregates of the financial transactions during the
course of the year. Of course, it enables to study the overall results of the business the
information is required regarding the cost, revenue and profit of each product but
financial accounting does not provide such detailed information product- wise.

Difference between Financial & Management Accounting
Financial accounting & management accounting are closely interrelated since management
accounting is to a large extent the rearrangement of data provided by financial accounting.
Financial accounting provides historical data which helps management to forecast & plan its
financial activities for the future period. Thus, for an effective & successful management
accounting there should be proper & well-designed financial accounting system. In spite of such
a close relationship there are differences between the two:
S.No. Point of Distinction Financial Accounting Management Accounting
1. Purpose/ Objective The main objective of financial
accounting is to provide
information in the form of profit
& loss account & balance sheet
to external users like
shareholders, creditors etc.
The main objective of management
accounting is to provide useful
information to internal parties i.e. to
the management for planning &
decision-making.
2. Periodicity of
reporting
The financial statements in
financial accounting are prepared
usually annually or half-yearly.
The information provided by
management accounting is available
as and when required by the
management.
3. Regulation &
Standardization
Financial Accounting system is
regulated & standardized by the
Generally Accepted Accounting
Principles.
Management Accounting system is
not regulated by anybody as it is
internal to the management.
4. Type of information Financial Accounting makes useManagement Accounting makes use

of only quantitative information
for making financial statements.
of both quantitative as well as
qualitative information for planning
& decision-making.
5. Legal Compulsion Financial Accounting is
compulsory for any business on
account of the provisions made
by the Companies Act.
Any business is free to install or not
to install the system of management
accounting.
6. Precision The information requires more
precision as it is meant for
external consumption
The information requires less
precision as it is meant for internal
consumption.
7. Audit The financial statements
provided by the business are
compulsorily audited by a
professional called Chartered
Accountant because it is
necessary to provide accurate
information to external users.
The reports provided by the
management accounting system need
not be audited as it is for use by the
internal management.

Ma unit 1

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Ma unit 1