MANAGEMENT ACCOUNTING UNIT :1

MEANING
Management accounting, also called managerial accounting is the process of analysing
business costs and operations to prepare internal financial report, records, and account to
aid managers’ decision-making process in achieving business goals. In other words, it is the
act of making sense of financial and costing data and translating that data into useful
information for management and officers within an organization.

NATURE
1. To Assist in Planning:

Management Accounting assists the management in planning as well as to formulate

policies by making forecasts about the production, the selling, the inflow and outflow of

cash etc., i.e., in planning a very wide range of activities of the business.

Not only that, it may also forecast how much may be needed for alternative courses of

action or the expected rate of return therefrom and, at the same time, decide upon the

programme of activities to be undertaken.

2. To Assist in Organising:

By preparing budgets and ascertaining specific cost centre, it delivers the resources to each

centre and delegates the respective responsibilities to ensure their proper utilisation. As a

result, an inter-relationship grows among different parts of the enterprise.

3. To Assist in Motivating:

By setting goals, planning the best and economical courses of action and also by measuring

the performances of the employees, it tries to increase their efficiency and, ultimately,

motivate the organisation as a whole.

4. To Coordinate:

It helps the management in coordinating the activities of the enterprise, firstly, by preparing

the functional budgets, then coordinating the whole activity by integrating all functional
budgets into one which goes by the name of ‘Master Budget’. In this way it helps the

management by coordinating the different parts of the enterprise. Besides, overall

coordination is not at all possible without ‘Budgetary Control’.

5. To Control:

The actual work done can be compared with ‘Standards’ to enable the management to

control the performances effectively.

6. To Communicate:

It helps the management in communicating the financial information about the enterprise.

For taking decisions as well as for evaluating business performances, management needs

information. Now, this information is available with the help of reports and statements

which form an integral part of Management Accounting.

7. To Interpret Financial Information:

It is not possible for all concerned to understand clearly the different treatments of

accounting until and unless the users have acquired a sufficient knowledge about the

subject since accounting is a highly technical subject.

And, for the same reason, management may not understand the implications of the

accounting information in its raw form. But this problem does not arise in the case of

Management Accounting as it presents the required information in an intelligible and non-

technical way. This leads the management to interpret financial data, evaluate alternative

courses of action and to take correct decisions.

CHARACTERISTICS/FEATURES

(i) Technique of Selective Nature:

Management Accounting is a technique of selective nature. It takes into consideration only
that data from the income statement and position state merit which is relevant and useful
to the management. Only that information is communicated to the management which is
helpful for taking decisions on various aspects of the business.

(ii) Provides Data and not the Decisions:

The management accountant is not taking any decision bu.: provides data which is helpful to
the management in decision-making. It can inform but cannot prescribe. It is just like a map
which guides the traveller where he will be if he travels in one direction or another. Much
depends on the efficiency and wisdom of the management for utilizing the information
provided by the management accountant.

(iii) Concerned with Future:

Management accounting unlike the financial accounting deals with the forecast with the
future. It helps in planning the future because decisions are always taken for the future
course of action.

(iv) Analysis of Different Variables:

Management accounting helps in analysing the reasons as to why the profit or loss is more
or less as compared to the past period. Moreover, it tries to analyse the effect of different
variables on the profits and profitability of the concern.

(v) No Set Formats for Information:

Management accounting will not provide information in a prescribed proforma like that of
financial accounting. It provides the information to the management in the form which may
be more useful to the management in taking various decisions on the various aspects of the
business.

SCOPE

The scope of management accounting is very wide and broad-based. It includes all
information which is provided to the management for financial analysis and interpretation
of the business operations.

Following field of activities are included in the scope of this subject:

(i) Financial Accounting:
Financial accounting though provides historical information but is very useful for future
planning and financial forecasting. Designing of a proper financial accounting system is a
must for obtaining full control and co-ordination of operations of the business.

(ii) Cost Accounting:
It provides various techniques of costing like marginal costing, standard costing, differential
and opportunity cost analysis, etc., which play a useful role n t operation and control of the
business undertakings.

(iii) Budgeting and Forecasting:

Forecasting on the various aspects of the business is necessary for budgeting. Budgetary
control controls the activities of the business through the operations of budget by
comparing the actual with the budgeted figures, finding out the deviations, analysing the
deviations in order to pinpoint the responsibility and take remedial action so that adverse
things may not happen in future.

Both the techniques are necessary for management accountant.

(iv) Cost Control Procedures:

These procedures are integral part of the management accounting process and includes
inventory control, cost control, labour control, budgetary control and variance analysis, etc.

(v) Reporting:
The management accountant is required to submit reports to the management on the
various aspects of the undertaking. While reporting, he may use statistical tools for
presentation of information as graphs, charts, pictorial presentation, index numbers and
other devices in order to make the information more impressive and intelligent.

(vi) Methods and Procedures:

It includes in its study all those methods and procedures which help the concern to use its
resources in the most efficient and economical manner. It undertakes special cost studies
and estimations and reports on cost volume profit relationship under changing
circumstances.

(vii) Tax Accounting:
It is an integral part of management accounting and includes preparation of income
statement, determination of taxable income and filing up the return of income etc.

(viii) Internal Financial Control:

Management accounting includes the internal control methods like internal audit, efficient
office management, etc.

(ix) Interpretation:
Management accounting is closely related to the interpretation of financial data to the
management and advising them on decision-making.

ADVANTAGES
Management accounting is very beneficial and hence is being used widely now.  The
benefits are as follows:
  Planning

In management accounting, the financial information and non-financial information is

presented at regular intervals say weekly, fortnightly to the management. This presentation
includes forecasts, budgets and in-depth analysis. Hence it assists the management in
planning the business activities.

 Decision making

Since management accounting presents various charts, forecasts and analysis the

management uses it for decision making.

 Identify early signs of problems

If a product is not performing well the management can identify it early on as the accounts
are presented at regular intervals. This will aid in overcoming the constraints early on and
avoiding future losses.  

 Strategic management

Based on the information presented in management accounting, the management can take
decisions about continuing a product or modifying the sale strategy. Since management
accounting is not regulated by any law, the management can decide the areas that require
more analysis, investigation and accordingly draw up strategies.

LIMITATIONS
1. It is based on Financial Accounting: Whatever information the management
according gets, they are of the financial accuracy of the management decisions is based
on the correctness of these information. If financial data is not reliable then management
accounting will not provide correct analysis. this effectiveness limited to the reliability of
those sources.

2. Lack of knowledge: For taking a sound decision it is necessary that the

management must have knowledge of various fields like accounting, statistics,
economics, taxation, production, engineering and so on. But it has been observed that
the person who is taking the decision may not have comprehensive knowledge of all such
subjects. 

3. Lack of continuity and Co-ordination: In order to make the conclusions drawn by

management accountant meaningful, they must be implemented in the organisation at
various levels. But in actual practice they lose their significance because it is not feasible
to implement such conclusions. 
4. Lack of objectivity: There are every possibility of personal bias and manipulations
from the collection of data to the interpretation stage in financial accounting. Thus, it
loses objectivity and validity.

5. Costly: The Instalment of management accounting system in a concern requires

large organisation and a wide network of rules and regulations and thus requires a heavy
investment. 

6. Evolutionary Stage: The management accounting is in a recent origin and still in

an evolutionary stage. New theories and new techniques are being introduced every now
and then. Thus, Essential to keep a continuous track for the latest theories and their
application. 

7. Effect of time element: The information received in management accounting are

all past and by the time the information and statistics are introduced. The situations are
all changed and this condition puts the organisation in difficulties.

DIFFERENCES BETWEEN MA/CA/FA