1.7 SCOPE OF MANAGEMENT ACCOUNTING
The scope of Management Accounting is very vast as Management Accountancy utilizes the
principles and practices of Financial Accounting and Cost Accounting in addition to other
management techniques for efficient operations of a company. It widely uses different techniques
from various branches of knowledge like Statistics, Mathematics, Economics, Laws and
Psychology to assist the management in its task of maximizing profits or minimizing losses. The
main thrust in Management Accountancy is towards determining policy and formulating plans to
achieve the desired objectives of management. Management Accountancy makes corporate
planning and strategy effective.
i) Financial Accounting
Financial Accounting provides basic historical data which helps management to forecast and plan
its financial activities for the future period. Thus for an effective and successful Management
Accounting, there should be a proper and well designed Financial Accounting system.
ii) Cost Accounting
Cost Accounting provides the most sophisticated techniques like marginal costing, budgetary
control, standard costing etc., which enables Management Accounting to provide necessary
information for effective decision making and control.
iii) Budgetary Control
In order to plan business activities for the future, forecasting and budgeting play a very significant
role. Forecasting helps in the preparation of budgets and budgeting helps management accountant
in exercising budgetary control.
iv) Tax Planning
Tax planning is another important area which has a serious impact on the profitability of the
concer. Without proper planning of tax, the profits of the enterprise are hijacked which affects
adversely the business operations. Hence, it is an important activity of Management Accounting.
v) Reporting to Management
There should be a system of prompt and intelligent reporting to management for effective and
timely decisions. Both routine and special reports are prepared for submission to top management,
middle-order management and operating level management depending on their requirements. This
is an essential part of Management Accounting.
Scanned with CamScannervi) Statistical and Quantitative Techniques
Most of the statistical tools and techniques like linear programming, regression analysis, ctc.,
facilitate in providing information to the management in a meaningful manner for effective control
and decision making.
vii) Inflation Accounting
This is also referred to as revaluation accounting which is concerned with maintaining capital in
real terms and profit is calculated with this fact in mind. This involves the exercise of revaluing the
assets at current prices and shows the increase/decreasce in the value of capital. On the assumption
that the monetary unit value is unstable; the impact on capital is ascertained as a result of changes
in the value of money. This is, therefore, another technique which falls within the orbit of
Management Accounting.
viii) Internal control and Internal Audit
Management accountant heavily depends on internal financial controls like internal audit and
internal check to plug loopholes in the financial system of the concern.
ix) Financial Analysis and Interpretation
Management accountant employs various techniques to analyse and interpret financial data to make
it understandable and useable to the management. Such analysis helps management to achieve
objectives of management in a more efficient manner.
x) Office Services
Management accountant is expected to maintain and control office routines and procedures like
filing, copying, communicating, electronic data processing and other allied services. Thus,
Management Accounting serves not only as a tool in the hands of management, but also provides
for a technique of evaluating the performance of the management itself. It operates as a
double-edged sword assisting the management in the proper performance of its functions of
planning, decision-making and control, and at the same time, enabling the owners and other
interested parties to evaluate and appraise the management of the enterprise.
Scanned with CamScanner3.7 USERS OF FINANCIAL STATEMENTS.
The Financial statements are useful in more than one way to many a category of persons. These
statements which communicate in a classified and analytical fashion the financial and operating
data about the activities of'a concer. They are needed by a variety of people. Some of the users of
accounting information (i.e., financial statements) have a direct interest in the firm while others
have an indirect interest. Persons who are directly interested in the information furnished by the
financial statements are owners, managers, creditors, investors, employees, customers and tax au-
thorities. The indirect users of the financial information include financial analysts, trade unions,
trade associations, etc.
The users of financial statements can also be classified into internal users and external users.
Persons within the concern who make use of the financial information are called internal users. To
them full information about the activities of the concern is available and they can have a full and
detailed analysis of the information so as to have (get) a complete picture of the financial and
operating results and their possible causes. The managers and the owners come under this category.
Other users of the statements are outside users and for them, financial statements act as windows
on the affairs of the enterprise.
The different types of users and the extent of use of financial statements to them are briefly
described here under:
i) Owners: Owners are those who have invested their financial resources in the firm and as such
they have a primary concern and interest in the operational and financial results of the concern.
They would like to know how safe their money is in the hands of management and how profitably
it has been put to use. They would like to be periodically informed of the performance of the firm.
Managers of the firm, as custodians of their investments, must submit periodical financial reports
to the owners. Thus, the financial statements act as reports by the management to the owners about
the financial and operating results of the firm. Through these reports the owners can know the
profit which the concern camed during the given accounting period and the financial position of
their concern at the end of the period. An analysis of the information contained in the financial
statements enables them to decide whether it would be worth continuing their ownership
association with the firm.
) Managers: Managers are responsible for the overal performance of the firm, since the success
or failure of the firm depends upon them. In the case of the corporate type of business concerns
where the ownership is divorced from management, the managers have become all the more im-
portant. They are entrusted withe financial resources contributed by the owners and other suppliers
of funds for effective utilisation. In their pursuit to take the firm to the destination or wealth
maximisation and maximisation of the economie welfare of owners, the managers make several
decisions. If their decisions are to be right and timely, they require the relevant information.
Accounting and its end products (i.c., financial statements) provide the relevant information. The
interest of the managers in the financial statements is direct and they take these statements (and
also other information which may not usually be presented in these statements) as bases for
decision making.
Scanned with CamScanneriii) Creditors: Creditors are suppliers of financial resources to the firm. These are different from
the owners who are also suppliers of funds but who expect a fixed periodical retum (i.e; interest)
on the amounts supplied (lent) and the return of the amount supplied during the life of the business.
The creditors may be trade creditors who offer a ready source of credit to the firm or term lenders
who lend money to the firm for specified periods of time. They are interested in the firm making
profit so that they may regularly receive interest on the sum lent to it and also repayment of the
principal sum. They find the financial statements useful to evaluate the firm’s performance and to
determine the degree of risk to which they are exposed.
iv) Potential Investors: These are the persons who intend to invest in the business firm either as
owners or creditors. These persons use financial statements to know the firm's financial position
and performance. The potential investors are usually interested in the earnings and growth
prospects of the firm. In the case of company form of business concems, they try to analyse the
earnings and dividend relationships, too. The financial statements are of use to these persons in
judging of the worthiness of different holdings and in determining their respective value.
v) Employees and Trade Unions: The financial statements are used by the employees of the firm
and their unions too. On the basis of the information revealed by these statements they can know
how much of the carnings are spent on employees and their welfare and think of bargaing for a
higher share in the form of higher scales of pay, bonus, fringe benefits, better working conditions,
ete, The financial statements are useful to the employees and their economic and social interests.
vi) Customers: Customers are the main targets for every business firm. The products and services
produced/rendered by the firms should cater to the needs of the customers. Customers are
interested in the financial statements because a careful study of these statements provide —_infor-
mation about the prices charged by the firm. A realistic appraisal of the firm’s activities as dis
closed by these statements would enable them to know whether they are charged unduly high rates/
prices and are being exploited and in case they consider it unwarranted, they may mobilise their
strength to represent to the government secking suitable remedial action in the form of — regula-
tion and control or nationalisation.
vii) Government: Gone are the days when the Government was considered to be primarily
concerned with the protection of the country against invasion (defence) and maintenance of law
and order. In the present day world, Governments as the custodians of the general public have
assumed a dynamic role in shaping the econimic activities to take their own course in the hands of
a few, self-interested capitalists, the Governments have started planning, regulating and
controlling the economic activities of the country in a systematic way. To achieve planned and
balance development the Governments have been taking all types of regulatory and control
measures. To make these efforts effective and fruitful require information about the egonimic
activities in the country. The financial statements of the individual business concerns serve as
sources of information on the basis of which the government can formulate suitable policies in this
regard. For the purpose of tax levies, granting subsidies or loans, imposing controls, fixing prices,
offering protection or even nationalisation and taking over management, the Government uses the
financial (statements) information of the business units, as the basis for taking suitable decisions.
Ananalysis of the financial statements also reveals whether there is undue concentration of econimic
power in the hand of a few business persons which the Government should identify at the earliest
and dilute it by suitable diffusion and diversification.
Scanned with CamScanner1.3 EMERGENCE OF MANAGEMENT ACCOUNTING
Management Accounting is one of the branches of accounting. It is of recent origin. To overcome
the limitations of Financial Accounting, Management Accounting came into existence recently.
But some of the clements of Management Accounting are well known to management circle for
quite a long ago. As a separate study on Management Accounting has been recognised recently.
Initially, in the year 1923 James. H. Bliss (UK), originated the idea of Management Accounting
through his books “financial and operating ratios in management” and in the year 1924,
“management through accounts” prescribed the functions of Management Accounting as “placing
before business executives the most complete information on their affairs analysed and interpreted”.
Later, the term was used in 1950 by a team of accountants visiting the U.S.A. under the auspices of
Anglo-American Council on productivity. The terminology of Cost Accounting had no reference to
the word ‘Management Accountancy’ before the visit by this study group. Intensive competitions,
large scale production, dynamic developments in technology and complexities of modem business
have led to the development of Management Accounting to solve many of the problems.
However, According to International Federation of Accountants (IFAC) issued a statement namely,
Management Accounting concepts, summarizing its understanding the scope and purpose of
Management Accounting, accordingly an attempt is made by IFAC to clarify the evolution of
Management Accounting with a view of interesting history and useful set of parameters and
categorised into four stages
The trends of Management Accounting from prior 1950 to by 1995 are grouped as follows:
Stage 1: pre-1950 The focus was on cost determination and financial control, through the use of
budgeting and cost accounting technologies;
Stage 2: By 1965 The focus had shifted to the provision of information for management planning
and control, through the use of such technologies as decision analysis and responsibility
accounting;
Scanned with CamScannerStage 3: By 1985 Attention was focused on the reduction of waste in resources used in business
processes, through the use of process analysis and cost management technologies
Stage 4: By 1995 Attention had shifted to the generation or creation of value through the effective
use of resources, through the use of technologies which examine the drivers of customer value,
shareholder value, and organizational innovation.
The change in every stage represents an adaptation to a new environment faced by organizations in
which the organization has had to reshape and reformulate its strategies to remain competitive in
the market.
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