UNIT 1 INTRODUCTION TO MANAGEMENT ACCOUNTING

Objectives

After going through this unit, you will be able to:

 Explain scope of Management Accounting
 Distinguish between:
a. Management Accounting & Financial Accounting,
b. Management Accounting & Cost Accounting,
c. Management Accounting & Financial Management

Structure
1.1 Introduction
1.2 Definition of Management Accounting
1.3 Scope of Management Accounting
1.4 Significance of Management Accounting
1.5 Financial Accounting Vs Management Accounting
1.6 Cost Accounting Vs Management Accounting
1.7 Financial Management Vs Management Accounting
1.8 Summary
1.9 Self Assessment Questions

1.1 INTRODUCTION

In last few years many changes have taken place in Global & Indian economy. Corporate
environment is becoming extremely dynamic day by day. There are many opportunities as well as
challenges for every business. Companies have to continuously improve their products &
processes to gain sustainable competitive advantage. Companies are evolving market driven
strategies so as to give maximum satisfaction to customer & win the market. Companies are
improving their accounting information system so that information is available for decision
making & control. Management accounting is the use of accounting information to achieve
corporate excellence

1.2 DEFINITION OF MANAGEMENT ACCOUNTING

1. International Federation of Accountant (IFAC) has defined Management Accounting process
as “the process of Identification, Measurement, Accumulation, Analysis Preparation, and
Interpretation & Communication of information both financial and operating used by
management to plan, evaluate and control within an organization and to assure use of and
accountability for its resources.
2. As per international Federation of Accountants “Management Accounting is the process of:
Identification, measurement, recognition and valuation of business transactions or other
economic events that have occurred or may occur.Accumulation i.e. disciplined and consistent

1
 approach to recording and classifying appropriate business transactions and other economic
events.
3. Analysis i.e. identifying the reasons for and the relationship of business activities with
economic events and circumstances.
4. Preparation and Interpretation i.e. meaningful coordination of accounting and /or planning
data to satisfy a specific need of management & present information in logical format and
draw appropriate conclusions drawn from that data.
Communication i.e. reporting of pertinent information to management and other internal and
external users.
5. ICWAI published Glossary of Management accounting terms defines Management Accounting
as “a system of collection and presentation of relevant economic information relating to an
enterprise for Planning, Controlling and Decision making”.
6. Official Terminology of CIMA has defined Management Accounting as “ the provision of
information required by management for following purposes Formulation of policies
1. Planning and controlling the activities of the enterprise
2. Decision taking on alternative course of action
3. Disclosure to those external to the entity (shareholders and others )
4. Disclosure to employees
5. Safeguarding Assets”.
7. American Accounting Association defines Management Accounting as “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.”

Above definitions highlight following features of Management Accounting:

1) Prepares & communicates financial & operational information to management for
planning, controlling & optimum use of available resources.
2) Accumulation, analysis & communication of accounting information to managers & others
for improving the management process.
3) Collecting , analysis & communicating economic information of company for:
a. Planning
b. Controlling
c. Decision making
d. Policy formulation
e. Safeguarding assets of Company.
f. Achieving economic objectives of Company.
g. Increasing organizational effectiveness.

1.3 SCOPE OF MANAGEMENT ACCOUNTING

1. Management Accounting includes:
i. Financial Accounting
ii. Cost Accounting
iii. Financial Management
2. It ensures both statutory as well as internal control requirements relating to financial
information of a company.

2
3. Scope of Management Accounting includes :
A) Management Information System (M.I.S.).
i) To Establish & Operate Accounting Information System.
ii) To Establish & Operate Costing Information System.
iii) To Establish & Operate Management Information System (M.I.S.)
iv) To Establish & Operate Tax Management System.
v) To Compile & Maintain Vital Data Required for Planning
B) Management by Exception
This involves installation of effective feedback system which is useful for controlling
various activities of the company. Management accountant analyses & reports the
deviations from expected results, identifies reasons for such deviations & highlights the
corrective measures wherever necessary. Reporting is done only for those areas which
are not giving expected results.
C) Management by Objective
Every manager must perform his functions & every activity must be carried out in such a
way that it is useful for achieving organizational objectives. Management accounting
provides necessary information system for this.
D) Communication System
To provide appropriate system & procedure for properly communicating plans of
management to various levels of organization. This helps in achieving coordination of
various activities of organization & useful in defining role of individual activity in overall
plans of company. Both these functions are necessary for directing the efforts of various
individuals towards objectives of organization.
E) Analysis & Interpretation
Management accounting analyses accounting, costing & financial data of company &
interprets this data which is useful for decision making and control. For this, techniques
such as marginal costing, standard costing, budgetary control, financial analysis & ratio
analysis have been used by management accountant.

1.4 SIGNIFICANCE OF MANAGEMENT ACCOUNTING

Management accounting is a powerful tool available to management to improve efficiency &

profitability of organization. It is useful to management in following areas:
i) Establish, coordinate & administer plans of company to be useful for profit planning,
capital budgeting & financing of business.
ii) It highlights deviations from standards, which can be analyzed for corrective actions &
fixing responsibilities as well as for evaluation of divisional performance.
iii) Internal audit is useful for protecting business assets.
iv) It provides information relating to external and internal environment of business. This
information is vital for formulating strategies & polices of company
v) Marginal costing technique is useful for taking many vital decisions such as product mix,
make or buy, continue operations or shut down, and so on.
vi) Financial analysis is useful to know trend of profitability, solvency & liquidity of company.

3
 vii) Ratio analysis indicates financing pattern, solvency, and liquidity, and profitability,
effective use of available resources, financial strength & market value of company’s
shares.

1.5 FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING

1. Financial Accounting is governed by statutory framework. Financial statements must be

prepared within the framework of Companies Act. And Income Tax Act. Management
accounting has no statutory requirements
2. Basic function of Financial Accounting is to record the transactions of the business, to prepare
& publish financial statements to be used by internal as well as external users for their decision
making.
3. Basic function of Management Accounting is to prepare M.I.S. reports to be used by
management for decision making & controlling of business.
4. Information given by Financial Accounting is publicly available to anybody Information given
by Management Accounting is confidential and is available only to management of company.
5. Financial statements given by Financial Accounting are to be made available as & when
required by the Act.
6. Management Accounting reports are to be made available as and when required by
management of company.
7. Reports generated by Financial Accounting are detailed and accurate but they are generated
slowly.
8. Reports generated by management accounting are fast but approximate.
9. Financial accounting provides the information for entire company. Management accounting
provides the information for various segments of company.
10. Format of financial accounting reports is standardized as per provisions of Companies Act.
11. Format of management accounting reports is tailor made as per requirements of
management.

1.6 COST ACCOUNTING VS. MANAGEMENT ACCOUNTING

1. Cost Accounting is concerned more with the ascertainment, allocation, distribution and
accounting aspects of costs.
Management accounting is concerned more with impact and effect aspect of costs.
2. Cost Accounting data serves as a base to which the tools and techniques of management
accounting can be applied.
The Management Accounting data is derived, both from the cost accounts and financial
accounts.
3. Management Accountant is generally placed at a higher level of hierarchy than the Cost
Accountant.
4. The approach of Cost Accountant is much narrower than that of Management Accountant,
who may have to use certain economic and statistical data along with the costing data to

4
 enable the management to be more accurate and precise in its functions of planning, decision
making and control.
5. Management Accounting, in addition to the tools and techniques like marginal costing, break-
even analysis, budgetary control, standard costing, etc. available to cost accounting, also make
use of other techniques like funds flow, cash flow, ratio analysis etc. which are not within the
scope of cost accounting.
6. Cost Accounting does not include financial accounting and has nothing to do with tax
accounting.
Management Accounting includes both financial accounting as well as cost accounting. It also
embraces tax planning and tax accounting
7. Cost Accounting is more concerned with short term planning. Management Accounting is
concerned equally with short range and long range planning.
8. Cost Accounting is concerned merely with assisting in management functions and does not
provide for evaluation and performance of management. Management Accounting is
concerned, both with assisting management in its functions, as well as evaluating the
performance of the management as an institution.
9. Cost Accounting is mostly historical in its approach and projects the past.Management
Accounting is futuristic in its approach. Management Accounting is more predictive in nature
than Cost Accounting.
10. Cost Accounting system can be installed without Management Accounting while Management
Accounting system cannot be installed without proper Cost accounting system.

1.7 FINANCIAL MANAGEMENT VS. MANAGEMENT ACCOUNTING

1. Financial Management establishes & executes programmes for the provision of capital
required by the business.
Management Accounting develops plans, budgets for control of existing operations and, if
necessary, to expand / discontinue activities.
2. Main function of Financial Management is to establish and maintain an adequate market for
the company’s securities and to maintain adequate liaison with investment bankers, financial
analysts and shareholders. Main function of Management Accounting is to develop standards
for costs and capacity and to update these standards as necessary.
3. Main concern of Financial Management is to maintain adequate sources for the company’s
current borrowing from commercial banks and other lending institutions. Main concern of
management accounting is to develop a chain of responsibility reporting and to monitor
performance against plans.
4. Financial management monitors credit and collection of accounts due to company.
Management accounting monitors level of dissatisfaction and people’s reaction to and use of
accounting information.
5. Financial Management assures protection of company’s funds through appropriate policies &
control measures. Management Accounting assures of business assets protection through
internal control, & internal auditing.

5
1.8 SUMMARY
1. In the era of liberalization & competitive environment accounting information should be
useful to management for achieving business excellence & sustainable competitive
advantage. This is provided by management accounting.
2. Management accounting covers financial accounting, cost accounting & financial
management. Tools provided by management accounting include marginal costing,
financial analysis & ratio analysis.
3. Management accounting is useful for planning, controlling, protecting assets of
organization & for taking many vital decisions such as make or buy, continue or shut down
business & soon.
4. Management accounting is different from financial accounting. While former is governed
by requirements of management, later by statutory framework.
5. Management accounting is also different from cost accounting. It makes use of costing as
well as financial management techniques.
6. Management accounting differs from financial management. While former is concerned
with only utilization of Company’s funds, later covers procurement, utilization &
distribution of funds.