IFTM University

School of Business Management

BCOM (H) IV Semester
Session 2022-23
Question Bank: Management Accounting (BCOM (H) 401)

UNIT I
Question:- Define Management Accounting? Compare and contrast it with Cost and Financial
Accounting.

Answer: The Accounting System which is prepared for the help of Management to plan the
activity, evaluate performance, ensure integrity of the financial information to the Organization
can be considered as “Management Accounting”. The main thrust of Management Accounting is
towards determining policy and formulating plans to achieve desired objectives of management. It
helps the Management in planning, controlling and analyzing the performance of the organization
in order to follow the path of continuous improvement. Management Accounting utilizes the
principle and practices of financial accounting and cost accounting in addition to other modern
management techniques for effective operation of a company.

In a nutshell, management accounting is the process of measuring and reporting information about
economic activity within organizations, for use by managers in planning, performance evaluation,
and operational control:

 Planning: For example, deciding what products to make, and where and when to make
them. Determining the materials, labor, and other resources that are needed to achieve
desired output. In not-for-profit organizations, deciding which programs to fund.
 Performance evaluation: Evaluating the profitability of individual products and product
lines. Determining the relative contribution of different managers and different parts of the
organization. In not-for-profit organizations, evaluating the effectiveness of managers,
departments and programs.
 Operational control: For example, knowing how much work-in-process is on the factory
floor, and at what stages of completion, to assist the line manager in identifying
bottlenecks and maintaining a smooth flow of production.

Compare and Contrast between Management, Cost and Financial Accounting

Accounting is a very old science which aims at keeping records of various transactions. The
accounting is considered to be essential for keeping records of all receipts and payments as well as
that of the income and expenditures. Accounting can be broadly divided into three categories.

 Financial Accounting, aims at finding out profit or losses of an accounting year as well as
the assets and liabilities position, by recording various transactions in a systematic manner.
 Cost Accounting helps the business to ascertain the cost of production/services offered by
the organization and also provides valuable information for taking various decisions and
also for cost control and cost reduction.
 Management Accounting helps the management to conduct the business in a more efficient
manner.
Relationship of Financial, Management, and Cost Accounting

Product Costs

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTING ACCOUNTING

Difference between Management (Cost) Accounting and Financial Accounting

Management (cost)accounting Financial accounting

Nature  Records material, labour and  Records company

overhead costs in product or job transaction events

 Reports produced are for internal  External financial

management and control statements are produced

Accounting  Not based on the double entry  Follows the double entry
system system system

Accounting  No need to use accounting  Use Generally Accepted

principles principles Accounting Principles for
 Adopt any accounting techniques recording transactions
that generates useful accounting
information
Users of  Used by different levels of  Used by external parties:
Information management or departments shareholders, creditors,
responsible for respective activities government, etc

Operations  Based on management instructions  Conforms to company

Guidelines or and requirements Ordinances, stock exchange
rules, HKSSAPs
standards

Time Span  Reports are prepared whenever  Reports are prepared for a
needed definite period, usually
 They may be prepared on a weekly yearly and half yearly
or daily basis
Time Focus  Future orientation: forecasts,  Past orientation: use of
estimates and historic data for historic data for reporting
management actions and evaluation
Perspective  Detailed analysis of parts of the  Financial summary of the
entity, products, regions, etc whole organization
Difference between Management Accounting and Cost Accounting
Management Accounting
 To provide information for
Objective
planning and decision
making by the management
 Concerned with transactions
Basic of recording
related to the future
Coverage  Covers a wider area: financial
accounts, cost accounts,
taxation, etc.
Utility  Only the needs of internal
management
 Provides historical and
Approach
predictive information for
future decision-making,
hence futuristic in approach
 No statutory requirement of
Statutory
audit for reports.
requirements
Types of transactions  Deals with both monetary
any non-monetary
transactions, covering both
quantitative and qualitative
aspects
Success  Success of management
accounting depends on sound
financial accounting system
and cost accounting systems
of a concern.
Cost Accounting
 To ascertain and control
cost
 Based on both present and
future transactions for cost
ascertainment
 Covers matters relating to
ascertainment and control
of cost of product or
service
 The needs of both internal
and external interested
groups
 Provides future cost-
related decisions based on
the historical cost
information, hence
historical in approach
 Statutory audit of cost
accounting reports are
necessary in some cases,
especially big business
houses.
 Deals only with monetary
transactions, covering
only quantitative aspect
 Success of cost accounting
does not depend upon
management accounting
system.
Question:- Briefly explain the concept, feature, objectives, scope, importance and limitations of
management accounting.
OR
“Management Accounting is concerned with accounting information that is useful to
management.” Explain the term management accountancy and states its main objectives.

Answer:

Concept of Management Accounting:

In ordinary language any system of accounting, which assists management in carrying out its
functions more efficiently may be termed as management accounting. The Institute of Chartered
Accountants of England and Wales has stated that “any form of accounting, which enables a
business to be conducted more efficiently can be regarded as Management Accounting.”
On the same lines, Robert N. Antony has stated, “Management accounting is concerned with
accounting information which is useful to management.” However, these definitions are very
general in nature.
The Institute of Cost and Management Accountants, London has defined Management
Accounting as the “application of professional knowledge and skill in the preparation of
accounting information in such a way as to assist management in the formation of policies and in
the planning and control of the operations of the undertakings”.
The American Accounting Association has defined 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 in the
making of rational decisions with a view towards these objectives.”
In the words of Brown and Howard, management accounting may be defined broadly as that
aspect of accounting, which is concerned with the efficient management of a business through
the presentation to management of such information as, will facilitate efficient and opportune
planning and control.
The above definitions clearly indicate that management accounting is concerned with accounting
information, which is useful to management. The common thread underlying these definitions is
that management accounting is concerned with the efficiency of the various phases of
management.
Features of Management Accounting

The features of Management Accounting are given below.

1. The Management Accounting data are derived from both, the financial accounting and
cost accounting.
2. The main thrust in management accounting is towards determining policy and
formulating plans to achieve desired objectives of management.
3. Management Accounting makes corporate planning and strategy effective and
meaningful.
4. It is concerned with short and long range planning and uses highly sophisticated
techniques like sensitivity analysis, probability techniques, decision tree, ratio analysis
etc. for planning, control and evaluation.
5. It is futuristic in approach and predictive in nature.
 6. Management accounting system cannot be installed without proper cost accounting
system.
7. Management Accounting systems generate various reports which are extremely useful
from the Management point of view.

Objectives / Functions of Management Accounting

The basic objective 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:

 Measuring performance: Management accounting measures two types of performance.

First is employee performance and the second is efficiency measurement. The actual
performance is measured with the standardized performance and a report of deviation
from the standard performance is reported to the management for the effective decision
making and also to indicate the effectiveness of the methods in use. Both types of
performance management are used to make corrective actions in order to improve
performance.

 Assess Risk: The aim of management accounting is to assess risk in order to maximize
risk.

 Allocation of Resources: is an important objective of Management Accounting.

 Provides data: Management accounting serves as an important source of data for

management planning. The accounts and documents are a store-house of a vast quantity
of data about the past progress of the enterprise, facilitating forecasts for the future.

 Modifies data: The accounting data required for managerial decisions is properly
collected 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.

 Analyses and interprets data: The accounting data is probed 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.

 Serves as a means of communication: 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 informed about the plans that
have been agreed upon and their roles in these plans.

 Facilitating Management 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.
  Use of 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.

Scope of Management Accounting

The main concern of management accounting is to provide necessary quantitative and qualitative
information to the management for planning and control. For this purpose it draws out
information from accounting as well as non-accounting sources. Hence, its scope is quite vast
and it includes within its fold almost all aspects of business operations. However, the following
areas may rightly be pointed out as lying within the scope of management accounting.

 Financial Accounting: The major function of management accounting is the

rearrangement or modification of data. Financial accounting provides the very basis for
such a function. Hence, management accounting cannot obtain full control and
coordination of operations without a well-designed financial accounting system.

 Cost Accounting: Planning, decision-making and control are the basic managerial
functions. The cost accounting system provides necessary tools such as standard costing,
budgetary control, inventory control, marginal costing, and differential costing etc., for
carrying out such functions efficiently. Hence, cost accounting is considered a necessary
adjunct of management accounting.

 Revaluation Accounting: Revaluation or replacement value accounting is mainly

concerned with ensuring that capital is maintained in real terms and profit is calculated on
this basis.

 Statistical Methods: Statistical tools such as graph, charts, diagrams and index numbers
etc., make the information more impressive and comprehensive. Other tools such as time
series, regression analysis, sampling techniques etc., are highly useful for planning and
forecasting.

 Operations Research: Modern managements are faced with highly complicated business
problems in their decision-making processes. O P techniques like linear programming,
queuing theory, decision theory, etc., enable management to find scientific solutions for
the business problems.

 Taxation: This includes computation of income tax as per tax laws and regulations, filing
of returns and making tax payments. In recent times, it also includes tax planning.

 Organization and Methods [O&M]: O&M deal with organizations reducing cost and
improving the efficiency of accounting, as also of office systems, procedures, and
operations etc.

 Office Services: This includes maintenance of proper data processing and other office
management services, communication and best use of latest mechanical devices.
  Law: Most of the management decisions have to be taken in a legal environment where
the requirements of a number of statutory provisions or regulations are to be fulfilled.
Some of the Acts, which have their influence on management decisions, are as follows:
The Companies Act, MRTP Act, FEMA, SEBI Regulations, etc.

 Internal Audit: This includes the development of a suitable system of internal audit for
internal control.

 Internal Reporting: This includes the preparation of quarterly, half yearly, and other
interim reports and income statements, cash flow and funds flow statements, scarp
reports, etc.

Need / Importance of Management Accounting

 Determine of Aim: Management accounting on the basis of the information available

determines its goal and tries to find out the route through which it can reach the goal.

 Helps in the Preparation of Plan: Present age is the age of planning. That producer is
considered as most successful producer who produces articles according to the plan and
needs of the consumers. Before taking any plan the manager must study and analyze the
present and future of the business.

 Better Services to Customers: The cost control device is management accounting

enables the reduction in prices of the product. All employees in the concern are made cost
conscious. The quality of the product become good because quality standards ate pre-
determined. The Customers are supplied goods and goods quality at reasonable price.

 Easy to take judgment: Before taking any plan or to determine policy. There are several
plans or policies before the management on the basis of the study he decides which plan
and policy was to be adapted so that it may be more useful and helpful.

 Measurements of performance: The techniques of budgetary control standard costing

enables the measurement of performance In standard costing, standards are determined
1st and then actual cost of compared with standard cost. It enables the management to
find out deviations between standard cost and actual cost. The performance will be good
it actual cost does not exceed the standard cost. Budgetary control system too helps in
measuring efficiency of all employees.

 Its Increase Efficiency of the business: Management accounting increases efficiency of

the business concern. The targets of different departments of the enterprise are
determined in advance and the achievement of these goals is taken as a tool for
measuring their efficiency.

 Its Provide effective management control: The Tools and techniques of the
management accounting are helpful to the management in planning controlling and
coordinating activities of the business, the getting of standard and assessing actual
performance regularly enables the management to have ‘management by exception’.
Everybody assesses his own work and immediate actions are taken as a tool for
measuring their efficiency.
  Maximum profits of can be obtained: in this process every possible effort are made to
control unnecessary expenses. The incapability or inefficiency is removed. New systems
or techniques are found out to achieve the goal, so that there may be maximum profits out
if the capital invested in the Business.

 Safety and security from trade cycle: The Information received form the management
accounting gives more or throws enough light over the past trade cycle. The management
tries to ascertain the Causes of trade cycle and its affect. Thus, management accounting
tries to safeguard the organization from the affect of trade cycle.

Limitations of Management Accounting

Despite the development of Management Accounting as an effective discipline to improve the

managerial performance, some of the limitations are as under:

 Accuracy is not ensured: Management Accounting is largely based on estimates. It does

not deal with actuals, alone, and thus total accuracy is not ensured under Management
Accounting.

 A Tool in the Hands of Management: Management Accounting is definitely a tool in

the hands of management, but cannot replace management.

 Strength and Weakness: Management Accounting derives information from Financial

Accounting, Cost Accounting and other records. The strength and weakness of these
basic information providers become the strength and weakness of Management
Accounting too.

 Costly Affair: The installation of Management Accounting is a costly affair so all the
organizations, in particular, small firms cannot afford.

 Lack of Knowledge and Understanding: The emergence of Management Accounting is

the fusion of a number of subjects like statistics, economics, engineering and
management theory. Any inadequate grounding in any one or more of the subjects is
bound to have an unfavourable effect on the consideration and solution of the problems,
relating to management performance.

 Persistence on Intuitive Decision-making: Though the main contribution of

Management Accounting is elimination of intuitive approach, there is always a
temptation to take an easy course of arriving at decisions, by intuition, rather than taking
the tortuous path of scientific decision-making.

 Psychological Resistance: Adoption of a system of Management Accounting brings

about a radical change in the established pattern of the activity of the management
personnel. It calls for rearrangement of personnel as well as their activities. This is bound
to encounter opposition from some quarter or other.

 Evolutionary Stage: Comparatively, Management Accounting is a new discipline and is

still very much in a stage of evolution. Therefore, it comes across the same difficulties or
obstacles, which a relatively new discipline has to face.
Question:- Discuss various tools and techniques used in management accounting.

Answer: Management accountants look ahead - they focus on forecasting and decision-making.
They use information to advise on how the business can move forward, for example, should a
company buy another, should it invest in new equipment. Management accounting involves
using the internal financial information available to managers, as well as that information which
companies must publish by law. This contributes to forward planning, reviewing and analysing
the performance of the business.

Management accounting is fundamental in strategic planning. When a business is looking to

make a strategic decision, for example, whether to develop a new product line, acquire another
business or expand into other countries, the CIMA trained management accountant can provide
advice. They can use a number of tools to assist decision-making. These include ratio analysis,
budgets and forecasts (such as cash flow and variances).

Management accounting is the accounting or analysis of financial statements prepared for the
managers within organizations to make them aware of the business conditions and eventually it
helps them to make better decisions for the future.

Tools of Management Accounting

The following are the major tools and techniques of management accounting that can help an
organization or business to support its sustainability objectives.

1. Ratio Analysis

A ratio is one variable measured in terms of another, for example, how many girls are in a class
compared to the number of boys. Ratio analysis is one tool in the strategic decision making
process. Management accountants use ratios along with other internal business data and publicly
available information to assess aspects of a company”s performance.

The main ratios used in management accounting are:

 Efficiency or activity ratios, including liquidity - these show whether the business is able
to pay its debts. They look at whether the assets of the company (its buildings, land
equipment) could repay any debts.
 Gearing- shows the long-term financial position of the business. It can show balance of
funding in a business i.e. how much money is from loans (on which it needs to pay
interest) and how much is from shareholder funds (on which it needs to pay a dividend to
shareholders). More money from loans carries more cost and therefore more risk.
 Profitability or performance ratios - show how well a business is doing. They relate to the
business objectives, which might be to make profit or obtain a return on investment, or
collects its debts quickly.

It is important that management accountants look at all the relevant ratios when making a
decision. Management accountants need to be able to produce accurate analysis, correct forecasts
and a detached and professional overview to a company’s performance. These contribute to the
future success of a business.
 2. Cost Volume Profit (CVP) Analysis

CVP analysis investigates the impact on total revenue, profits and costs, for a change in selling
price, output and the variable costs. CVP analysis provides the analysis which helps the
managers in understanding the relationship between price, cost and output.

3. Budget

Budgets are financial plans for the future. They help the business to see where it will incur costs
and where revenues will come from. They are particularly important in helping to co-ordinate the
different parts or activities of a business. Among the budget, flexible budget is more important
tool which helps management in decision making.
Flexible budget is a budgeting technique in which the budget is evaluated and prepared again at
different levels of the activity. It allows comparing the planned cost with the actual cost. If there
is a difference in planned and actual cost then proper action can be taken before moving to
further activity. The budget is differentiates the fixed and variable cost, thereby allowing
adjustments in the budget at each activity level.

4. Absorption Costing

Absorption costing divides the costs in two parts: product costs and period costs. The product
costs are manufacturing costs (fixed and variable both) and non-manufacturing costs are such as
selling and expenses and called period costs. It allocates all fixed and variable cost to each
product produced. Thus it includes all costs that is why it is also called as full cost method.

5. Standard Costing

Standard costing allocates costs on per unit basis. It measures variation is the standard and actual
costs and the proper actions are taken for correction. It includes all direct costs, indirect costs
,product and period costs. Variances show the difference between what was forecast to happen
(in a budget) and what actually happened. The reasons for these differences can then be analysed
to show why the variance occurred. Management accountants can then see how the business can
build on positive variances or avoid negative ones in future.

6. Transfer Pricing

Transfer pricing is a method of allocating the charges between different parties of related good or
service or property. It distributes all charges among the users of a particular service or good. It is
also used by the government to allocate taxation between national and international tax payers.

Thus there are numerous techniques and tools of management accounting which can support the
organization in achieving its sustainability objectives. The implementation of these tools and
techniques may differ across organizations.

7. Lean Thinking Model or Just In Time (JIT)

Lean thinking model or Just in Time helps management is in producing the right output at the
right place and on the right time. The lean thinking model has 5 steps in the whole process. It
produces units at customer orders avoiding the high inventory, high defects and more efforts. It
leads to low inventory, less defects, less efforts and attracting quicker consumers.

The five steps are as follows –

 Identify value in the product

 Indentify value in the business process of that product
 Make arrangements around customer orders
 Create the system responding to customer complaints/queries/requirements
 Continuously pursue the process of perfection and improvement in the process.

8. Six Sigma

Six Sigma is a management accounting technique which helps in improving the quality of the
process and the product. It identifies the customer requirement and then variations of the
produced product from the customer requirements. Once this gap is identified the process
improvement steps are taken to align the product process with the customer requirements. Six
Sigma helps in eliminating or keeping the variations in requirement and process at acceptable
level.

Thus Six Sigma follows the following steps:

 Defining user or customer requirements

 Identifying the variations of customer requirement from the actual process
 Improving the process to align it with customer requirement
 Continuous efforts to maintain or improve the acceptable level of variations.

Six Sigma measures the quality as frequency of defects per million operations. Variations are
measured by standard deviations from the given mean. It defines the lower limit and upper limit.

9. Total Quality Management (TQM)

W. E Deming introduced the concept of Total Quality Management (TQM). The TQM focuses
on quality improvement by modernization of the machines and equipment and proper training to
the workers and eventually increasing customer satisfaction. The purpose of TQM is to make
employees to use statistical methods and take the proper training and use problem –solving
methods in the process. Employees are encouraged to state hypotheses, to collect the data and
analyze and interpret and come up with new findings and formulation of new hypothesis.

10. Balanced Scorecard

It is an important tool of management accounting. It measures performance of all aspects of a

business such as customers, finance, human resources, marketing, training and development. Due
to its multi aspect phenomenon the balanced scorecard is a most used tool of management
accounting. It is not a pure financial performance indicator only.