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Introduction
Meaning
Management Accounting which is also known as Accounting for Managers is a
process of collecting information (both qualitative and quantitative) from
various sources such as Financial Accounting, Cost Accounting, Tax
Accounting, Human Resource Accounting etc. Selecting the important ones out
of the total, analyzing them with the help of certain tools and techniques and
then pass on to the management for taking decisions in the interest of the
organization and the parties interested in it.

Definition
According to The institute of Chartered Accountant of England and Wales, “Any
form of accounting which enables a business to be conducted more efficiently
can be regarded as management accounting.”
According to the Associations of Certified Corporate Accountants,
“Management Accounting is the application of accounting and statistical
techniques to the specified purpose of producing and interpreting information
designed to assist management in its functions of promoting maximum
efficiency and envisaging, formulating and co-coordinating their execution.

Nature and Characteristics of

Management Accounting
1. Selective Nature: This process allows for the careful selection of relevant
data and information, ensuring that only the most pertinent details are
considered.

2. No Need of Rules and Formats: There is no strict requirement to follow

specific rules or formats, providing flexibility in how information is
presented and analyzed.

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 3. Provide Data: The system or method in question is designed to gather and
provide data that can be used for further analysis and decision-making.

4. Classification of Costs: It involves the systematic classification of costs into

various categories, making it easier to analyze financial performance.

5. Integrated Method: This approach combines multiple methods and

perspectives to provide a comprehensive understanding of the subject
matter.

6. Related to Future: The information and analysis are forward-looking,

focusing on future trends and potential outcomes rather than just historical
data.

7. Causes and Effects Relationship: There is a clear emphasis on

understanding the relationship between causes and effects, helping to
identify the root causes of issues and their potential impacts.

8. Useful to Management: The insights and data provided are highly valuable
to management, aiding in strategic planning and operational decision-
making.

9. Service Function: This system or approach functions as a service, providing

ongoing support and information to those who need it.

Techniques and Tools of Management

Accounting
1. Common size statements: These statements express all items as
percentages of a common base figure, which allows for easy comparison
between companies of different sizes.

2. Comparative Statements: These are financial statements that provide

information for multiple fiscal periods, allowing for the analysis of trends
and performance over time.

3. Ratio Analysis: This involves the use of various financial ratios to assess a
company's performance, profitability, liquidity, and solvency.

4. Trend Analysis: This method examines financial data over a series of

periods to identify patterns and trends that can inform future financial
decisions.

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 5. Cash Flow Statement: This statement provides a detailed breakdown of a
company's cash inflows and outflows, showing how cash is generated and
used during a specific period.

6. Standard Costing: This is a cost accounting method that compares actual

costs to standard costs to measure performance and efficiency.

7. Budgetary Control: This involves the preparation and use of budgets to

monitor and control financial activities, ensuring that actual performance
aligns with financial plans.

8. Marginal Costing: This technique focuses on the impact of variable costs on

the total cost structure, aiding in decision-making regarding pricing and
production levels.

9. Responsibility Costing: This accounting method assigns costs to specific

managers or departments, holding them accountable for financial
performance within their areas of responsibility.

Scope of Management Accounting

Financial Accounting

Cost Accounting

Forecasting and Budgeting

Management Reporting

Statistical Tools

Financial analysis and interpretation

Control

Tax accounting

Office Services

Internal Audit

Functions of Management Accounting

1. Presentation of Information
Recording of Data

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 Accuracy of data

Analysis and interpretation of data

communication of data

2. Helpful to Management
Helpful in planning and forecasting

Helpful in organization

Helpful in coordination

Helpful in controlling

Helpful in Motivation

Helpful in decision making

Objectives of Management Accounting

Planning: Developing detailed plans and strategies to achieve organizational
goals and objectives.

Controlling: Implementing mechanisms and procedures to monitor and

regulate performance, ensuring alignment with established standards.

Decision Making: Evaluating various options and selecting the most

appropriate course of action to address specific challenges or
opportunities.

Classifying, Analyzing, and Interpreting Data: Organizing data into

meaningful categories, conducting thorough analysis, and interpreting
results to inform strategic decisions.

Increasing Efficiency: Identifying and implementing methods to optimize

processes, reduce waste, and enhance overall productivity within the
organization.

Coordinating: Ensuring that different departments and teams work together

seamlessly to achieve common goals, facilitating communication and
collaboration.

Increasing Profitability: Developing and executing strategies aimed at

boosting revenue, reducing costs, and maximizing the financial
performance of the organization.

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 Performance Evaluation: Assessing the performance of employees,
departments, and the organization as a whole, providing feedback and
identifying areas for improvement.

Limitations of Management Accounting

Lack of knowledge of subject concerned

Lack of coordination

Wide scope

Evolutionary Stages

Based on financial and cost accounting

Expensive

differences among Cost Accounting, Financial

Accounting and Management Accounting,
Management
Basis Financial Accounting Cost Accounting
Accounting

Management Financial accounting

accounting focuses is primarily aimed at
Cost accounting is a
on providing providing external
subset of
information and stakeholders, such as
management
analysis to internal investors, creditors,
accounting that
stakeholders, such as and regulatory
focuses on tracking
Purpose managers, authorities, with an
and analyzing the
executives, and accurate and
costs of producing
decision-makers. It is standardized
goods or services
used for planning, representation of a
within an
controlling, and company’s financial
organization.
decision support performance and
within an organization position.

Internal audience, Typically internal

External audience,
including stakeholders like
including
management and managers and
shareholders,
Audience employees who need production
potential investors,
financial data for supervisors who
lenders, and
operational decision- need to manage and
government agencies.
making. control costs.

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 Management
Basis Financial Accounting Cost Accounting
Accounting

It includes not only Concentrates on

Focuses solely on
financial data but also cost data related to
financial information
non-financial production
and transactions, like
information like processes, including
Scope balance sheets,
customer satisfaction direct and indirect
income statements,
scores, production costs, material
and cash flow
efficiency, and market costs, labor costs,
statements.
research. and overhead.

In accordance with
Reports are prepared The organization
legal and regulatory
as frequently as generates reports
requirements, the
needed, which can be regularly to actively
organization prepares
Timeframe daily, weekly, or monitor and control
financial statements at
monthly, depending costs within its
regular intervals,
on internal production
typically quarterly and
requirements. processes.
annually.

Subject to strict While it follows

regulatory standards management
Not subject to
and principles, such accounting
specific accounting
as Generally principles, it often
standards or
Accepted Accounting adheres to specific
Regulations regulations, allowing
Principles (GAAP) and cost accounting
flexibility in designing
International Financial principles and
management
Reporting Standards methods designed to
accounting systems.
(IFRS) in different allocate costs
countries. accurately.

Historical data,
Forward-looking, providing a snapshot Analyzing and
helping with of a company’s controlling
budgeting, cost financial performance production costs,
Key Focus analysis, performance and position over a optimizing resource
evaluation, and specific period, which utilization, and
strategic decision- serves as the basis improving cost
making. for evaluating past efficiency.
results.

Cost Control

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 Cost control is the first step in cost control and cost reduction, where the
primary focus is on controlling the total cost through competitive analysis.

Enterprises control the actual cost of the product with the help of several
practices. It guarantees that the total cost of operation does not exceed the
budget

With cost control, firms ensure that the product cost does not exceed the
production cost. It is a continuous process where variables are analyzed to find
the reason for high costs, and necessary steps are taken at the final stage

Setting Predetermined Standards: Before beginning any operation, the

company must make a performance goal or standard cost for each cost
center. Then, further works are done with the help of these prearranged
costs.

Assessing Actual Performance: Companies determine the actual cost of

each product. Later, they measure the performance as per targets. For
example, if the target is operation-wise, you can calculate and collect
actual costs on an operation-by-operation basis to provide a standard
benchmark for comparison.

Comparing Output with Initial Standards: After calculating the actual cost,
we can compare it to the desired outcome. Any discrepancy between the
two is identified and communicated to the person in charge.

Analyzing Action Variations: We review and identify discrepancies and

their causes in the previous steps. Following that, we take the necessary
actions, and if necessary, we can incorporate standards into developments
to control the price

Cost Reduction
Cost reduction is the process that concentrates on reducing the unit price of a
factory-made service or product. It is done without compromising quality
through new and better technologies.

This is possible by actively adapting to the latest product designs and

implementation improvements. In addition, several methods are used to reduce
production costs. The most common way is to use a unit’s cost, ensuring per-
unit price savings and profit maximization.
The primary goal of cost reduction is to eliminate unnecessary expenses during
production, storage, sale, and distribution. It works on cost-cutting measures

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 for the major systems. Savings are non-volatile assets.
Companies can follow these steps to achieve cost reduction:

Continual Research: Companies conduct numerous studies and research

to determine the most optimal and cost-effective ways to manufacture a
product or provide a service. Then, to reduce the costs, they can improve
their existing manufacturing structures.

Value Chain Analysis: Businesses can analyze and identify activities that
add no value to a company’s profit potential and remove them. Conversely,
this will strengthen activities that add substantial value to the company’s
functioning.

Difference Between Cost Control & Cost Reduction

Cost Control Cost Reduction

Cost reduction is about lowering the cost

Cost control refers to keeping costs within per unit by implementing new production
prearranged limits. methods that do not compromise product
quality.

Cost control focuses on lowering the total cost reduction focuses on lowering the
cost of a product, product’s unit price.

Cost control is a temporary measure, cost reduction is permanent.

The cost reduction process has no visible

The cost control process is completed
end because it is implemented from time to
when a particular target is met.
time to eliminate profligate expenses.

Cost management does not engage in cost reduction does engage in standard
standard quality maintenance quality maintenance

Cost control is an inhibitory function that

A cost-cutting measure is a corrective
determines the cost before it occurs i.e. a
action.
preventive action.

Cost Management
Cost management is the process of planning and controlling the budget of a
business. Having a good cost management system in place makes it easier for
an organization to estimate and allocate its budget.
Cost management is a form of management accounting that helps a business
reduce the chance of going over budget with more accurate forecasts of

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 impending expenditures. Many businesses use cost management tactics for
specific projects and for the overall business.

Steps in Cost Management

Setup: The setup phase determines what is included in the cost
management plan. It identifies the stakeholders of the plan, the tools used
to manage costs and the data structure needed to track cost.

Resource Planning: This planning phase identifies the resources needed to

complete the project. These could be physical materials, information
assets, staff and cloud computing resources. It determines resource
allocation, including how much of a resource is needed for how long and
how it will be allocated

Budgeting and Cost Estimation: In this stage, project team develop a

budget. Budgeted cost estimates get more specific as the project scope is
refined. A picture of the full project cost emerges as resources are
allocated.

Cost Control: This phase involves monitoring and controlling costs as the
project progresses, using data from different project teams. Managers track
how costs differ from the estimated budget and take action to
accommodate cost overruns, reduce deviations from the budget and cap
the budget when necessary.

Benefits of Cost Management

Reduces overspending

Encourages Planning

Facilitates financial health

Migrates risk

Support standards

Improve visibility

Limitations of Cost management

Change management: Project changes are inevitable. Teams must be able
to adapt to changing circumstances and manage the budget accordingly.

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 Effective communication: Reporting can be perceived in different ways,
depending on who sees it. A project manager may view results differently
than project stakeholders.

Tool Sprawl: Lack of a dedicated project management or cost management

tool can make managing cost over multiple tools difficult and complex.

Project scope: Poorly defined project scope can lead to cost overruns from
inaccurate estimates.

underestimation: If a project manager underestimates costs that go into a

budget, it can lead to a lack of resources and project delays.

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