DEFINITION OF MANAGEMENT ACCOUNTING Acc to CIMA Management

DEFINITION OF MANAGEMENT ACCOUNTING

�Acc to CIMA: - Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for nonmanagement groups such as shareholders, creditors, regulatory agencies and tax authorities"

CHARACTERISTICS (NATURE) OF MANAGEMENT ACCOUNTING

1. Providing Accounting Information: Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decision. 2. Cause and Effect Analysis: Financial accounting is limited to the preparation of profit & loss account and finding out the ultimate result. The ‘cause and effect’ relationship is discussed in management accounting. 3. Use of Special Techniques and Concepts: The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting etc.

4. Taking Important Decision: It supplies necessary information to the management which may base its decisions on it. The implications of various alternative decisions are also taken into account while taking important decisions. 5. Achieving of Objectives: The recording of actual performance and comparing it with targeted figures in case there are deviations between the standards set and actual performance corrective measures can be taken. 6. No Fixed Norms Followed: The tools of management accounting are the same but their use differs from concern to concern. Every concern

7. Increase in Efficiency: The efficiency can be achieved by setting up goals for each department or section. An effort is made to take corrective measures so that efficiency is improved. 8. Supplies Information and not Decision: The decision are to be taken by the top management. Management accountant is only to guide and not to supply decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management. 9. Concerned with Forecasting: The management accounting is concerned with the future. It helps the management is planning and forecasting. The information is supplied with the object to guide management for taking future decisions.

OBJECTIVES OF MANAGEMENT ACCOUNTING

1. Planning And Policy Formulation: Planning is essentially related to taking decisions for future. It also includes forecasting, setting goals and deciding alternative courses of action. 2. Helpful in Controlling Performance: Management accounting devices like standard costing and budgetary control are helpful in controlling performance. The work is divided into different units and separate goals are set up for each unit. 3. Helpful in Organizing: Organization is related to the establishment of relationship among different individuals in the concern. It includes the delegation of authority and fixing of responsibility.

4. Helpful in Interpreting Financial Information: The main object of management accounting is to present financial information to the management in such a way that it is easily understood. 5. Motivating Employees: Management accounting helps the management in selecting best alternatives of doing the things. Targets are laid down for the employees. They feel motivated in achieving their targets. 6. Helpful in Making Decisions: A decision may have to be taken about the expansion or diversification of production. The information provided by the accountant helps management in selecting a suitable alternative and taking correct decisions.

7. Reporting to Management: The management is kept informed through regular financial and other reports. The performance of various departments is also regularly communicated to the top management. 8. Helpful in Co-ordination: Management accounting provides tools which are helpful in coordinating the activities of different sections or department. Co-ordination is done through functional budgeting. 9. Helpful in Tax Administration: Management accounting helps in assessing various liabilities and depositing correct amount of taxes with the concerned authorities. Various tax returns are to be

FINANCIAL ACCOUNTING vs. MANAGEMENT ACCOUNTING

LIMITATIONS OF FINANCIAL ACCOUNTING 1. Historical Nature: Financial accounting records those transactions which have taken place in the business during particular period of time. The impact of uncertainties are not recorded so it cannot help management for future planning. 2. Provides Information About The Concern As a Whole: The information is provided about the whole concern so it is difficult to know the product-wise, department-wise information. 3. Not Helpful in Price Evaluation: It is not helpful in fixing prices of the products as it does not supply the information about fixed and variable costs that helps in

4. Cost Control Not Possible: The cost figures are known at the end of the financial period. When the costs are already incurred then nothing can be done to control it. 5. Appraisal Of Policies Not Possible: it is not possible to evaluate various policies and programmes as there is no technique to compare actual performance with the budgeted targets. 6. Only Actual Costs Recorded: It records only actual costs and does not record price level changes. The recorded costs cannot provide correct information or exact values of assets. 7. Not Helpful In Taking Strategic Decisions: Financial Accounts cannot provide necessary information for taking important decisions because information is recorded for the whole concern and it is

8. Technical Subject: The recording of transactions require knowledge of accounting principles and convention. A person who is not conversant with accounting subject has little utility of financial accounts. 9. Quantitative Information: It only records quantitative factors and neglect qualitative factors. 10. Lack Of Unanimity About Accounting Principles: Accounts differ on the use of the accounting principles. The use of different accounting methods reduces the usefulness and reliability of the accounts. 11. Chances Of Manipulation: There are chances of

BASIS FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING 1. Object The object is to record various The object is to help transactions with the purpose of management in formulating maintaining accounts and to policies and plans. know the financial position and to find profit loss at the end of the financial year. 2. Nature It is mainly concerned with the historical data. It deals with the projection of data for the future. 3. Subject-Matter It is concerned with assessing the results of the whole business. It deals separately with different units, departments and cost centers. 4. Compulsion The preparation is compulsory. The preparation is not compulsory. 5. Precision Only actual figures are recorded. No emphasis is given to the actual figures. 6. Reporting The financial accounting reports The management accounting are helpful for outsiders like reports are for the internal use bankers, investors and only. shareholders.

BASIS FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING 7. Description Only monetary items are recorded. Both monetary and nonmonetary items are recorded. 8. Quickness Reporting is slow and time consuming. Reporting is very quick. 9. Accounting Principles They are governed by generally accepted principles and conventions. No set principles are followed. 10. Period They are prepared for particular period. There are no specific periods for management accounts. 11. Publication Financial accounts are published for the benefit of the public. They are not published as they are for the use of the management only. 12. Audit They can be audited. It is not possible to audit management accounts as they are not based on actual figures.

COST ACCOUNTING vs. MANAGEMENT ACCOUNTING

LIMITATIONS OF COST ACCOUNTING 1. 2. 3. 4. 5. 6. Not an independent system of accounts. Based largely on estimates. Scope for subjectivity on items like depreciation, valuation of closing stock etc. Does not take into consideration all items of expenses and incomes. Lacks a uniform procedure. Its contribution for handling futuristic situations has not been much.

BASIS COST ACCOUNTING MANAGEMENT ACCOUNTING DEFINITION Acc to ICMA: - Cost Accounting is “the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned. ” Acc to CIMA: - Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" MEANING Management accounting is application of professional knowledge and skill in the preparation and presentation of financial information in such a way as to assist management in decision making and in the planning and control of Cost Accounting is an expanded phase of financial accounting which provides management promptly with the cost of producing and/or selling each product and rendering a particular service.

BASIS COST ACCOUNTING MANAGEMENT ACCOUNTING OBJECTIVE Computation of cost per unit. To provide information to the management for decision making purposes. FOCUS The cost of producing an item either historic or projected The measurement of past performance against targets and the setting of those targets DEALS WITH Ascertainment, allocation, apportionment and accounting aspect of costs. The effect and impacts of costs on the business. IMPORTANC To be competitive in a global E economy, companies must optimize material, labor and overhead costs. Cost accounting for a production process can help identify inefficient activities and improve productivity while also lowering cost. Management accounting is used for internal managerial decision making, project selection, budgeting, performance evaluation and strategy.

BASIS COST ACCOUNTING MANAGEMENT ACCOUNTING ROLE Helpful in collecting costing data for management Gives a clear idea of the types of costs and items requiring analysis and states the specific problems of business. OUTLOOK Has a narrow approach. Has to refer to economic and statistical data for analyzing cost effects. Reports the effect of cost on the business along with cost analysis. TOOLS AND TECHNIQUES Standard costing, variable costing, break Fund and cash flow even analysis etc. statement, ratio analysis etc. INPUTS AND OUTCOMES Cost accounting tracks and analyzes costs, including material, labor, overhead and time, for every activity performed in producing and delivering goods and services. This information can be used to improve efficiencies and reduce overall cost. Management accounting uses input from finance, operations, suppliers, customers and competitors to drive internal decisionmaking and planning INSTALLATIO N Can be installed without management accounting. Needs financial and cost accounting as its base for

PROCESS OF MANAGEMENT ACCOUNTING

� Managerial accounting processes are tools and procedures that a company depends on to rein in waste and run efficient operations. � Without adequate mechanisms, the firm may be unable to support the financial burdens inherent in business activities. � Operating expenses include interest, salaries, taxes and materials costs. � Accountants use the terms "management accounting, " "cost accounting" and "managerial accounting" identically. � The figure below depicts the process of management accounting:

MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING COST ACCONUTING DATA SUPPORT OTHER SOURCES IS THE PROCESS OF DATA IDENTIFICATION MEASUREMENT ACCUMULATION ANALYSIS PREPRATION AND INTERPRETATION COMMUNICATION OF INFORMATION TO MANAGEMENT AND OTHERS PLANNING AND DECISION MAKING DATA GENERATION IMPLEMENTATION CONTROL MANAGEMENT ACCOUNTING PROCESS

� The management accounting process begins with identification, measurement and accumulation of relevant data from financial and cost accounting records, and also from other external sources. � The data is then regrouped, classified analyzed. � The interpretations are made and information is communicated to internal and external users of such information for making decisions. � Decision making is linked to planning and control. Variations from plans are identified and feedback is built up for corrective measures.

After managerial accounting process management can answers such questions as: �What is the company's average cost per unit of labor (enterprise wide or within specific departments)? �How many rupees in sales does each marketing rupee bring in? �What is the required rate of return to make a new investment worthwhile? �Which activities require the greatest expenditures and which earn the greatest profits (and how can the organization maximize the former and minimize the latter)? �Managerial accounting procedures are intended primarily to supply knowledge to decision makers within an organization.

TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING

�Financial Policy and Accounting �Analysis of Financial Statements �Historical Cost Accounting �Budgetary Control �Standard Control �Marginal Costing �Decision Accounting �Revaluation Accounting �Control Accounting �Management Information Systems

FUNCTIONS OF MANAGEMENT ACCOUNTING (ACCOUNTANT)

1. Planning and forecasting: It help management in planning for short-term and long-term periods. Management accounting use various techniques such as budgeting, standard costing, marginal costing, fund flow statements, probability and trend ratios etc. 2. Modification of data: The information is modified in such a way that it becomes useful for the management. If sales data is required , it can be classified according to product, area, season-wise, type of customers and time taken for getting payment. 3. Financial Analysis and Interpretation: Management accounting analyses and interprets financial data in a simple way and presents it in a non-technical language. He gives facts and figures about various policies and evaluates them in monetary terms.

4. Facilitates Managerial Control: All accounting efforts are directed towards control of the enterprise. The actual performance is recorded and deviations are calculated. Performance evaluation is possible through standard costing and budgetary control which are an integral part of management accounting. 5. Communication: Management accounting establishes communication within the organization and with the outside world to prepare reports for the benefit of different levels of management and employees. 6. Use of Qualitative Information: While preparing a production budget, management accountant may not use past production figures, but he may rely on the assessment of persons dealing with production, production reports, consumer surveys and many other business documents.

7. Coordinating : Management accountant acts as a coordinator among different financial departments through budgeting and financial reports. It helps to increase the efficiency of various sections thereby increasing profitability of the concern. 8. Helpful in taking Strategic Decisions: It supplies analytical information regarding various alternatives and the choice of management is made easy. The decision may be regarding seasonal or temporary stoppage of production, replacement decisions, expansion or diversification of works and a correct decision is taken. 9. Supplying Information to Various Levels of Management: Top management takes broader decisions and leaves day-to-day decisions for the lower levels of management. The supply of adequate information at the proper time will increase efficiency of the management.

LIMITATIONS OF MANAGEMENT ACCOUNTING

1. BASED ON ACCOUNTING INFORMATION: Management accounting is based on data supplied from financial and cost accounting. Historical data is used to make future decisions. The correctness and effectiveness of material decisions will depend on the quality of the data on which theses decisions are based. If financial data is not reliable then it will not provide the correct analysis. 2. LACK OF KNOWLEDGE: The use of management accounting requires the knowledge of various subjects. It should be consent with accounting principles, statistics, economics, principles of management and etc. deficiently in knowledge of any of theses subjects limits the use of management accounting. So the application of management accounting will be useful if person connects the decision making process.

3. INTUTIVE DECISIONS: Though the management accounting provides scientific analysis of various situations and enables decision taking base on the facts and figures, there is a tendency to make decisions. It may avoid a lengthy course of deciding things and may take an easy course of arriving at decisions using it. they limit the usefulness of management accounting. 4. NOT AN ALTERNATIVE TO ADMINISTRATION: It does not provide an alternative to the administration. The tools and techniques of management accounting provide only information and not decisions. They are to be taken by the management and their implementation is also done by management. So management accounting has supplementary service function and has no final say either in decision making or its implementation.

5. TOP HEAVY STRUCTURE: The installation of management accounting system needs an elaborate organizational system. A large no. of rules and regulations are also required to make this system workable and effective. Introduction of management accounting system as a costly affair and can be used but big concerns only. Smaller units cannot afford to use this system because of heavier cost. 6. EVOLUTIONARY STAGE: Management accounting is only in development stage, it has not yet reached the final stage. The techniques and tools used by this system give varying and different results. The conclusion taken from the analysis and interpretations are not the same. It will take sometime for the management accounting to reach a final stage.

7. PERSONAL BIAS: The interpretation of financial information depend upon the capability of interpreter as one has to make a personal judgment. There is every likelihood to be framed of personal bias in analysis and interpretation. Personal prejudices and bias affect the objectivity of decisions. 8. PSYCHOLOGICAL RESISTANCE: The installation of management accounting involves basic change in organizational set up. New rules and regulations are also requires to be framed which affect a number of personnel and hence there is a possibility of resistance from some quarters or the other.