Management Accounting: An Overview


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Management Accounting: An Overview

  1. 1. Management Accounting Meaning: It comprises of two words, Management + Accounting i.e., accounts which increase managerial efficiency or providing all those information and facts which are necessary for managers. Definitions: According to Cost and Management Accounts, London, “Management Accounting is concerned with the presentation of professional knowledge and abilities to reveal accounting information which may help to the management in policy formulation, planning and control for the undertakings.”
  2. 2. Meaning & Definition The American Accounting Association has defined as follows, “Management Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances.”
  3. 3. Definitions continued According to Anglo-American Council of Productivity, “ Management Account is the presentation of accounting information in such a way as to assist management in the creation of policy in today‟s operation of undertakings.” According to Robert Anthony, “ Management Accounting is concerned with accounting information that is useful to management.”
  4. 4. Scope of Management Accounting 1. Financial Accounting: In this transactions are recorded in the books then they are classified and summarised. At the end of the year final accounts and statements are prepared. 2. Cost Accounting: It explains various techniques of cost analysis and it is that branch of accounting in which transactions related to cost are recorded, measured and reported.
  5. 5. Scope of Management Accounting 3. Budgetary Control: under this variances are measured by comparing actual amount with budgeted estimates through budgets. 4. Statistical Methods: At present, statistical figures are extensively used in management accounting. The main statistical techniques are Time Series Analysis, Regression analysis, correlation analysis.
  6. 6. Scope of Management Accounting 5. Tax Accounting: Management accounting proves to be useful in conditions of excessive tax liabilities, in the process of payment of taxes. 6. Data Interpretation: Management accounting provides various data's and figures to managers, which assist them in decision making process. 7. Management Information System: is a easy method of obtaining information, at various levels of management, in any organization.
  7. 7. Scope of Management Accounting 8. Capital Budgeting: It is very useful in proper planning of capital expenditure, development and expansion.Decisions related to capital investments are taken in capital budgeting. 9. Reporting: It is an important part of providing accounting information to managers.
  8. 8. Functions of Management Accounting Two types of functions are performed in Management Accounting: • Main or Primary Functions 1. 2. Providing accounting information Assistance in managerial activities • Secondary Functions 1. 2. 3. 4. 5. Protection of Assets Helpful in Financial Planning Helpful in Tax determination Strategic Function Fixation of Accountability
  9. 9. Main or Primary Functions 1. Providing Accounting Information: The main function of management accounting is to provide necessary information to managers and other parties related to it: such as investors, Financers, Shareholders, etc. (a) Forecasting: This is a primary function of management accounting, in which forecasts are made for activities at certain level of confidence.
  10. 10. Main or Primary Functions (b) Recording Function: All the transactions are recorded in financial accounts & cost accounts within a definite period and then management arrives at conclusion after analyzing them. (c ) Interpretation and Appraisal Function: Management accounting evaluates all the activities in the interest of managers and organization. (d) Reporting: Management accounting provides reports which are required by managers at different levels.
  11. 11. Main or Primary Functions 2. Assistance in Managerial Activities: Management accounting assists managers in their operations, management principles and practices. It includes six functions of management: (a) (b) (c) (d) (e) (f) Planning Organizing Directing Co-ordination Motivating Controlling
  12. 12. Secondary Functions 1. Protection of Assets: Management accounting projects a course of action for the long term viability and continuity of the enterprise. Under this strategy various profitable and good tasks are identified and investments are made in them. 2. Financial Appraisal: Management accounting uses various accounting techniques such as: Financial planning, cost control, Ratio analysis, etc. in financial appraisal.
  13. 13. Secondary Functions 3. Determination of Tax Policies: Management accounting formulates favorable Tax Policy with the proper use of capital. As a result of these policies efforts are made to make tax liabilities minimum. 4. Determination of Accountability: Management accounting ensures accountabilities of people through „Reporting System‟ so that people are not able to shift their responsibility on other ignorantly.
  14. 14. Distinction Between Management Accounting & Financial Accounting Basis 1. Objective 2. Users 3. Importance FA MA Recording , Classifying To deliver and Summarizing information Financial transactions various to managers. Internal parties (Managers) External parties mainly Investors, Creditors. It is less important , It is more important. as it is related to As it is related with operational activities managerial activities.
  15. 15. Distinction Between Management Accounting & Financial Accounting Basis 4. Accounting Principles FA MA It provides information It does not adhere to on the basis of any such principle. “Generally Accepted Accounting” Principles. 5. Information It provides historical It provides future information. 6. Compulsory information based upon historical data. It is compulsory as It is entirely optional. per Companies Act.
  16. 16. Distinction Between Management Accounting & Financial Accounting Basis FA MA 7. Methodology Under this transactions are recorded on the basis of double entry system. In MA after collection & analysis of information, it is divided between cost centres and responsibility centre. 8. Accuracy More accuracy Less accuracy 9. Reporting Annual reporting Reporting as per requirement.
  17. 17. Distinction Between Management Accounting & Cost Accounting Basis 1. Nature 2. Subjectmatter MA CA It is concerned with formulation of policies, improvement of productivity and profitability. It is concerned with cost ascertainment and cost control. It involves It deals primarily considerations of with cost data both cost and revenue data.
  18. 18. Distinction Between Management Accounting & Cost Accounting Basis 3. Part 4. Tools MA CA It is not a part of It is a part of Cost Accounting. Management Accounting. It involves- Ratio analysis , fund flow and cash flow statements, budget, budgeting, BEP, standard costing It involves- unit cost, job costing, process costing, operating costing, contract costing, and standards costing.
  19. 19. Distinction Between Management Accounting & Cost Accounting Basis MA 5. Qualification MBA, CA and CA ICWAI (members), CA ICWAI 6. Audit Auditing is compulsory management accounting. not Auditing is for compulsory for cost accounting. 7. Expenses Allocation In management accounting expenses are allocated into two part fixed and variable. In Cost accounting expenses are allocated as – Direct cost and Indirect cost.
  20. 20. Role & Responsibility of Management Accountant Consistent with other roles in today's corporation, management accountants have a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization.
  21. 21. Role & Responsibility of Management Accountant • The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability may be more meaningful to the business management team vs. the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management score carding, and client profitability analysis. Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation.
  22. 22. The Role of Management Accountant • A great variety of accounting information is available to managers. How does an accountant know what information should be reported to managers? The accountant chooses the information to be reported to a manager by: • 1. Identifying the purpose for which the information is needed. • 2. Determining the relevance of the information.
  23. 23. Information is relevant if it: • Affects the accomplishment of the objectives of the decision maker. • Will change as a result of the decisions or choice made by the decision maker.
  24. 24. Management Accounting Decision Models The following illustrates the association of management accounting tools with specific financial statement items.
  25. 25. Management Accounting Decision Models Financial Statement Items Balance Sheet: Cash Accounts receivable Inventory Fixed assets Income Statement: Sales Expenses Net income Management Accounting Tools Cash budget Capital budgeting models Incremental analysis EOQ models, Safety stock model Incremental Analysis, Capital budgeting C-V-P analysis, Segmental reporting Incremental analysis C-V-P analysis, Incremental analysis Direct costing
  26. 26. Decision-making and Required Information Tools Flexible budget Variance analysis EOQ models Incremental analysis Capital budgeting models Cost-volume-profit analysis Required Information Variable cost rates Standard costs Purchasing cost, carrying cost Opportunity cost, escapable costs Future cash inflows, future cash outflows Variable cost percentage, fixed cost,desired income