What is Management Accounting?

1. MANAGEMENT
ACCOUNTING

2. WHAT IS MANAGEMENT ACCOUNTING?
 Management accounting or managerial accounting is
concerned with the provisions and use of accounting
information to managers within organizations, to provide them
with the basis to make informed business decisions that will
allow them to be better equipped in their management and
control functions.
 IFAC(International Federation of Accountants) defined
management accounting process as “The process of
identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of financial
information used by management to plan, evaluate, and
control an organization and to assure appropriate use and
accountability for its resources.”

3. SCOPE OF MANAGEMENT ACCOUNTING
 Formation, installation and operation of accounting, cost
accounting, tax accounting and information systems.
Management accountant has to construct and re- construct these
systems to meet the changing needs of management functions.
 The compilation and preservation of vital data for management
planning. It presents the past data in such a way as to reflect the
trends of events to the management.
 Providing means of communicating management plans to the
various levels of organization. This insures the coordination of
various segments of the enterprise plans and also defines the
role of individual segments in the whole plan and assist the
management in directing their activities.

4.  Assisting management in decision making by providing relevant
accounting and other data, analyzing the effect of alternative
proposals on the profits and position of the enterprise.
 Providing methods and techniques for evaluating the
performance of the management in light of the objectives of the
enterprise, thus assisting in the implementation of the principle
“management by objectives”.
 Providing and installing an effective system of feedback
reports. By pin pointing the significant deviation between actual
and expected activities and by adhering to the principles of
selectivity and relevance, such reports help in the installation
and operation of the system of “management by exception”.
 Improving, modifying and sharpening the effectiveness of the
existing techniques of analysis. The management accountant
would always think of increasing the practability of existing
techniques.

5. NATURE OF MANAGEMENT ACCOUNTING
 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 decisions.
 Cause and effect analysis: Financial accounting is limited to
the preparation of profit and loss account and finding out the
ultimate result, i.e., profit or loss management accounting
goes a step further. The ‘cause and effect’ relationship is
discussed in management accounting. If there is a loss, the
reasons for the loss are probed. If there is a profit, the factors
different expenditures, current assets, interest payables,
share capital, etc.

6.  Supplies Information and not decision: The management
accountant supplies information to the management. The
decisions are to be taken by the top management.
 Concerned with forecasting: The management accounting is
concerned with the future. It helps the management in planning
and forecasting. The historical information is used to plan future
course of action.
 Use of Special Techniques and concepts: management
accounting uses special techniques and concepts to make
accounting data more useful. The techniques usually used include
financial planning and analysis, standard costing, budgetary
control, marginal costing, project appraisal, control accounting,
etc.
 Increase in Efficiency: The purpose of using accounting
information is to increase efficiency of the concern. The efficiency
can be achieved by setting up goals for each department.

7. FUNCTIONS OF MANAGEMENT ACCOUNTING

8. Management accounting is one of important part of accounting. To
use accounting for decision making encourages its development.
Management accounting’s main function is to collect accounting
information which is useful for different managerial functions like
planning, organization, coordination and control. Other important
functions of management accounting:
 Modification of data: First good function of management
accounting is to modify of raw accounting data. After this,
businessman bids fair to effective use these modify data in
business’s management. Management accounting can be used to
classify every accounting item in different views. There are so
many accounting software which can be helpful to show sale or
purchase or any other accounting items according to production
level, area, season, country, age or quality of debtors or
creditors.
 Interpretation function: It is also function of management
accounting to do complete interpretation of financial analysis. It
cuts down work burden of manager because management
accountant supports him by providing fact and interpretation of
financial data after its analysis.

9.  Management control function: Management control can be
possible only with management accounting function.
Management accounting uses responsibility accounting tool in
which different cost, revenue and investment centers are made.
Proper budget is maintained in each centre. Analysis of actual
recorded performance is compared with standard performance
and deviation is evaluated. This will be helpful to fix up wrong
side of company’s decision promptly.
 Communication functions: Management accounting puts
together all useful accounting information with comparable past
data for good communication with govt., bankers and investors.

10. FINANCIAL ACCOUNTING VS MANAGEMENT
ACCOUNTING
 Necessity
 Financial Accounting (FA): SEC (or banks or
suppliers) requires publicly traded companies to
publish financial statements according to GAAP.
 Management accounting (MA) is optional.
 Purpose.
 FA: Produce financial statements for outside
users.
 MA: Help managers plan, implement and control.

11.  Users
 FA: faceless group, external users, present or
potential shareholders.
 MA: Known managers who influence what
information is needed.
 Underlying structure
 FA: built around: Assets = Liabilities +
Stockholders’ Equity.
 MA: 3 purposes each with its own set of
concepts and constructs (addressed later).

12.  Source of principles
 FA: GAAP.
 MA: whatever managers believe is useful.
 Time orientation
 FA: historical, tell it like it was.
 MA: future/decision oriented, tell it like it will be.
(However, the past is often a good predictor of
the future.)

13.  Information content
 FA: financial statements are the end product and
include primarily financial info.
 MA: non-monetary as well as monetary info.
 Information precision
 FA: Uses approximations but as a generalization
is more precise than MA.
 MA: Management needs info rapidly to be useful
in decision making and therefore precision is
sometimes sacrificed.

14.  Report frequency
 FA: Publicly traded, SEC: quarterly, with more
detailed info annually.
 MA: Up to management.
 Report timeliness
 FA: Usually, several weeks to months after fiscal
close of accounting period.
 MA: Quickly to be useful for decision making.

15.  Report entity
 FA: Organization as a whole.
 MA: Relatively small parts
(responsibilities centers such as
departments, product lines, divisions,
subsidiaries as well as organization as a
whole.)