Introduction to management accounting

1. Management Accounting
Unit-1
Introduction

2. Unit-1
• INTRODUCTION: Definition, scope, functions, importance and
limitations of management accounting.
• Distinction between Management accounting, Financial Accounting
and Cost Accounting.
• role and responsibilities of Management Accountant.

3. Introduction of Management
Accounting-1
Lesson 1
Objectives: After Studying this lesson you should be able to
understand-
Meaning of Management Accounting
Functions of Management Accounting
 Scope of Management Accounting

4. Introduction of Management
Accounting-I
Meaning & Definition
According to the Chartered Institute of Management
Accountants (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" (CIMA Official Terminology).

5. 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.”

6. 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.”

7. 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.”

8. 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.

9. 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.

10. 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.

11. 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.

12. Functions of Management
Accounting
Two types of functions are performed in Management
Accounting:
 Main or Primary Functions
1. Providing accounting information
2. Assistance in managerial activities
 Secondary Functions
1. Protection of Assets
2. Helpful in Financial Planning
3. Helpful in Tax determination
4. Strategic Function
5. Fixation of Accountability

13. 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.

14. 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.

15. 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) Planning
(b) Organizing
(c) Directing
(d) Co-ordination
(e) Motivating
(f) Controlling

16. 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.

17. 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.

18. Management Accounting
UNIT – 1
LESSON -2

19. Introduction of Management
Accounting-2
Lesson -2
Objectives: After studying this lesson you should be able to
learn:
• Importance of Management Accounting
• Limitations of Management Accounting

20. Importance of Management
Accounting
1. Various sources of Information: Management accounting
provides information related to financial and
non-financial activities to organization from
various sources.
2. Reliability and Accuracy: Through various techniques of
management accounting, different information
are obtained from financial accounting and cost
accounting.

21. Importance of Management Accounting
3. A Detail Study: The management collects information
from various sources such as, Accounting, Taxation, financial
and non-financial sources, thereafter these information are
studied in detail for taking decisions.
4. Getting Investment Opportunities: Management
accounting provides various opportunities of investment to
organization. It tests various proposals of investment and
selects the best alternative.

22. Importance of Management Accounting
5. Development and Expansion of Business: In case of expansion
of business, management accounting proves to be
useful for issue allotment of shares and proper
utilization of capital.
6. Financial Investigation: Management accounting carries out
financial investigation in such a manner, so that
related parties can reap benefits out of it.

23. Importance of Management Accounting
7. Helpful in Corporate Planning: Management accounting
plays a vital role in management of a company. This assists
management in formulating long-term plans.
8. Variance Analysis: Management accounting makes it
simple for the firm to attain desired goals by analysis of
variances.
9. Corrective Actions: Under management accounting
corrective measures are taken against the adverse variances
and decisions are implemented to attain desired goals.

24. Limitations of Management
Accounting
1. Dependency for Data and Information: To an extent
Management Accountant or controller has to
depend on financial accounting and cost
accounting for accuracy and information of facts
and figure.
2. More Expensive: Management accounting is useful
only for large scale organizations, small
organizations are not able to bear burden of
heavy expenditure on these provisions.

25. Limitations of Management
Accounting
3. Lack of Knowledge: Managers should be efficient enough
to use the techniques of Management Accounting.
4. Delays in Decision: At many instances when decision
making process is lengthy, decisions taken by
managers become useless.
5. Possibilities of Manipulation:At times , information and
figures obtained from financial accounting and cost
accounting may manipulated for managerial use.

26. Management Accounting
UNIT – 1
LESSON -3

27. Introduction of Management
Accounting-3
Lesson - 3
Objectives: After studying this lesson you should be
able to learn:
•Difference of management accounting with
Financial accounting
•Difference of Management accounting with
cost accounting.
• Role & Responsibilities of Management
Accountant

28. Distinction Between Management
Accounting & Financial Accounting
Basis FA MA
1. Objective Recording , Classifying
and Summarizing
Financial transactions
To deliver various
information to
managers.
2. Users External parties
mainly Investors,
Creditors.
Internal parties
(Managers)
3.
Importance
It is less important ,
as it is related to
operational activities
It is more important.
As it is related with
managerial activities.

29. Distinction Between Management
Accounting & Financial Accounting
Basis FA MA
4. Accounting
Principles
It provides information
on the basis of
“Generally Accepted
Accounting” Principles.
It does not adhere to
any such principle.
5. Information It provides historical
information.
It provides future
information based
upon historical data.
6. Compulsory
Vs Optional
It is compulsory as
per Companies Act.
It is entirely optional.

30. 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.

31. Distinction Between Management
Accounting & Cost Accounting
Basis MA CA
1. Nature It is concerned
with formulation
of policies,
improvement of
productivity and
profitability.
It is concerned
with cost
ascertainment
and cost control.
2. Subject-
matter
It involves
considerations of
both cost and
revenue data.
It deals primarily
with cost data

32. Distinction Between Management
Accounting & Cost Accounting
Basis MA CA
3. Part It is not a part of
Cost Accounting.
It is a part of
Management
Accounting.
4. Tools 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.

33. Distinction Between Management
Accounting & Cost Accounting
Basis MA CA
5. Qualification MBA, CA and ICWAI ICWAI (members)
6. Audit Auditing is not
compulsory for
management
accounting.
Auditing is
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.

34. Role of Management Accountant-
The Controller
• The management accountant has very significant role to perform in the installation,
development and functioning of an efficient and effective management accounting system. He
designs the framework of the financial and cost control reports that provide each managerial
level with the most useful data at the most appropriate time. Mr. P.L. Tandon has explained
beautifully the position of the management accountant in the following words:
• “ The management accountant is exactly like the spokes in a wheel, connecting the rim of the
wheel and the hub receiving the information. He processes the information and then returns the
processed information back to where it came from.”
• 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.

35. • 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.
• One widely held view of the progression of the accounting and
finance career path is that financial accounting is a stepping stone
to management accounting. Consistent with the notion of value
creation, management accountants help drive the success of the
business while strict financial accounting is more of a compliance
and historical endeavour.

36. Responsibilities of Management
Accountant
• It is the duty of the management accountant to keep all levels of management
informed of his real position. He has, therefore, varied functions to perform.
His important functions can be summarized as follows:
1. He administers tax policies and procedures
2. He supervises and coordinates the preparation of reports to government
agencies.
3. He ensures fiscal protection for the assets of the business through adequate
internal and proper insurance coverage.
4. He carries out continuous appraisal of economic and social forces, and the
government influences and interprets their effects on the business.