2. ACKNOWLEDGEMENT
First, we acknowledge God the Almighty, for his Goodness, All the time. Secondly, our
sincere appreciation goes to our supervisor, DR. AMISHA GUPTA for her support and
persistent encouragement throughout the development and completion of this project work.
This achievement could not have been a reality without her scholarly assistance, guidance,
patience and self sacrifice. May God continue to bless her throughout her life. We equally
place on record our appreciation to all our colleagues. Your enlightment, council and
suggestion were invaluable in realising the completion of our work. Finally to our parents,
family and friends as we appreciate their love and support, we wish them long life and gods
abundant blessings.
Vasudha Dogra (67-MBA-16)
Vidhu Arora (68-MBA-16)
Arjit Gupta (69-MBA-16)
Aanchal (70-MBA-16)
Ridham Mahajan (71-MBA-16)
3. MANAGEMENT ACCOUNTING
1. Management Accounting Concept
Management Accounting is a new approach to accounting. The term Management Accounting
is composed of two words — Management and Accounting. It refers to Accounting for the
Management. Management Accounting 339 Management Accounting is a modern tool to
management. Management Accounting provides the techniques for interpretation of
accounting data. Here, accounting should serve the needs of management. Management is
concerned with decision-making. So, the role of management accounting is to facilitate the
process of decision-making by the management. Managers in all types of organizations need
information about business activities to plan, accurately, for the future and make decisions for
achieving the goals of the enterprise. Uncertainty is the characteristic of the decision-making
process. Uncertainty cannot be eliminated, altogether, but can be reduced. The function of
Management Accounting is to reduce the uncertainty and help the management in the decision
making process. Management accounting is that field of accounting, which deals with
providing information including financial accounting information to managers for their use in
planning, decision-making, performance evaluation, control, management of costs and cost
determination for financial reporting. Managerial accounting contains reports prepared to
fulfill the needs of managements.
Different authorities have provided different definitions for the term ‘Management
Accounting’. Some of them are as under:
“Management Accounting is concerned with accounting information, which is useful to the
management”. —Robert N. Anthony
“Management Accounting is concerned with the efficient management of a business through
the presentation to management of such information that will facilitate efficient planning and
control”. -Brown and Howard
“Any form of Accounting which enables a business to be conducted more efficiently can be
regarded as Management Accounting” —The Institute of Chartered Accountants of
England and Wales
4. The Certified Institute of Management Accountants (CIMA) of UK defines the term
‘Management Accounting’ in the following manner:
“Management Accounting is an integral part of management concerned with identifying,
presenting and interpreting information for:
(i) formulating strategy
(ii) planning and controlling activities
(iii) decision taking
(iv) optimizing the use of resourceslfil the needs of managements.
(v) disclosure to shareholders and others, external to the entity.
(vi) disclosure to employees.
(vii) safeguarding assets”.
From the above definitions, it is clear that the management accounting is concerned with that
accounting information, which is useful to the management. The accounting information is
rearranged in such a manner and provided to the top management for effective control to
achieve the goals of business.
Thus, management accounting is concerned with data collection from internal and external
sources, analyzing, processing, interpreting and communicating information for use, within
the organization, so that management can more effectively plan, make decisions and control
operations. The information to be collected and analysed has been extended to its competitors
in the industry. This provides more meaningful clues for proper decision-making in the right
direction.
The information in the management accounting system is used for three different purposes:
(A) Measurement
(B) Control and
(C) Decision-making
Situation specific: The reports in managerial accounting are situation specific. Information in
the accounting statements is to be culled out to meet the requirements of the relevant situation
and presented to the management for specific problem, situation or decision.
5. 2. SCOPE OF MANAGEMENT ACCOUNTING
Management accounting is a new approach to accounting. It provides techniques for the
interpretation of accounting data. It also help in developing realistic approach to future course
of action. The main aim is to help management in its functions of planning, directing and
controlling. Management acounting is related to a number of fields. At the Seventh
International Conference of Accountants held in Amsterdam in 1957, the main emphasis was
on Cost Accounting, Budgetary control, Materials Control, Interim Reporting, Determination
of the most efficient and economical accounting system, Special cost and economic studies
and assisting management in interpreting financial data. The following facts of management
accounting are of a great significance and form the scope of this subject.
(i) Financial Accounting. Financial accounting deals with the historical data. The
recorded facts about an organisation are useful for planning the future course of action.
Though planning is alwayz for the future but still it has to be based on recorded facts and
figures. So management accounting is closely related to financial accounting.
(ii) Cost Accounting. Cost accounting provide various techniques for determining cost of
manufacturing products or cost of producing service. It uses financiaal data for finding out
cost of various jobs, products or processes. The systyem of standard costing, marginal costing,
differential costing and opportunity costing are all helpful to the management for planning
varios business activities.
Cost accounting also helps in finding out economical and non economical fields of
production. The efficiency of different departments is judged by setting up standards and
finding out variances. So cost accounting is an essential part of management accounting.
(iii) Financial Managemenet. Financial management is concerned with the planning and
controlling of the financial resources of the firm. It deals with the raising of funds and their
effective utilisation. Its main aim is to use business funds in such a way that earnings are
maximised. Finance has become so much important for every business undertaking that all
managerial activities are connected with it. Financial viability of various propositions
influence decisions on them. Although, financial management has emerged as a seperate
6. subject, management accounting includes and extends to the operation of financial
management also.
(iv) Budgeting and Forecasting. Budgetting means expressing the plans, policies and
goals of the enterprise for a definite period in future. The targets are set for different
departments and responsibilty is fixed for achieving these targets. The comparison of actual
performance with the budgeted figures will give an idea to the management about the
performance of different departments. Forecasting, on the other hand, is a predictionof what
will happen as a result of a given set of circumstances. Forecasting is a judgement whereas
budgetting is an organisational object. Both budgetting and forecasting are useful for
management accountant in planning various activities.
(v) Inventory Control. Inventory is used to denote stock of rawmaterials, goods in the
process of manufacture and finished products. Inventory has a special significance in
accounting for determining correct income for a given period. Inventory control is significant
as it involves large sums. The management should determine different levels of stocks, i.e.
minimum level, maximum level, re-ordering level for inventory control. The control of
inventory will help in controlling costs of products. Management will need effective inventory
control for controlling stocks. Management accounting will guide managemnt as to whe and
from where to purchase and how much to purchase. So the study of inventory control will be
helpful for taking managerial decisions.
(vi) Reporting to Management. One of the functions of management accountant is to
keep the management informed of various activities of the concern so as to assist it in
controlling the enterprise. The reports are presented in the form of graphics, diagrams, index
numbers or other statistical techniques so as to make them easily understandable. The
management accountant sends interim reports to the management and these reports may be
monthly, quarterly, half-yearly. The reports may cover profit and loss statement, cash and
fund flow statements, stock reports, absentee reports and reports on orders in hand, etc. these
reports are helpful in giving a constant review of the working of the business.
(vii) Interpretation of Data. The management accountant interprets various financial
statements to the management. These statements give an idea about the financial and earning
position of the concern. These statements may be studied in comparison to statements of
earlier periods or in comparison with the statements of similar other concerns. The
significance of these reports is explained to the management in a simple language. If the
statements are not properly interpreted then wrong conclusions may be drawn. So
interpretation is as important as compiling of financial statements.
7. (viii) Control procedures and methods. Control procedures and methods are needed to use
various factors of production in most economical way. The studies about cost, relationship of
cost and profits are useful for using economic resources efficiently and economically.
(ix) Internal Audit. Internal audit system is necessary to judge the performance of every
department. The actual performance of every department and individual is compared with the
pre-determined standards. Management is able to know deviations in performance. Internal
audit helps management in fixing responsibility of different individuals.
(x) Tax Accounting. In the present complex tax systems, tax planning is an important
part of management accounting. Income statements are prepared and tax liabilities are
calculated. The management is informed about the tax burden from central government, state
government and local authorities. Various tax returns are to be filed with different
departments and tax payments are to be made in time. Tax accounting comes under the
purview of management accountant’s duties.
(xi) Office Services. Management accountant may be required to control an office. He will
be expected to deal with data processing, filing, copying, duplicating, communicating, etc. he
will also be reporting about the utility of different office machines.
3. Need And Importance of Management Accounting
In the present complex industrial world, management accounting has become an integral part
of management. Management Accountant guides and advises management at every step. The
increase in scale of operations has increased the significance of management accounting also.
Improvement in analytical and problem solving techniques of management accounting and
information needs of various levels of management are met regularly. Management
accounting not only increase efficiency of the management, it also increases efficiency of
employees. The following are advantages of management accounting:
(i) Increase Efficiency. Management accounting increases efficiency of business
operations. The targets of different departments are fixed in advance and the achievments of
these goals is a tool for measuring their efficiency.
(ii) Proper Planning. Management is able to plan various operations with the help of
accounting information. The technique of budgeting is helpful in forecasting various
activities. Budgets are prepared department wise firstly and then a master budget is prepared
8. for the whole organisation. The work load of each and every individual is fixed in advance.
The activities of the concern are planned in a systematic manner.
(iii) Measurements of Performance. The systems of budgetary control and standard
costing enable the measurement of performance. In standard costing, standards are determined
and then actual cost is compared with standard cost. It enables the management to find out
deviations between standard cost and actual cost. The performnce will be good if actual cost
doesnot exceed the standard cost. Budgetary control system too helps in measuring efficiency
of all employees.
(iv) Maximising Profitability. The thrust of various management technique is to control
cost of production and increase efficiency of each and every individual in the organisation.
The steps of controlling cost are able to reduce cost of production. The profits of enterprise
are maximised with the help of management accounting system. Every unit of organization
tries to contribute its maximum which enables the best use of all factors of production. The
return on investment also goes up.
(v) Improves Services to Customers. The cost controlled devices employed in
management accounting enable the reduction of prices. All employees in the concern are
made cost conscious. The quality of products become good because quality standards are pre
determined. The customers are supplied good quality goods at reasonable prices. The increase
in production of goods also enhances supply of goods to consumers.
(vi) Effective Management Control. Thje tools and techniques of management
accounting are helpful to the management in planning, co-ordinating and controlling activities
of the concern. The setting of standard and assessing actual performance regularly enables the
management to have “management by expectation.” Everybody assesses his own work and
immediate actions are taken in case of deviations in performance.
4. Limitations Of Management Accounting
Though management accounting is helpful tool to the management as it provides information
for planning, controlling and decision making, still its effectiveness is limited by a number of
reasons. Some of the limitations of management accounting are as follows:
(i) Based On Accounting Information. Management accounting is based on data and
information provided by financial accounting and cost accounting. As such the correctness
and effectiveness of managerial decisions will depend upon the quality of data provided by
9. cost and financial accounts. So, effectiveness of management account is limited to the
reliability of sources of information.
(ii) Lack Of Knowledge. The use of management accounting requires the knowledge of
number of related subjects. Deficiency in knowledge in related subjects like accounting
principles, statistics, economics, principle of management etc. will limit the use of
management accounting.
(iii) Intensive Decisions. Decision taking based on management accounting that provide
scientific analysis of various situations will be time consuming one. As such management
may avoid systematic procedures for taking decision and arrive at decision using intuitive.
And intuitive limit the usefulness of management accounting.
(iv) Management Accounting Is Only A Tool. The tools and techniques of management
accounting provide only information and not decisions. Decisions are to be taken by the
management and implementation of decisions are also done by management.
(v) Evolutionary Stage. Management accounting is still in a development stage and has
not yet reached a final stage. The techniques and tools used by this system give varying and
differing results. It is still named as internal accounting and/ or operational accounting.
(vi) Personal Prejudices And Bias. The interpretation of financial information may differ
from person to person depending upon the capability of the interpreter. Analysis and
interpretation of data and information may be influenced by personal basis. As such, the
objectivity of decision may be affected by personal prejudices and bias.
(vii) Psychological Resistance. Changes in traditional accounting practices and
organizational set up are required to install the management accounting system. It call for a
rearrangement of the personnel and their activities and framing of new rules and regulations
which generally may not be liked by the people involved.
