Introduction to Management Accounting

1. Unit-1
INTRODUCTION TO MANAGEMENT
ACCOUNTING

2. • Introduction- Accounting is an ancient art as old as money itself; however the role of
accounting has changing with economic and social developments. The traditional
view of accounting as a historical description of financial activities is no longer
acceptable. Accounting now is regarded as service activity the function of which is
to provide quantitative information about economic activities.

3. • Development of accounting -In India chanakya in his artha shastra had emphasized
the existence and need of proper accounting and auditing.
• However modern system of accounting owes its origin to pacoili who lived in Italy
in the 15th century.
• The advent of industrial revolution has resulted in large scale production, cut throat
competition and widening of the market. This has resulted in decentralization of
authority and control.
• Accounting today, therefore cannot be the same as it used to be about half a century
ago. Changes in technology have also brought a remarkable change in the filed of
accounting.

4. • Accountancy is the art of communicating financial
information about a business entity to users such as
shareholders and managers.[1] The communication is
generally in the financial form statements that show in money
terms the economic resources under the control of
management; the art lies in selecting the information that is
relevant to the user and is reliable.[2]

5. • Classification of accounts.
1. Financial accounting
2. Management accounting
3. Cost accounting
• Financial accounting –According to the American institute of certified Public
accountants “the art of recording , Classifying and summarizing in a significant
manner and in terms of money transactions and events which are in part at
least of a financial character and interpreting the results thereof”
• Functions of Financial accounting –
1. Recording
2. Classification of data
3. Summarizing
4. Deals with Financial Transactions
5. Interpreting Financial information

6. • Limitations of Financial Accounting:
1. Historical in nature
2. Provides information about the concern as a whole
3. Not helpful in price Fixation
4. Only Actual costs are Recorded.
5. Not Helpful in Taking Strategic Decisions.
6. Chances of manipulation.

7. • Cost accounting-
Costing is a specialized branch of accounting.In management Cost refers to
expenditure and not the price.Costing is the technique and process of ascertaining costs.
It consists of the principles and rules which are used for ascertaining the costs of
products and services.
• Objectives of cost Accounting.
1. Analysis and Ascertainment of costs.
2. Presentation of costs for Cost reduction and cost control
3. Planning and Decision making

8. • Importance and Advantages of cost accounting.
1. Cost accounting as an aid to management
2. Advantages to employees
3. Advantages to creditors, investors and Bankers
4. Advantages to the government and the society.

9. • Management Accounting- The Term management Accounting Refers to
accounting for the management I,e accounting which provides necessary
information to the management for discharging its functions. The functions
are planning , organizing ,directing and controlling of business operations.
• ICWAI published Glossary of management accounting terms Defining
Management accounting as a “system of collection and presentations of
relevant economic information relating to an enterprise for planning,
controlling and decision making”.

10. • Charactersitics of Manangement accounting.
1. Providing Accounting Information – The collection and classification of data is the
primary function of accounting department.(I,e from cost and financial
accounting).The information so collected is used by the management for taking
policy decisions. Management Accounting is a service function and it provides
necessary information to different levels of Mgt.
2. Cause and effect analysis –Financial accounting is limited to the preparation of
profits and loss A/c and finding out the ultimate result I,e Profit and loss
.Management Accounting goes a step further.
If there is a loss, the reasons for the loss are probed: if there is a profit the factors
directly influencing the profitability are also studied.
3. Helps to take important decisions: - Which are operational based and strategic in
nature.
4. Helps in achieving of objectives:- Management accounting helps in achieving
organizational objectives.
Historical data is used for formulating plans & setting up objective
Actual performance is compared with the targeted figures and corrective action if
necessary.

11. 5 No fixed norms Followed –In financial Accounting Certain rules are followed for
preparing Different accounting books. On the other hand no specific rules are
followed in management accounting as there is scope for flexibility in their
preparations and moreover outsiders have no access to them.
6 Increase in efficiency – Since Management accounting helps the management to
take a decision about the future ,the efficiency can be achieved by setting up goals
for each Department or section.
The performance Appraisal will pin point efficient and inefficient spots.
7 Helps in co-ordination- Management accounting techniques of planning also
helps in coordinating various business activities. Ex While Preparing budgets for
various Departments like production ,sales , purchases etc there should be
coordination among all the three depts. than contradiction.

12. • Scope of Management accounting-
1. Financial accounting –Management accounting is mainly concerned
with the rearrangement of the information provided by financial
accounting. Thus for an effective and successful management
accounting there should be a proper and well designed financial
accounting system.
2. Cost accounting – Many of the techniques of cost control like standard
costing, budgetary control etc are used by management accounting
3. Budgeting and forecasting – This includes framing of budgets.in order
to plan business activities for the future forecasting and budgeting play
a very significant role. Comparison of actual performance with the
budgeted performance ,computation of variances, finding their causes.

13. 4. Inventory control- Inventory Control denotes raw materials, goods in the process
of manufacture and finished products. Inventory control is significant as it
involves large sums. The management should determine different levels of stock
I,e minimum, maximum and reorder level. The control of inventory will help in
controlling costs of products. Management accountant will guide management as
to when and from where to purchase and how much to purchase.
5. Financial Management – Financial management is concerned with the planning
and controlling of the financial resources of the firm. It deals with raising funds
and their effective utilization.
6. Reporting to management- One of the functions of management accountant is to
report to the management. The reports are presented in the form of graphs,
diagrams , statistical techniques. The reports may cover profit and loss statement,
Cash and fund flow statement, Stock reports etc. The reports may be monthly,
quarterly and half yearly.
7. Cost control procedures – Any system of management accounting is incomplete
with out effective cost control procedures like inventory control ,
labour control,budgetrary control etc.

14. 8. Internal Audit – Management accountant heavily depends on internal financial
controls like internal audit and internal check to plug the loop holes in the
financial systems of the concern. Internal audit system is necessary to judge the
performance of different individuals.
9. Tax accounting- Tax planning is an important part of management accounting .
Income statements are prepared and liabilities are calculated. The management is
informed about the tax burden from central, state and local governments. Tax
returns are to filed with different departments.
10. Office services – Management accountant is expected to deal with data
processing. filing. copying ,duplicating, communicating etc.

15. • Differences Between Managment accounting and financial accounting
The main points of discussion are discussed below
• Object -
 Financial accounting is designed to supply information in the form of profit and loss
a/c and balance sheet ( to find out the financial position)) to external parties like
shareholders, creditors , banks , investors and government.
 Management accounting is essential to help management in formulating policies
and plans which is internal.
• Analyzing performance –
 Financial accounting portrays the position of business as a whole. The financial
statements like income statement and balance sheet report on overall performance of
the business.
 On the other hand management accounting directs its attention to various
divisions ,departments of the business and reports about the profitability,
performance etc. of each of them.

16. • Nature –
 Financial accounting is mainly concerned with the historical data. It records only
those transactions which have already taken place.
 Management accounting deals with projection of data for the future and therefore it
supplies data for the present and future duly analysed and in detail in the
management language.
• Monetary Management –
 In Financial accounting only such economic events find place which can be
described in money.
 However the management is equally interested in non monetary economic events viz
technical innovations, personnel in the organization etc
• Precision –
 There is less emphasis on precision in case of management accounting.
 Where as in financial accounting only exact figures are taken to arrive at precision..

17. • Reporting –
 Financial accounting reports are meant for outsiders like
bankers , Investors , shareholders, govt agencies etc.
 Where as management accounting are meant for internal use
only.
• Legal compulsion –
 Financial accounting has become compulsory for companies
where as management accounting is not.
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End of Unit-1