Introduction to Management Accounting: Concepts and Applications

This assignment provides a comprehensive introduction to management accounting. It begins by defining management accounting and outlining its core principles, emphasizing its role in internal decision-making, unlike financial accounting. The document differentiates management accounting from cost and financial accounting, highlighting the types of information each provides. It explores the emergence of management accounting, its characteristics, and its use of various techniques. The assignment covers the role and scope of management accounting, emphasizing its importance in providing data for strategic decisions and enhancing organizational efficiency. It also includes a discussion on the relationship between cause and effect, the application of specific accounting techniques, and the use of historical data for future planning. The assignment concludes by clarifying that while management accountants provide information, the decisions are made by top management.

<COURSE NAME>
<SEMESTER>
Management Accounting
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CONTENT
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Unit 1: Introduction to Management Accounting
Unit 2: Ratio analysis
Unit 3: Cash Flow Analysis
Unit 4: Cost volume profit analysis
Unit 5: Budget & Budgetary control
Unit 6: Management Reporting
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UNIT - 1: INTRODUCTION TO MANAGEMENT ACCOUNTING STRUCTURE
1.0 Learning Objectives
1.1 Introduction
1.2 Meaning
1.3 Role & Scope of management accounting
1.4 difference between financial accounting
1.5 cost accounting and management accounting
1.6 Role of management accountant and management accounting in caree
1.7 Summary
1.8 Keywords
1.9 Learning Activity
1.10 Unit End Questions
1.11 References
1.0 LEARNING OBJECTIVES
After studying this unit, you will be able to:
 Describe the meaning of management accounting
 Identify the difference between cost accounting and management accounting
 State the role of management accountant
 List the scope of management accounting
1.1 INTRODUCTION
Broadly speaking, the science of management attempts to organize the quantitative factors of
a business decision, while the art of management lies in considering the qualitative factors in
the scale of the manager’s judgment, experience and insight to produce the best decision in
the circumstances. In the past, managers entirely relied on their intuition and experience in
making business decisions vitally affecting the survival and success of their business units.
But, with the increase in the structure and complexity of business due to various factors like
large scale operation, application of sophisticated modern technology, managerial decision-
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making has become more complex task. To fulfill the increasing adhoc needs of large-scale
business, the modern managers need substantive and timely data for making decisions.
Management Accounting is recently developed because of limitations of Financial
Accounting and Cost accounting. Management accounting connects management with
accounting. Management accounting serve the needs of internal users unlike financial
accounting but gathers information from financial and cost accounting systems only. For
example, management information needs like the net profit margin to sales during off seasons
etc are ascertained from management accounting. It collects and provides accounting, cost
accounting, economical, statistical information to managers of different hierarchical levels.
Management accounting makes use of mathematical, statistical and accounting techniques.
1.2 MEANING
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”1.
The definition of Management Accounting is furnished by the management accounting Team
of Anglo-American Council on Productivity in its Report states that:
“Management Accounting is the presentation of accounting information in such a way as to
assist management in the creation of policy and the day-to-day operation of an undertaking.
The technique of accounting is of extreme importance as it works in the most nearly universal
medium available for the expression of facts so that facts of great diversity can be presented
in the same picture. It is not the presentation of these pictures that is the function of
management but the use of them.”
Management accounting enables the use of cost accounting information to managers within
organizations, and provides them with the basis to make informed business decisions that will
1 Cost and management accounting by ICWAI
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help them in their management and control functions. Management accounting information is
used for decision-making within an organization. Unlike financial accounting information,
management accounting information is custom-made for internal users of the organization,
whereas financial accounting information is designed for external users.
Management accounting is required to recognize the financial situation of the business, it
reports to those inside the organisation for planning, directing, motivating, and controlling
and performance evaluation. It gives special emphasis on decision affecting the future. It is
needed to prepare plan.
Nature of Management Accounting
Though Management Accounting is the latest branch in the accounting arena, it may be
regarded partly as a Science and partly as an Art. It is the science of ‘Quantifying and
summarising’ and Art of ‘Interpreting’ accounting data.
Management Accounts derives its conclusions through collection, processing and objective
analysis of data Quantified in figures. Thus it depends upon “Objectivisation and
Quantification of progress and problems”. From this point of view Management accounting
may be regarded as a Science.
However Management Accounting also involves human judgement, impulses, whims and
prejudices as evidenced in interpretation of data, deductions and conclusions drawn from
analysis. ‘Subjectivity’ is inevitable in ‘deriving the meaning of data’. Deductions cannot be
scientific with precision. Personal judgement of Management accountant may influence the
interpretations and deductions significantly. From this point of view, Management
Accounting may be regarded as an Art.
We may conclude by saying that like all other social sciences, Management Accounting is
partly a Science and Partly an Art.
Emergence of management accounting
With the advent of science and technology more sophisticated equipments and gadgets have
been put into operation in the domain of accounting as well. This has transformed accounting
from a mere vehicle of reporting financial statements to a powerful tool of forecasting,
budgeting and budgetary control. Thus, financial accounting has been appended with
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financial and cost control, budgeting and budgetary control and also production planning and
control besides reporting on business performance. This has led to the emergence of
management accounting. The term ‘Management Accounting’ is of recent origin. The term
‘management accounting’ was first used by the British Team of Accountants that visited the
United States under the auspices of Anglo-American Productivity Council in 1950. Since
then management accounting has evolved into a full fledged subject in recent years. It is also
known as “Accounting for Management”.
Generally, Management Accounting refers to as an effective tool in the hands of the
management as against the traditional package of accounts. Its main purpose is to cater to
management all the pertinent financial and statistical information concerning every phase of
activity in the organization. Management accounting, in the words of W.M. Harper, is
concerned with “(a) management need for information regarding the economic operation of
the enterprise and (b) the actual direct management of cash.”
Robert Anthony stated that “Management Accounting is concerned with accounting
information which is useful to management”. Shilling law has stated that accounting, which
serves management by providing information as to the cost or profit associated with some
portion of firm’s total operations, is called managerial accounting.
All these definitions of Management Accounting disclose the following salient features:
1. Management accounting connects management with accounting.
2. It is associated with accounting information useful to management in studying the
strengths and weakness of the organization thus leading to maximizing profits or minimizing
losses.
Experts have used different terms to refer managerial accounting like business environment
accounting, control accounting, decision accounting, responsibility accounting, etc. It is
called responsibility accounting, since it provides accounting and statistical information to
different departments and levels of managers as and when needed for decision-making of that
department or center.
Characteristics of Management Accounting
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The job of management accounting is to provide accounting data to the management for
establishing its strategic decisions on it. It also assists in enhancing competence and
accomplishing organizational aims. The main characteristics of management accounting are
mentioned below:
1 Cause and effect relationship analysis: It is said that where financial accounting
stops management accounting starts. Financial accounting is limited to the preparation of
profit and loss account and financial position of the business at a point; management
accounting continues to the next step. Management accounting analysis the ‘cause and effect’
relationship like for example, the relationship between number of units sold and profit
earned, number of units sold and sales commissions paid. If the company incurs losses, the
reasons for the loss are examined. If the company earns profit, the various factors like the
expenditures, current assets etc are analyzed. Thus, cause and effect relationship among
various items of profit and loss account and balance sheet are studied in management
accounting.
2. Furnishing Accounting Information: Management according is based on accounting
information. The accumulation and compilation of financial data is the primary function of
accounting department. The information thus collected is used by the management for taking
policy decisions like pricing decisions, product or buy etc. Management accounting involves
the presentation of information in tailor-made way fitting to the managerial needs.
Management accounting acts as a service function and it caters necessary information to
different levels of management.
3. Application of specific techniques and concepts: Management accounting applies
specific techniques and concepts like financial planning and analysis (FP & A), standard
costing, marginal costing, budgetary control, project appraisal, and control accounting, to
make accounting data more useful. The use of a particular technique is decided based on the
situation and necessity.
4. Taking strategic decisions: Management accounting helps in taking various strategic
decisions. With the help of management tools and techniques like standard costing
and budgetary control, the historical data is analyzed to ascertain its possible impact
on future decisions. The effects of various alternative options are also considered
while making strategic decisions.
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5. Attaining Objectives: In management accounting, the accounting information is applied
in achieving organizational objectives. Historical data is used for formulating future plans
and setting up objectives. With the help of budgetary control and standard costing, the actual
performance is registered and compared it with targeted a figure which gives an idea to the
management about the performance of various departments. If there are any differences
between the standard set and actual performance of various departments, remedial measures
are taken.
6. Increase in Efficiency: One of the main purposes of using accounting information is
to increase efficiency of the concern. The efficiency can be achieved by setting up
goals for each department. The performance appraisal enables the management to nail
down efficient and inefficient points. Efforts are made to take corrective measures in
order to improve efficiency. The constant review of performance makes the staff cost
– conscious and it’s a continuous process.
7. Related to prediction and forecasting: Management accounting is associated with
the future. It facilitates the management in planning and estimation of future requirements.
The ascertained historical data is analyzed to chart necessary future plans.
8. Assists in Information needs but not take decisions: The management accountant
supplies information to the management. The decisions are to be taken by the top
management. The information is classified in the manner in which it is required by the
management. Management accountant only guides and does not supply decisions. The way
the accounting data is used depends on the expertise and skills of the management.
1.3 ROLE & SCOPE OF MANAGEMENT ACCOUNTING
Management accounting helps in providing of accounting data to the management for
decisions-making. It improves the efficiency of management and enables to achieve the
organizational goals.
1. Management accounting relies on accounting information. Management accounting acts as
a means in providing necessary information to different levels of management. The
accounting data gathered in a required format like for example, the sales turnover during peak
seasons or during off seasons etc is used for reviewing various policy and strategic decisions.
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2. It is said that where the role of management accounting starts when the role of financial
accounting ends. Management accounting discusses the reasons for the loss and the factors
directly influencing the profitability. Profits are compared to sales, share capital current
assets, different expenditures, and interest payables etc.
3. Management accounting uses tools and techniques like financial planning and analyses,
standard costing, budgetary control, direct costing, control accounting, according to necessity
to make accounting data more useful.
4. Assessment of actual performance with targeted numbers lets the management know about
the performance of various departments. If there are any differences or variations, necessary
corrective steps are taken at once with the help of budgetary control and standard costing.
6. With the help of accounting information, management points out efficient and inefficient
spots. The constant review makes the staff cost–conscious.
7. The management accounting helps the management in planning and forecasting.
The primary function of management accounting is to assist management by providing
required reports to take strategic decisions in order to maximize the wealth of shareholders.
It systematically allocates responsibilities for implementation of plans and budgets. It assists
in effective comparison between forecasts and actual performance.
The important objectives of management accounting are
1. To develop policies and planning:
Planning involves forecasting and setting goals on the basis of available information.
Framing policies determine alternative courses of action and deciding on the program of
activities. It facilitates preparation of statements based on past results, and give estimates for
future.
2. To interpret financial reports:
Management accounting presents financial information to the management. It analyzes and
interprets accounting information with the help of charts and statistical tools and presented in
an easy way to management.
3. To aid decision-making:
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In these days of complex decision-making, management accounting makes decision-making
process more scientific with the help of various techniques like funds flow analysis, cash
flow analysis, and ratio analysis. Information relating to costs, profits, investments, debts,
capital and savings are evaluated with alternative choices and based on them sound decision
is taken.
4. To assist in controlling aspect: Management accounting assists in managerial control.
Management accounting tools like standard costing and budgetary control help in controlling
aspect. Cost control is implemented through the use of standard costing and departmental
control is implemented through the use of budgets. As efficient performing centers and
inefficient performing centers are spotted with the help of management accounting, the
performance appraisal of each department’s managers become easy.
5. To help co-ordination of operations: Management accounting through use of tools like
budgets facilitate in coordination of operations of various departments.
FUNCTIONS OF MANAGEMENT ACCOUNTING,
The basic function of management accounting is to assist the management in performing its
functions effectively. The functions of the management are planning, organizing, directing,
and controlling.
Management accounting is a part of accounting. It has developed out of the need for making
more use of accounting for making managerial decisions.
Management accounting helps in the performance of each of these functions in the following
ways:
1. Provides data
Management accounting serves as a vital source of data for management planning. The
accounts and documents are a repository of a vast quantity of data about the past progress of
the enterprise, which is a must for making forecasts for the future.
2. Modifies data
Management accounting modifies the available accounting data rearranging in such a way
that it becomes useful for management.
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The modification of data in similar groups makes the data more useful and understandable.
The accounting data required for management decisions is properly compiled and classifies.
For example, purchase figures for different months may be classified to know total purchases
made during each period product-wise, supplier-wise, and territory-wise.
3. Communication
Management accounting is an important medium of communication. Different levels of
management (top, middle, and lower) need different types of information.
The top management needs concise information at relatively long intervals, middle
management needs information regularly, and lower management is interested in detailed
information at short-intervals.
Management accounting establishes communication within the organization and with the
outside world.
4. Analyses and interprets data
The accounting data is analyzed meaningfully for effective planning and decision-making.
For this purpose, the data is presented in a comparative form, Ratios are calculated, and likely
trends are projected.
5. Serves as a means of communicating
Management accounting provides a means of communicating management plans upward,
downward, and outward through the organization.
Initially, it means identifying the feasibility and consistency of the various segments of the
plan. The later stages it keeps all parties informed about the plans they have been agreed
upon and their roles in these plans.
6. Facilitates control
Management accounting helps in translating given objectives and strategy into specified
goals for attainment t by a specified time and secures the effective accomplishment of these
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