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Management Accounting
Unit I The nature -source -purpose of management information -Accounting for management,- Sources of data - Sampling techniques-, Cost classification - different types of cost behavior- cost objects, cost units and cost centres- cost-profit-investment - revenue centres-Presenting information - tables, -charts - graphs-pie charts- scatter diagrams. Management accounting (practical science of value creation) measures and reports financial information as well as other types of information that are intended primarily to assist managers in fulfilling the goals of the organisation. Additionally, a management accounting system is an important facet of overall organisational control. CIMA considers MA to be the application of principles to create, protect, preserve and increase value for shareholders and it requires the identification, generation, presentation, interpretation and use of relevant information relevant to: - ● Inform strategic decisions and formulate business strategy; ● Plan long, medium and short-term operations; ● Determine capital structure and fund that structure; - ● Design reward strategies for executives and shareholders; ● Inform operational decisions; ● Control operations and ensure the efficient use of resources; ● Measure and report financial and non-financial performance to management and other stakeholders; ● Implement corporate governance procedures, risk management and internal controls. Definition Of Management Accounting Management accounting means accounting designed for the management, i.e., accounting which provides necessary information to the management for discharging its functions. It is basically concerned with presentation of accounting information in a manner which can assist the management in the creation of policy and in the day-to-day operations of an undertaking. Its aim primarily is to assist the management in performing its functions effectively. The Chartered Institute of Management Accountants (CIMA) London, defines Management Accounting as follows: “The application of professional knowledge and skill in the preparation of accounting information in such as way as to assist management in the formation of policies and in the planning and control of the operations of the undertaking.”
What is Management Accounting? Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of financial information used by management to plan, evaluate and control within an organization and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for management groups such as shareholders, creditors, regulator agencies and tax authorities. Management accounting thus is the process of
- Identification – the recognition and evaluation of business transactions and other economic events for appropriate accounting action.
- Measurement – the qualification including estimates of business transactions or other economic events that have occurred or may occur.
- Accumulation – the disciplined and consistent approach to recording and classifying appropriate business transactions and other economic events.
- Analysis – the determination of resources for, and the relationships of the reported activity with other economic events and circumstances.
- Preparation and Interpretation – the meaningful coordination of accounting and or planning data to identify a need of information, presented in a logical format, and if appropriate, including conclusions drawn from those data.
- Communication – the reporting of pertinent information to management and others for internal and external uses. Management accounting is used by management to :
- Plan – to gain an understanding of expected business transactions and other economic events and their impact on the organization.
- Evaluate – to judge the implications of various past and or future events.
- Control – to insure the integrity of financial information concerning an organization or its resources.
- Assure accountability – to implement the system of reporting that is closely aligned to organizational responsibilities and that contributes to the effective measurement of management performance. The essence of the management process is decision making. Decision making is an unavoidable and continuous management activity. It may be directed towards some specific objectives, or it may result as a reaction of environmental factors as they occur. An enterprise would operate successfully if it does not simple react to events, rather it directs its efforts towards the accomplishment of desired purposes. Objectives tend to make decisions purposeful to the firm. The decision making process should be both efficient and effective. It would be effective when management’s objectives are achieved. The decision making system is said to be efficient when objectives are realized with the minimum use of resources. The process of decision making involves two basic management functions of planning and controlling. As discussed in the previous section, management accounting accumulates, measures and reports relevant information in such a way that planning and control functions of management
- Rules not Precise and Universal: In management accounting no set of rules or standards are followed universally. Though the tools of management accounting are the same, their use differs from concern to concern.
- Supplies Information and not decision: An important nature of management accounting is thatits provides requisite information and not decisions. However, decisions are taken by management with the help of these information.
- Achieving of Objectives: In management accounting, the accounting information is used in such a way so that organizational objectives and targets may be achieved and efficiency of business may be improved. Objectives of Management Accounting The fundamental objective of management accounting is to enable management to maximize profits or minimize losses. Following are the important objectives or purposes of management accounting:
- Policy formulation- Policy formulation and planning are the primary functions of management. The object of management accounting is to supply necessary data to the management for formulating plans. The figure supplied and opinion given by the management accountant helps management in policy formulation.
- Helpful in decision making- The management is required to take various important decisions. Management accounting techniques help in collecting and analyzing data relating to cost, volume and profit which provide a base for taking sound decision.
- Helpful in controlling- Management accounting is a useful device of managerial control.
Various accounting techniques such as standard costing and budgetary control are helpful in controlling performance. The actual results are compared with pre-determined targets to know the deviations.
- Motivation- Another important objective of management accounting is to help the management in selecting best alternatives of doing the things. Delegation of authority as well as responsibility increases the job satisfaction of employees and encourages them to look forward.
- Interpretation of financial information- Financial information is of technical nature and must be presented in such a way that it can be easily understood. It is the duty of management accountant who uses statistical devices like charts, diagrams etc. so that the information can be easily understandable.
- Reporting- One of the primary objectives of management fully informed about the latest position of the concern. Management accounting provides data as well as different alternative plans before than management for comparative study. The performance of various departments is also communicated regularly to the also communicated regularly to the top management. . Helpful in co-ordination- Management accounting provides tools which are helpful for this purposes. Co-ordination is maintained through functional budgeting. It is the duty of management accounting to act as a coordinator and reconcile the activities of different department. SCOPE OF MANAGEMENT ACCOUNTING : The scope of management accounting covers all the tools and techniques which help the management in effective discharge of their functions. The scope, therefore is very wide and broad based, covering mainly the following aspects of management accounting. (i) Financial Accounting : Financial accounting provides the data base on the basis of which management accounting processes information to management to serve their needs. Proper designed financial accounting system forms the very base on which management accounting prepares relevant and analytical report to facilitate management decision making. Management accounting assembles and presents the financial accounting data in meaningful
efficiency of the business. Report have to be well designed and frequent to help the management. This is an essential part of management accounting. FUNCTIONS OF MANAGEMENT ACCOUNTING : The basic functions of management accounting is to furnish relevant information along with analytical data to the management to enable timely decisions for appropriate actions. It helps in the effective discharge of management functions of planning, organizing, directing and controlling. The following are the main functions of management accounting. (a) Furnishing of relevant and vital data : Relevant and vital data is collected from concerned sources and presented through meaningful reports to management which facilitates decision making. Accounting data provides a strong base for furnishing financial figures to management to enable appropriate and timely action. (b) Compilation of data in suitable form : Accounting data as it is may not serve a meaningful and useful purpose to management for decision making. This data is required to be suitably modified and amended in manner that suits the management purpose. Hence the data is classified and rearranged in a way that helps the management to gain insight into the situation. (c) Analysis and Interpretation : Management accounting provides the tools and techniques for analysis and interpretation of data. Information is furnished in a comparable and analytical manner for easy grasp of the situation. This facilitates planning and decision making. (d) Means of communication and reporting : Management accounting system constitutes an important segment of the management communication system providing information and guidance for prospective planning and control. Reports well prepared sand presented makes the management more effective in controlling business operations. It helps in co- coordinating the operations of various department. (e) Facilitates control function : Management accounting helps in control function through the techniques of budgeting control and standard costing. These techniques enable comparison of actual performance with the targets and standards set analysis of the
deviations from such standards taking corrective action as a result of analysis and follow up to appraise the effectiveness of corrective action. (f) Planning : Planning involves determination of different courses of actions based on the purpose facts and considered estimates. It helps in planning the strategy to be adopted in achieving the targets. It renders necessary help in planning for future the business goals and objectives . (g) Guides the management in judgment : It assists the management in forming its judgment about the financial condition or the profitability of the business operation. Suitable action can be taken in laying down future plans and policies for improvement and advancement. (h) Decision – making : Decision making is a management process of making right choices from amongst the various courses of action. Decision can be taken only when the data is assembled and presented in meaningful terms and the areas requiring management attention are highlighted. Management accounting makes this decision making more effective.
- Reporting is usually at the end of the year; when the events have already taken place for which nothing can be done.
- Financial accounting offers a macro view of the entire activities of the organization; it shows the results of the business as a whole without showing the results of the individual departments or products. Hence there is a fusion of all positive and negative results culminating into one result.
- Financial accounting is subject to statutory audit which is compulsory as per the provisions of the Companies Act, 1956. Management Accounting is not subject to any such statutory audit.
- Financial accounting considers only the monetary aspect. Management accounting considers both the monetary as well as non monetary aspects. ROLE OR IMPORTANCE OR SIGNIFICANCE OF MANAGEMENT ACCOUNTING OR
analysis is to various levels of management in respect of various aspects of business operations. It helps in prompt and correct decision by management.
- Reduction in Business Risks: The collection and analysis of historical information in management accounting provides knowledge to the management in respect of nature of fluctuations and their causes and effects. Management can prepare such plans which may minimize the impact of trade cycle or seasonal fluctuations and consequently reduction in various types of business risks. LIMITATIONS OF MANAGEMENT ACCOUNTING: Management accounting is not free from limitations limits its effectiveness :
- Data Base: Management accounting depends for data on the financial and cost records. If the financial and cost accounting contains incorrect and inaccurate information; management accounting also gets affected to that extent. Discrepancies of financial and cost accounting penetrates into the management accounting system giving unreliable results. Therefore, effectiveness of management accounting system depends upon the efficiency of system followed for recording and compiling financial and cost records.
- Intuitive Decision making : Many times management is prone to take decisions without reference to information provided by management accounting system. They are tempted to take decision in an easy and short cut manner rather than on scientific basis. They may base their decision on mere guess work and ignore the information provided by management accounting system.
- Absence of Objectivity : Management accounting provides both qualitative and quantitative information which offers scope for subjective element. The report are therefore influenced by
opinion judgment based on personal bias and prejudice. These make the reports more subjective rather than objective.
- Developing discipline : Management accounting is still a new and developing. It has yet to sharpen its tools and techniques and seek perfection in its application. As a evolving discipline it is subject to certain obstacles and impediments which are to be cleared before it emerges as a fully developed science.
- Expensive proposition : It is an expensive proposition to install the system with necessary facilities and highly skilled persons. Therefore, small concerns cannot afford to adopt it. Only large concerns can taken advantage of it; where the benefits outweigh the cost in many ways.
- Wide scope: Management accounting embraces many disciplines and its scope is very wide. Hence it requires a through knowledge and understanding of many subjects to make the data more meaningful and informative. This makes the task of management accounting difficult.
- Resistance : This subject demands a change in the method and style of working which may meet opposition and non co-operation from certain vested interests. If may be construed by some persons as tool for their exploitation. They dislike being guided in decision making through scientific approach. Proper education of the system is necessary to help them break away from the traditional style of working.
- Cannot replace Management : Management accounting with all its tools and techniques can only facilitate decision making process for the management. It cannot be treated as an alternative or substitute for management. Ultimately it depends on the management for execution. Therefore, it is only a tool in the hands of management and cannot replace management. Management accounting processes quantitative data and collaborates with qualitative data. Only qualitative and unquantified data cannot be easily processed by management accounting.
4. Budgetary Control- It is a system which uses budgets as a tool for planning and control. The budgets of all functional departments are prepared in advance. The actual performance is recorded and compared with the pre-determined targets. The timing of budgets and finding out deviations is an important tool for planning and controlling. 5. Standard Costing- Standard costing is an important technique for cost control purposes. In standard costing system, costs are determines in advance. The actual costs are recorded and compared with standards costs. The variances, if any, are analysed and their reasons are ascertained. 6. Marginal Costing- This is a method of costing which is concerned with changes in costs resulting from changes in the volume of production. Under this system, cost of product is divided into marginal (variable) and fixed cost. The latter part of cost (fixed) is taken as fixed and is recorded over a level of production and every additional production unit involves only variable cost. 7. Decision Accounting- An important work of management is to take decisions. Decision taking involves a choice from various alternatives. There may be decisions about capital expenditure, whether to make or buy, what price to be charged, expansion or diversification, etc. 8. Revaluation Accounting- This is also known as Replacement Accounting. The preservation of capital in the business is the main objective of management. The profits are calculated in such a way that capital is preserved in real terms. During periods of rising prices, the value of capital is greatly affected. 9. Control Accounting- Control accounting is not a separate accounting system. Different systems have their control devices and these are used in control accounting. In control accounting we can use internal check, internal audit, statutory audit and other similar methods for control purposes.
- Management Information Systems- With the development of electronic devices for recording and classifying data, reporting to management has considerably improved. The data relevant planning, co-ordination and control is supplied to the management. Feedback of information and responsive can be used as control techniques.
Relationship of management accounting, financial accounting and cost accounting Management accounting, financial accounting and cost accounting are the methods of accounting providing information about the business firms. The financial accounting is related to the recording of daily transaction whereas in management accounting sources of information are used to specific mean. Financial accounts have deep impact on management accounting, because it is a branch of financial accounting. Both of these accounting are mutually helper and alternate to each other and are necessary for efficient operation of the firm. Cost accounting is tool that provides necessary data to the management for planning, decision making and determination of policies. Basically cost accounting and management are supplementary to each other. If in any business there is no room for cost accounting then management accounting will have no identity in that business. Basis of Difference Financial Accounting Management Accounting
1. Objects Its object is to record various transactions and to know, on that basis, profit or loss during a particular period and financial position at the end of that period. It s object is to provide necessary accounting information to management which may help it in taking decisions and formulating policies.
8. Accounting Principles They are prepared generally on the basis of certain accepted accounting principles and conventions. No set accounting principles are followed in this accounting 9. Period Generally, its duration is one year and this year is called as accounting year or financial year. It collects and supplies information from time to time during the whole year. 10. Publication As per Companies Act, every company is required to send a copy of its final accounts to the Registrar of Companies. Moreover, its publication is compulsory in case of Public Company. They are prepared for the use of management only and thus they are not published. 11. Audit These accounts can be got audited There is no such provision in this accounting. 12. Scope Its scope is limited Its scope is much wider.
COST CONCEPTS AND CLASSIFICATIONS
CONCEPT OF COST
The scope of term ‘cost’ is extremely broad and general. It is therefore, not easy to define or explain this term without leaving any doubt concerning its meaning. Cost accountants, economists and others develop the concept of cost according to their needs. This concept should, therefore, be studied in relation to its purpose and use. Some of the definitions of ‘cost’ are reproduced below : Cost is “the amount of expenditure (actual or notional) incurred on or attributable to a given thing”. (C.I.M.A. London). COST VERSUS EXPENSES AND LOSSES Cost should be distinguished from expenses and losses though in practice the terms cost and expenses are sometimes used synonymously. An expense is defined as including “all expired costs which are deductable from revenue”. COST CENTRE AND COST UNIT Cost is ascertained by cost centres or cost units or by both. The terms are discussed below: Cost Centre : A cost centre is “a location, person, or item of equipment or group of these for which costs may be ascertained and used for the purpose of control”. Thus, a cost centre refers to a section of the business to which costs can be charged. It may be a location (a department, a sales area), an item of equipment (a machine, a delivery van), a person (a salesman, a machine operator) or a group of these (two automatic machines operated by one workman).
Distribution cost is the cost of sequence of operations which begins with making the packed product available for despatch and ends with making the reconditioned returned empty package for re-use. The various items included in manufacturing administrative, selling and distribution costs ate available in Table 2. Table 2. Functional Classification of Costs Manufacturing Costs Selling Costs Materials Labour Factory rent Depreciation Power & lighting Advertising Salaries & Commissions of salesmen Showroom expenses Samples Travel expenses Insurance
Distribution Costs Stores Keeping Administration Costs Accounts office expenses Audit fees Packing costs Carriage outward Warehousing costs Upkeep and running costs of delivery vans Legal expenses Office rent Director’s remuneration Postage
