Dibrugarh University B.COM 5TH SEMESTER Management Accounting UNIT-1


Management Accounting


Q1. What is Management Accounting?

Ans: Meaning of Management Accounting: Management Accounting is comprised of two words Management and Accounting. It is the study of managerial aspects of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formation of policy, control and execution and appreciation of effectiveness. It is that system of accounting which helps management in carrying out its functions more efficiently. Management accounting provides all possible information required for managerial purposes.

Q2. Define Management Accounting.

Ans: Definitions of Management Accounting

According to Anglo-American Council on Productivity, “Management accounting is the presentation of accounting information in such a ways as to assist management in the creation of policy and the day-to-day operation of an undertaking.”

According to the Institute of Cost and Works Accountants of India defines management accounting as, “ A system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision making.”

Q3. What are the characteristics or nature of management Accounting?

Ans: followings are the characteristics or nature of management Accounting:

a. Providing accounting information: Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs.

b. Cause and effect analysis: Financial accounting is limited to the preparation of profit and loss account and findings out the ultimate result i.e., profit or loss. Management accounting goes a step further. The cause and effect relationship is discussed in management accounting. If there is a loss, the reasons for the loss are proved. If there is a profit, the factors directly influencing the profitability are also studied.

c. Use of special techniques and concepts: Management accounting uses special techniques and concepts to make accounting data more useful. The techniques usually include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting etc. The type of technique to be used will be determined according to the situation and necessity.

d. Taking important decisions: Management accounting helps in taking various important decisions. It supplies necessary information to the management which may base its decisions on it. The implications of various alternative decisions are also taken into account while taking important decisions.

e. Achieving objectives: In management accounting, the accounting information is used in such a way that it helps in achieving organizational objectives. Historical data is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments.

f. 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. Though the tools of management accounting are the same but their use differs from concern to concern.

g. Increase in efficiency: The purpose of using accounting information is to increase efficiency of the concern. The efficiency can be achieved by setting up goals for each department or section. The performance appraisal will enable the management to pin point efficient and inefficient spot.

h. Supplies information and not decision: 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 is only to guide and not to supply decisions.

i. Concerned with forecasting: The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.

Q4. Discuss the scope of Management accounting.

Ans: Management accounting is a new approach to accounting. It provides techniques for the interpretation of accounting data. It also helps 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 accounting is related to a number of fields. The following facts of management accounting are of a great significance and form the scope of this subject:

a. Financial accounting: It deals with historical data which provides the basis for control aspect of management accounting. So it is closely related to management accounting.

b. Cost accounting: It provides various techniques for determining the cost of manufactured product or service. The system of standard costing, marginal costing, differential costing, opportunity costing are helpful to the management for planning various activities.

c. Financial management: It helps the management in planning and controlling the financial resources of the firm in order to maximize the return on resources.

d. Budgeting and forecasting: It provides plans, policies and goals of the enterprise for a definite period. Comparison of actual performance with budgeted performance helps the management in determining performance of the employees. Forecasting helps in prediction of what will happen in a future in given situation.

e. Inventory control: Inventory control is provided by costing system through determining various levels of stock such as minimum level, maximum level etc., It saves uses of resources.

f. Reporting system: Various financial statements provide essential information about the business. These reports are analyzed and interpreted for managerial decision purpose.

g. Interpretation of data: Interpretation of financial data brings the attention of the management on critical areas of the business.

h. Control procedures and methods: Control procedures and methods help the management in efficient use of economic resources.

i. Internal audit: It evaluates the performance of each department and fixes the responsibility of variances to the concerned persons.

j. Tax accounting: Tax planning and payment of tax are the integral part of management accounting.

k. Office services: Management accounting may be required to control an office. He will be expected to deal with data processing, filling, copying, duplicating, communicating etc. He will also be reporting about the utility of different office machines.

Q5. Discuss the objectives of Management accounting.

Ans: The primary objective of management accounting is to enable management to maximize profits or minimize losses. This is done through the presentation of statements in such a way that management is able to take correct policy decisions. The following are the important objectives of management accounting:

a. Planning and policy formulation: The object of management accounting is to supply necessary data to the management for formulating plans. Planning is essentially related to taking decisions for future. It also includes forecasting, setting goals and deciding alternative courses of action.

b. Helpful in controlling performance: Management accounting devices like standard costing and budgetary control are helpful in controlling performance. The work is divided into different units and separate goals are set up for each unit. The performance of every unit is made the responsibility of a particular person.

c. Helpful in organizing: Organization is related to the establishment of relationship among different individuals in the concern. It also includes the delegation of authority and fixing of responsibility.

d. Helpful in interpreting financial information: The main object of management accounting is to present financial information to the management in such a way that it is easily understood.

e. Helpful in making decision: The management has to take certain important decisions. A decision may have to be taken about the expansion or diversification of production. Management accountant prepares a report on the feasibility of various alternatives and make an assessment of their financial implications.

f. Reporting to management: One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This helps management in taking proper and timely decisions.

g. Motivating employees: Management accounting helps the management in selecting best alternatives of doing the things. Targets are laid down for the employees. They feel motivated in achieving their targets and further incentives may be given for improving their performance.

h. Helpful in coordination: Management accounting provides tools which are helpful in coordinating the activities of different sections or departments. Coordination is done through functional budgeting. Management accountant acts as a coordinator and reconciles the activities of different sections.

i. Helpful in tax administration: The complexities of tax system are increasing every day. Management accounting helps in assessing various tax liabilities and depositing correct amount of taxes with the concerned authorities. Tax administration is carried on with the advice and guidance of the management accountant.

Q6. Explain the functions of Management accounting.

Ans: Management accounting is a part of accounting. It has developed out of the need for making more and more use of accounting for managerial decisions. Management accounting is assigned the functions of classifying presenting and interpreting data in such a way that it helps management in controlling and running the enterprise in an efficient and economical manner. Some of the functions of management accounting are given as follows:

a. Planning and forecasting: Management fixes various targets to be achieved by the business in near future. Planning and forecasting are essential for achieving business objectives. One of the important functions of the management accounting is to help management in planning for short-term and long-term periods and also in making forecasts for the future.

b. Modification of data: Management accounting helps in modifying accounting data. The information is modified in such a way that it becomes useful for the management. Management accountant classifies and modifies information according to the requirements of the management.

c. Financial analysis and interpretation: Management accountant undertakes the job of presenting financial data in a simplified way. Financial data is generally collected and presented in a technical way. Management accountant analysis and interprets financial data in a simple way and presents it in a technical language.

d. Facilitates managerial control: Management accounting is very useful in controlling performance. All accounting efforts are directed towards control of the enterprise. It enables the management to assess the performance of everyone in the organization.

e. Communication: Management accounting establishes communication within the organization and with the outside world. The Management accountant prepares reports for the benefit of different levels of management and employees.

g. Use of qualitative information: Financial data alone are not sufficient for decision making process. Qualitative data has strategic impact on decision making process and management accounting provides relevant qualitative information to the management to use it along with quantitative information taken from financial accounting.

h. Co-ordination: Co-ordination is an important part of management control. Management accountant acts as a coordinator among the different functional departments. It is done through budgeting and performance appraisal.

i. Helpful in taking strategic decision: Management accounting helps in taking strategic decisions. It supplies analytical information regarding various alternatives and the choice of management is made easy.

 Q7. Discuss the Tools and Techniques of management accounting:

Ans: The various tools and techniques used in management accounting are discussed as follows:

a. Financial planning: Financial planning involves determining both long-term and short term financial objectives of an enterprise, formulating financial policies and developing financial procedures to achieve the objectives. Thus management has to take strategic decisions like-fund raising, fund allocation, capital structure, etc. Management accounting provides techniques for such financial planning.

b. Analysis of financial statements: The analysis of financial statements is meant to classify and present the data in such a way that it becomes useful for the management. The techniques of financial analysis include comparative financial statements, ratios, fund flow statements, trend analysis etc.

c. Historical cost accounting: The system of recording actual cost data on or after the date when it has been incurred is known as historical cost accounting. The actual cost is compared to the standard cost and it gives an idea about the performance of the concern.

d. Budgetary control: It is a system where budgets are used as a tool for planning and control. Functional budgets are prepared on the basis of actual data and future possibilities. They are compared with the actual performance and differences are analyzed for corrective actions.

e. Standard costing: It is an important tool of cost control. It involves the preparation of standard costs, their comparison with the actual costs and analysis of the differences. It is also necessary for performance appraisal.

f. Marginal costing: It is a method of costing which is concerned with the changes in costs resulting from the changes in volume of production. It is concerned with variable costs. It is used in utilizing idle capacity in maximizing profits or minimizing loss.

g. Decision accounting: Decision making is the primary function of the top management. It involves a choice from various alternatives. Decision accounting assesses the profitability of various proposals. It facilitates the correct selection of a proposal.

h. Revaluation / Replacement accounting: Preserving of capital is an important object of management. Profits are to be calculated in such a way that capital is preserved in real terms. Revaluation accounting is used to denote the method employed for overcoming the problems connected with fixed assets replacement in a period of rising prices.

i. Control accounting: In control accounting we can use internal check, internal audit, statutory audit and organization and methods for control purposes.

j. Management information systems: With the development of electronic devices for recording and classifying data, reporting to management has considerably improved. The data planning co-ordination and control is supplied to the management.

Q8. Explain the needs and importance of management accounting.

Ans: In the present complex industrial world, management accounting has become an integral part of management. Management accounting guides and advices management at every step. The increase in scale of operations has increased the significance of management accounting also. Management accounting not only increases efficiency of the management, it also increases efficiency of the employees. Following are the advantages of management accounting:

a. Increase efficiency: Management accounting increases efficiency of business operations. The targets of different departments are fixed in advance and the achievements of these goals are a tool for measuring their efficiency.

b. 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. The activities of the concern are planned in a systematic manner.

c. Measurement of performance: The systems of budgetary control and standard costing enable the measurement of performance. In standard costing it enables the management to find out deviations between standard cost and actual cost. Budgetary control system too helps in measuring efficiency of all employees.

d. Maximizing profitability: The thrust of various management techniques is to control cost of production and increase efficiency of each and every individual in the organization. The profits of the enterprise are maximized with the help of management accounting system.

e. Improves services to customers: The cost control devices employed in management accounting enable the reduction of prices.  The quality of products becomes good because quality standards are pre-determined. It helps in improving good public relations by providing quality services to customers.

f. Effective management control: The tools and techniques of management accounting are helpful to the management in planning, co-coordinating and controlling activities of the concern.

Q9. Discuss the limitations of management accounting.

Ans: Following are the limitations of management accounting:

a. Based on accounting information: Management accounting is based on data supplied by financial and cost accounting. Management accounting has to depend upon the information collected by other sources, its effectiveness is limited to the reliability of those sources.

b. Lack of knowledge: The use of management accounting requires the knowledge of a number of related subjects. Management should be conversant with accounting principles, statistics, economics, principles of management etc. So the application of management accounting will be useful if persons connected with decision-making process have proper understanding not only of management accounting but also of related subjects.

c. Intuitive decisions: Though management accounting provides scientific analysis of various situations and enables decision taking based on facts and figures, there is a tendency to make decisions intuitively. Intuitive decisions limit the usefulness of management accounting.

d. Not an alternative to administration: Management accounting does not provide an alternative to administration. The tools and techniques of management accounting provides only information and not decisions. Decisions are to be taken by the management and their implementation is also done by management.

e. Top heavy structure: The installation of management accounting system needs an elaborate organizational system. A large number of rules and regulations are also required to make this system workable and effective. Smaller units cannot afford to use this system because of heavy costs.

f. Personal Bias: The interpretation of financial information depends upon the capability of interpreter as one has to make a personal judgment. There is every likelihood of personal bias in analysis and interpretation.

g. Psychological resistance: The installation of management accounting involves basic change in organizational set up. New rules and regulations are also required to be framed which affect a number of personnel and hence there is a possibility of resistance from some quarters or the other.

Q10. What are the distinctions between Financial Accounting and Management Accounting?

Ans: Following are the distinctions between Financial Accounting and Management Accounting:

myedu365 Question 10

Q11. What are the distinction between Management accounting and Cost accounting?

Ans: Following are the distinction between Management accounting and Cost accounting:

Q12. Explain the limitations of financial accounting and point out how management accounting helps to removing them.

Ans: Financial accounting is mainly concerned with the preparation of financial statements like Profit and Loss account and Balance sheet to know the operational results profit or loss and financial position respectively. This information is complex and is given in technical language and is not very useful to the management. Moreover the growth and complexities of modern business has extended the area of limitations so far as its managerial uses are concerned. Some of the limitations are given below:

1. Historical in Nature: Financial accounting is historical in nature in the sense that it records what has happened during a given period. It is not concerned with future uncertainties.

But Management accounting uses financial data to determine the impact of the data on the future course of action through trend analysis, probability structures, ratio analysis etc. Thus financial accounting as such is not so useful to managerial decision making but it becomes useful to the management after suitable modifications to the data.

2. Information about the enterprise as a whole: Financial accounting provides information about the enterprise as a whole e.g. total expenses, total revenues etc. It does not provide information in details such as product wise, process wise, department wise information etc.

But management accounting needs information in details. Management accounting provides information in details such as product wise, process wise, activity wise etc; through the technique of standard costing, responsibility accounting, budgetary control, ratio analysis, performance appraisal reports etc.

3. Price fixation: Financial accounting is not helpful in price fixing because costs are obtained after they are incurred.

  Management accounting assists the management in removing this limitation with the help of projected and estimated costs through standard costing, marginal costing, budgetary control techniques.

4. Cost control: Cost control under financial accounting is not possible because costs are known only after the end of the year. As costs are already incurred, they cannot be controlled.

Management accounting can assist the management in cost control and cost reduction by providing an yardstick for measuring efficiency in the use of resources. It is done through responsibility accounting, standard costing, budgetary control, performance appraisal report etc., by comparing the actual cost with standard cost and actual performance with budgeted performance.

5. Policy appraisal: Financial accounting has no technique for performance appraisal. Profitability is the only yardstick in financial accounting.

Management accounting can appraise the policies and programmes through its various techniques such as budgeting, ratio analysis, performance appraisal etc. Evaluation of management policies and functions is one of the basic functions of management accounting.

6. Decision making: Financial accounting cannot provide relevant information necessary to take strategic decision relating to introduction of a new product, replacement of labor by machine, selection of a proposal out of many alternatives, expansion or contraction of production etc.

But Management accounting provides useful information for such strategic decisions. It is done through project appraisal and ranking on the basis of profitability, focusing on weak areas for management supervision, etc.

7. Financial accounting records only quantitative information and ignores qualitative information. But decision making process is materially influenced by both quantitative and qualitative information.

On the other hand management accounting provides information of both quantitative and qualitative information which helps it in decision making process.