Management Accounting
UNIT-1
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:
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.
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