Introduction to Management Accounting

In every business enterprise, various transactions and events take place every day; sales are effected, purchases are made, expenses are met or incurred, payments are received and made, assets are sold and acquired. These events, arising out of the decisions and actions of management, exercise their effects and impact on the operational efficiency and position of the enterprise. Most of these transactions and events have money values or can be measured and expressed in money values. Since they affect the operation and position of the enterprise, they need to be measured, recorded, analysed and reported to the management, so that the management can evaluate their effect upon theenterprise.

As compared with financial accounting and cost accounting, management accounting is a later development.

Management accounting links management with accounting. All such information that is useful to the management is the subject matter of management accounting. Any information required for decision making is the concern of management accounting. Management accounting, unlike financial accounting, provides information for internal users, though the basic data come from the same accounting system i.e., financial accounting and cost accounting systems.

Management accounting collects and provides accounting, cost accounting, economic and statistical information to the men at various managerial levels to assist them in the performance of managerial functions and their evaluations. It is the development and application of various techniques of recording, analysis, interpretation and presentation, making the financial, costing, and other data active and effective in the performance of managerial functions, viz., planning, decision- making and control. It should be noted that management accounting makes use of not only accounting techniques but also of statistical and mathematical techniques. Management accounting is forward looking and should, therefore, be able to treat economic information and data to make it suitable for use by the management.

OBJECTIVE OF MANAGEMENT ACCOUNTING

The fundamental objective of management accounting is to assist the management in carrying out its duties efficiently so that maximize profits or minimize losses of management. It includes computation of plans and budgets covering all aspects of the business. Example: production, selling, distribution, research and finance. Management accounting systematic allocate responsibilities for implementation of plans and budgets. It analysis of all transactions, financial and physical, to enable effective comparison to be made between the forecasts and actual performance.

The main objectives of management accounting are as follows:

NATURE OF MANAGEMENT ACCOUNTING

The following aspects are considered as the nature of management accounting:

1. Management accounting is a decision making system: Management accounting provides accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations. Though management accountant is not taking any decision but provides data which is helpful to management in decision making. It communicates a great variety of facts in a systematic and meaningful manner.
2. Management accounting is futuristic: Management accounting unlike the financial accounting, deals with the future. It helps in planning the future-because decisions are always taken for the future course of action. In the decision making process management accounting provides selective and fruitful information out of the data collected.
3. Management accounting is a technique of selective nature: Management accountant takes into account only those data from the financial statement and communicates to the management which is useful for taking decisions.
4. Management accounting analyses different variables: Management accounting helps in analyzing the reasons for variations in profit as compared to the past period. It analyses the effects of different variables on the profits and profitability of the concern.
5. Management accounting does not set particular formats for information: It provides necessary information to the management in the form which may be more useful to the management in taking various decisions on different aspects of the business.

SCOPE OF MANAGEMENT ACCOUNTING

Management accounting includes financial accounting and extends to the operation of a system of cost accountancy, budgetary control and statistical data. While meeting the legal and conventional requirements regarding the presentation of financial statements, (profit and loss account, balance sheet and cash flow statements) it stresses emphasis upon the establishment and operation of internal controls.

The scope of management accounting, inter alia includes:

1. Formation, installation and operation of accounting, cost accounting, tax accounting and information systems. Management accountant has to construct and reconstruct these systems to meet the changing needs of management functions.
2. The compilation and preservation of vital data for management planning. The accounts and the document files are repository of vast quantities of details about the past progress of the enterprise, without which forecasts of the future is very hazardous for the enterprise. The management accountant presents the past data in such a way as to reflect the trends of events to the management. He is supposed to give his assessment of anticipated changes in relevant areas.

Such information provides effective assistance in the planning process. At times the management accountant may be called upon to associate with and even supervise the actual planning process along with other members of the management team.

1. Providing means of communicating management plans to the various levels of organization. This, on the one hand ensures the coordination of various segments of the enterprise plans and on the other defines the role of individual segments in the whole plan and assists the management in directing their activities.
2. Providing and installing an effective system of feed-back reports. This would enable the management in its controlling function. By pin-pointing the significant deviations between actual and expected activities and by adhering to the principles of selectivity and relevance, such reports help in the installation and operation of the system of ‘management by exceptions’. The management accountant is expected to analyse the deviation by reasons and responsibility and to suggest appropriate corrective measures in deserving cases.
3. Analysing and interpreting accounting and other data to make it understandable and usable to the management. It is only through such analysis and clarification that the management is enabled to place the various data and figures in proper perspective in the performance of its functions. Such analysis assists management in the location of responsibilities and to effect necessary changes in the organizational set up to achieve the objectives of the enterprise in a more efficient manner.
4. Assisting management in decision-making by (a) providing relevant accounting, other data and (b) analyzing the effect of alternative proposals on the profits and position of the enterprise Management accountant helps the management in a proper understanding and analysis of the problem in hand and presentation of factual information obviously in financial terms.
5. Providing methods and techniques for evaluating the performance of the management in the light of the objectives of the enterprises, thus assisting in the implementation of the principle of management by objectives.
6. Improving, modifying and sharpening the effectiveness of co-existing techniques of analysis. The management accountant should always think of increasing the practicability of existingtechniques.

He should be on the lookout for the development of new techniques as well.

Thus, management accounting serves not only as a tool in the hands of management, but also provides for a technique of evaluating the performance of the management itself. It operates as a double-edged sword assisting the management in proper performance of its functions of planning, decision-making and control, and at the same time, enabling the owners and other interested parties to evaluate and appraise the management of the enterprise.

TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING

A number of tool and techniques have been used under management accounting to help management in achieving the desired goals. For this the management accountant normally uses the following tool and techniques:

1. Financial Planning: Financial planning is the process of deciding in advance about the financial activities necessary for the organisation to achieve the desired objectives. It includes determining both long term and short term financial objectives, formulating financial policies and developing the financial procedures etc. Financial policies may relate to the determination of the capital requirement, sources of funds, determination and distribution of income, use of debt and equity capital and the determination of the optimum level of investment in various areas.
2. Financial Statement Analysis: Financial statements are analysed to make data more meaningful.

Comparative statement analysis, common size statement analysis, trend analysis, ratio analysis, cash flow analysis etc. are the major techniques of financial statement analysis used in management accounting.

1. Decision Making: Management accounting helps the management through the techniques of marginal costing, differential costing, capital budgeting, cash flow analysis, discounted cash flow etc. to select the best alternative which will maximize the profits of the business.
2. Control Techniques: Management should ensure that the plan formulated by it has been translated into action. Standard costing and budgetary control techniques are useful control techniques used by management.
3. Statistical and Graphical Techniques: Management accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such a form so that it may help the management in decision making. The techniques of linear programming, statistical quality control, investment chart, sales and earning chart etc. are of vitaluse.
4. Reporting: Management accountant prepares the necessary reports for providing information to the different levels of management by proper selection of data to be presented, organisation of data or selecting the appropriate method of reporting.

DIFFERENCE BETWEEN COST ACCOUNTING AND MANAGEMENT ACCOUNTING

Cost accounting and management accounting both are internal to the organization. Both have the same objectives of assisting management in its functions of planning, decision-making, controlling and techniques like budgetary control, standard costing and marginal costing owe their existence to cost accounting and have slipped into the kitbag of the management accountant. There is a good deal of overlapping in their functions. However, the two systems can be differentiated on the following grounds:

LIMITATIONS OF MANAGEMENT ACCOUNTING

The management accountant has the responsibility of producing and providing dependable accounting and other relevant data for the use of management. The data provided, if it has to be really effective in the management process, must be: (1) relevant and precise, (2) consistent and comparable, (3) presented in an appropriate and understandable form, (4) provided at appropriate time intervals, and (5) provided to meet the needs of various levels of management. The management accountant is expected to keep in mind the above points while producing his product. However, the information and reports presented by management accountant still suffers from the following limitations:

1. Different meaning of the same term: In accounting different terms carry different meanings under different set of circumstances and conditions. Such meanings and figures may superficially resemble one another and a person who is not, familiar with them may easily become confused or frustrated. The most common source of confusion is the word ‘cost’. There are historical costs, full costs, direct costs, variable costs, standard costs, original costs, residual costs, net costs, differential costs, opportunity costs, estimated cost and incremental costs. Some of these terms are synonymous, others are not exactly synonymous through resembling each other, still others, although not synonymous at all, may be used as if they were synonymous. In order to avoid such confusion and misunderstanding, the management accountant should in approaching a specific problem, define, as carefully and clearly as possible, the meaning in which such words are being used.

He should as far as possible be consistent in prescribing the meanings to such terms.

1. Approximations: Management accounting data cannot be completely accurate in all respects. A good deal of approximation is involved in the compilation and preparation of such data. The smaller the time gap between the happening and reporting of an event, the greater will be the approximation. In addition, in the working out of the estimates and future costs, approximation has to be resorted to. Even in case of historical data, the cost and time required for accuracy may be prohibitive and compel the management accountant to do some approximations. Therefore, while using the information provided by the management accountant, the management must be aware of the degree of approximation. The management accountant should follow a consistent practice in matters of approximations.
2. Incompleteness of the data: Management accountant can provide only the quantitative data as far as available, to the management. Business problems and their decisions often require additional quantitative as well as qualitative data which may be outside the purview of the management accountant. For example, the management accounting data will not disclose the extent to which the quality and utility of a product is affected by the changes in materials or methods of production. The management should guard itself against the belief that problems could be completely solved by numerical analysis. The management accountant should point out as far as possible, the qualitative factors relevant for decision- making in each case.
3. Importance of proper management action: A management accountant may provide information and figures in most appropriate form to the management. But figures themselves are nothing more than marks on pieces of paper, and by themselves they accomplish nothing. Anything that the business accomplishes is the result of action of the people. Figures can only assist people in the organization in various ways. It is the management and the people in the organisation who are to use the figure by understanding their language and act accordingly. The same set of figures, if not acted upon by the management, becomes useless or if misunderstood by the management, may lead to unwise actions.