Management Accounting Dr. Kudshiya Raza Learning • Meaning of Management Accounting • Definition • Characteristics of Management Accounting • Objectives of Management Accounting MANAGEMENTACCOUNTING : Problem of Terminology Though the term ‘Management Accounting’ is in wide use, some other terms like ‘Management-oriented Accounting’, ‘ Management Accountancy’ and ‘ Accounting for Management’, etc. Are also used for this subject. As this subject edits, analysis and presents accounting information for the understanding of management and decisions to be taken by them its is called ‘Management-oriented Accounting’ or ‘Accounting for Management’. J. Batty has preferred the term ‘Management Accountancy’. According to him Management Accounting is usually used to indicate a limited use of some recognised principles while the scope of Management Accountancy is much wider. 3 Management Accounting : concept and definitions The term ‘Management Accounting’ represents a merger of two words ‘Management’ and ‘Accounting’. ‘Management’ refers to the functions of planning, direction and control, etc. while ‘Accounting’ refers to record, compilation, analysis and presentation of various financial transactions. In this context that form or system of accounting may be called management accounting which provides all such information's as are required by management for planning, direction and control of business activities. Some important definitions of management accounting are as follows : 4 “Management Accounting is the adaptation and analysis of accounting information and its diagnosis and explanation in such a way as to assits management.” – T. G. Rose 1)“Management Accounting is concerned with the accounting information that is useful to management.” – Robert N. Anthony “Management Accounting is the term used to describe the accounting methods, systems and techniques which, coupled with special knowledge and ability, assists management in its tat of maximizing profits or minimizing losses.” – J. Batty “Management Accounting may be defined as the application of accounting techniques to the provisions of information designed to assist all levels of management in planning and controlling the activities of the firm.” – John Sizer 6 “Management Accounting is the process of identification, measurement, presentation, analysis, interpretation and communication of accounting information that assists the management in planning, decision-making, direction and control within the framework of fulfilling the organizational objectives.” Nature or Characteristics of management accounting 1. Science & Arts 2. Accounting Service 3. Integrated system 4. More Concern with future 5. Selective Nature 6. Achieving of Objective Nature or Characteristics of management accounting 1. Both as a Science and an Art : In management accounting data are collected systematically and they are analysed with the help of various formulae and techniques and on this basis it is a science. On the other hand, subjective judgment of management and various needs of the organisation are also taken into account while taking decisions and on this basis it is an art. 2. Accounting Service : Management accounting is a function of accounting service towards management. Under this service necessary information's are provided to various levels of management. These information's may be financial as well as non-financial. . 9 3. Integrated System : Management accounting is an integrated system in which techniques related to various subjects are used in the process of data collection, analysis and decision-making. These subjects include cost accounting, financial accounting, statistics, economics, business laws, industrial psychology, quantitative techniques, etc 4. More concerned with Future : Management accounting is more concerned with ‘future’. No doubt, analysis and interpretation are made on the basis of historical data, but the important objective of management accounting is to determine policies for future to make forecasting and help to management in its task of planning and budgeting 5. Selective Nature : Management accounting is selective in nature. It selects only those plans or alternatives which seems to be more attractive and profitable. Similarly, only those facts and figures are presented before the management which are useful for managerial understanding and decisions. 6. Achieving of Objectives : In management accounting, the accounting information is used in such a way so that organisational objectives and targets may be achieved and efficiency of business may be improved. On then whole, management accounting is very important and sensitive system from the view of managerial needs which helps the management in the form of science as well as an art. 11 Scope of management accounting Financial Accounting Cost Accounting Financial Management Budgeting and Forecasting Inventory Control Scope of management accounting 1) Financial Accounting : Financial accounting means general accounting which pertains to recording of all business transactions in the book of prime entry, posting them into ledger accounts, balancing them and preparing a trial balance, from and out of which a Profit & Loss Account showing financial results of the business and a balance sheet showing assets and liabilities of the business concern are prepared. 2) Cost Accounting : Cost accounting is an important part of management accounting. Various aspects of cost accounting, such as standard costing, marginal costing, budgetary control, differential costing, etc. are very helpful to the management for planning various business activities. 13 3) Financial Management : It is concerned with the planning and controlling of financial resources of the firm so that the funds at disposal may be utilised effectively. Though, financial management has developed as a separate subjects, management accounting includes and extends to the functioning of financial management also. 4) Budgeting and Forecasting : Budget means expressing the plans, policies and goals of an enterprise in quantitative terms for a definite period in future. After the completion of period actual performance is compared with budgeted figures and the efficiency is measured. Forecasting, on the other hand, is a prediction o the basis of past trends, current information's and future possibilities. Forecasting is a judgment whereas budgeting is an organisational objects and both are useful in management accounting. 14 • Inventory Control : Inventory control is an important technique for cost control and efficiency of the enterprise. It involves determination of different levels of stock such as economic order quantity (E.O.Q), re-order point, minimum level, maximum level, etc. and for all these levels management accountant provides useful guidelines to the management Functions or objectives of management accounting Objectives/ Functions 1. Operating 2.Theoratical 16 I. Operating functions Management accounting means use of financial and accounting data for managerial functions. It requires systematic collection and processing of data. Such processing is termed as operating functions. The main operating functions of management accounting are as follows : 1) Recording of Data : Recording of business transactions is a basic function of any accounting system. Initially these transactions are recorded in their original form so as to maintain their basic entity and quality. Later on, these original recorded facts and data are classified into distinct groups and subrecorded and finally analytical reports are drafted on the basis of these sub-records. These reports provide information base for managerial actions. 2) VALIDATING THE DA: The effectiveness of managerial functions depends upon the accuracy TA and adequacy of financial data. Hence, through proper communication and experience it should be ensured by the management accountant that the data available are complete and accurate at certain predetermined level of significance. 3) Interpretation of data : Interpretation of data is an important function of management accounting. It involves impartial, objective and concise explanation of data and its analysis. In other words, financial data is generally collected and presented in a technical way. Management accountant analyses and interprets financial data in a simple way and presents it in a non-technical language. 4) Communication the data : The collected and interpreted information in the form of quantitative expression can give fruitful results only when it is communicated to proper person and at proper time. To accomplish this function of management accounting several reports and statements are used by the management accountant. 18 II. Theoretical functions The theoretical function of management accounting is to help in effective and successful performance of managerial functions. Incidentally this becomes the objective of management accounting also. The main theoretical functions (objectives) of management accounting are as follows : 1) Help in forecasting and planning : One of the important functions of the management accounting is to help management in the process of forecasting and planning so as to achieve the objectives of the business concern. It is worthwhile to note that formulation of policies and plans needs various forecasts and management accounting adequately provides various tools with the help of which various forecasts can be made in respect of production cost, sales, cash receipt, cash payments and profit, etc. 2) Help in organising : Organising establishes structural relationship among various individuals and segments in an enterprises, which is achieved through the process of delegation of authority and fixing of responsibility. Management accounting can help greatly in this process. Management accounting also develops the system of internal audit in order to maintain sound organisation structure. 19 3) help in controlling : Control means to ensure the work performance as per plan and pre-determined standards. It is possible through standard costing and budgetary control which are integral parts of management accounting. 4) Help in communication : Management accounting plays an important role in the process of communication. All operating results ad financial data are presented in the form of various reports and statements. These reports and statements communicate useful information to internal management as well as to outside parties, such as shareholders, debentures holders and other institutions. Sometimes some special reports or statements dealing with specific problems are also prepared for the purpose of conveying it to different levels. 20 3) Help in co-ordination : Management accounting helps in the over-all coordination of various operational activities and this purpose is achieved with the help of various functional budgets. 4) Help in decision- making : Management accounting provides necessary analytical information to management which help in the process of rational decision-making.
