ACM – 601 UNIT - I

Unit – I
LESSON 1
OVERVIEW OF MANAGEMENT ACCOUNTING-1
Objectives:

 To familiarize the student with the concept of accounting and its main
branches
 To introduce the concept of Management accounting
 To explain the meaning, definition, scope and significance of Management
Accounting.

Structure:
 Introduction
 Meaning and classification of Accounting
 Management Accounting – Conceptual frame work
 Definitions of Management Accounting
 Nature and Significance of Management Accounting
 Scope of Management Accounting
 Summary
 Self Assessment Questions

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Introduction
Accounting is both at the centre and circumference of management decision making
i.e. both cause and effect of any decision making process. Accounting has been
defined as „the measurement and communication of financial and economic data‟.
Though it has been in existence over ages under a traditional system called „Single
Entry‟, the present system „Double Entry‟ took over the erstwhile system and this is
more scientific, informative and useful as it presents the performance of the
business for a specific period as also the position of the business as on that day.
The science of Management seeks to organize the quantitative factors of a business
decision, while the art of Management concern is weighing the qualitative facts while
judging a solution. For a longtime people used to differentiate the management of a
business from its accounting but business organizations realized the fact that
accounting information form the basis for managerial policies and decisions and the
impact of these can be felt only through the accounting information.

Meaning and Classification of Accounting

Accounting involves collection, recording, classification and presentation of financial
data for the benefit of its stakeholders. The stakeholders here include Management,
employees, creditors, customers, society and Government. Eric Kohlen defines
accounting as „the procedure of analyzing, classifying and recording transactions in
accordance with a preconceived plan for the benefit of (a) providing a means by
which an enterprise can be conducted in an orderly fashion and (b) establishing a
basis for reporting the financial condition of enterprise and the results of its
operation. Smith and Ashburne describes it as „Accounting is the science of
recording and classifying business transactions and events, primarily of financial
character and the art of making significant summaries, analyses and interpretation of
these transactions, events and communicating the result to persons who must make
decisions from judgment. It emerges the scope of accounting as not only compiling
of financial information, but analyzing, presenting and providing necessary base for
decision making. Thus accounting can be classified into three main branches;

(a) Financial accounting

(b) Cost accounting and
(c) Management accounting

Though modern approach gives origin to number of other branches like Price Level
Accounting, Human Resource Accounting, Social Accounting, Responsibility
Accounting, etc., all these techniques supplement the major three branches –
financial accounting, cost accounting and management accounting. Financial
accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money transactions which are in part at least of financial
character and interpreting the results there of. Thus its scope is confined to
numerical information, historical in nature, does not facilitate planning, fore casting
and decision making, which are primary functions of management. Costing on the
other hand lays emphasis on mitigating the cost of the product by cost
ascertainment and cost control to enable to get more margin of profit by reduction in
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ACM – 601 UNIT - I
costs. Thus it is the technique of classifying, recording and appropriate allocation of
expenditure for the determination of costs of products or services for the
presentation of suitably arranged data for purposes of control and guidance of
management. Here again, it helps management from only one angle ie., reduction
of costs and neglects the other side i.e., ‟Revenue‟ which also should be given
weightage for an efficient business unit. Thus came into vogue, Management
Accounting which aims at supplying and using all the accounting information for
managerial decision making for efficient running of the business to ensure maximum
profit.

Management Accounting – Conceptual frame work.

With the progress of science and technology the system of accounting also
underwent change from a mere tool of financial information to a proper instrument to
facilitate managerial decision making through futuristic approach. This widened the
operations of financial accounting to include cost control, budgeting, etc., thus the
origin of Managing Accounting. The term „Management Accounting‟ is of recent
origin. This was first coined by British Team of Accountants who visited United
States in 1950 under the auspice of Anglo-American Productivity Council. Since
then it has been recognized as an independent stream under the caption
„Management Oriented Accounting‟, „Accounting for Management‟ or „Management
Accounting‟. The emphasis of management accounting is to redesign accounting
in such a way that it is helpful to the management in formatting of a policy, control of
execution and appreciation of effectiveness. This is so because in the modern
business world with large scale undertakings owned and managed not just by an
individual but by a group of people, working in tough competition, decision making
can not be based on intuition but should be based on scientific analysis and
systematic approach with the help of accounting information

Definitions of Management Accounting:

The scope, functions and importance of Management Accounting has been defined
differently by different people. To name a few;

Anglo-American Council on productivity opinion “Management Accounting is the

presentation of accounting information in such a way as to asses the management in
the creation of policy and the day to day operations of the undertaking‟.
Here the objective of management accounting is as to facilitate policy formulation
and implementation.

Robert N.Anthony simplifies by saying „Management Accounting is concerned with

accounting information that is useful to management which automatically involves
collection, compilation and presentation of the accounting information.

J.G. Rose defines it as „ Management accounting is the adaptation and analysis of

accounting information and its diagnosis and explanation in such a way as to assist
management. J. Batty in a more comprehensive way observes it as a term used to
describe the accounting methods, systems and techniques which coupled with
special knowledge and ability, assist Management in its task of maximizing profits
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ACM – 601 UNIT - I
and minimizing losses‟ Hence the word „special knowledge‟ includes economics,
laws, statistical methods, psychology and other related subjects.

Smith R.L. defines it as „Management Accounting is a more intimate merger of the

two older profession of management and accounting where in the informational
needs of the manager determine the accounting means for their satisfactory. Thus
this speaks about the mutual dependence of management and accounting.

Institute of Chartered Accountants of India defines it as „Such of techniques and

procedures by which accounting mainly seeks to aid the management collectively
have come to be known as Management accounting‟.

From all these definitions, it is clear that financial data recorded, analyzed and
presented to facilitate managerial decision making right from planning to execution is
the art/science of management accounting.

Nature and Significance of Management Accounting:

The task of Management accounting can be listed as below;
1. Providing Accounting Information: This involves collection and classification
of financial information which is the primary function of Management Accounting.
2. Cause and effect analysis: Here the reason for any situation is questioned e.g.
the reason for losses, fall in sales, increase in costs, etc.
3. Use of special techniques and concepts: Here some special techniques like
financial planning, budgetary control, standard costing, etc., are used to facilitate
planning and decision making.
4. Facilitation decision making: The historical data available is classified,
analyzed and helps management for planning and decision making.
5. Achieving of objectives: Actual performance vis a vis targeted performances
account for gaps and enables decision making.
6. Flexible system: Management accounting is an art based on scientific
principles. The data available is analyzed as per the requirement of
stakeholders.
7. Increase in efficiencies: Management accounting focuses at efficiency by
following goal setting and working towards it.
8. Supplies information but not decision: Management accounting provides all
the information required for various categories of people. Taking the information
available, decisions have to be made which proves individual talent and
efficiency.
9. Concerned with forecasting: This is an art helps planning, budgeting,
forecasting, thus ensures a better functioning of the organization.

Scope of Management Accounting.

Management Accounting provides all the techniques that facilitate interpretation of
data. Its main purpose is to assist management in its managerial functions i.e.,
planning, organizing, communicating, coordinating and controlling. At the Seventh
International Conference of Accountants held in Amsterdam in 1957, the main
emphasis was on cost accounting, Budgetary control, Material control, Interim
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Reporting, other related costing techniques. Though management accounting as an
art is ever inclusive, the following can be certain facets of management accounting:

1. Financial accounting.
This deals with the historical data. The recorded facts about the organization
form a basis for future decision making and data available from a systematic
financial records for any future course of action.

2. Cost accounting.
The techniques of cost accountings marginal costing, standard costing and
budgetary control enables measurement of performance and thus bring out grey
areas and efficient areas. This helps management in decision making. It uses
financial data to find out the cost of each job, product or process. The systems of
standard costing, differential costing, marginal costing, opportunity costing, etc.,
are all helpful to management in planning its future course of action.

3. Budgeting and Forecasting.

Budgeting means, expressing the plans, policies and goals of the enterprise for a
definite period in future. For each department and cost centre targets are fixed
and their actual performance is compared with the budgeted figures to appraise
the performance of each department. Forecasting is a judgment whereas
budgeting is an organizational object. Forecasting is for forewarning which helps
forearming to protect the organization against eventualities. Both budgeting and
forecasting helps management accountants, in planning various activities.

4. Inventory control.
Stock forms a very important element of cost controlling techniques proper
levels of raw material, semi finished goods and finished product are to be
properly planned as stock more required implies costs towards hoarding apart
from the money locked up in it. Less stock would mean incapability of catering to
demand which mars reputation. A smooth flow of required stock ensures proper
stock management and control. Management account will guide the organization
as to when and from where the purchases have to be made.

5. Reporting to Management.
One basic function of management accountant is to report all the activities to
management. Reporting is done through diagrammatic representation, graphs,
index numbers or other statistical techniques/ Periodical reports are sent to
concerned authorities, which may be about cost flow, fund flow, report of
absenteeism, stock report, etc. Thus the authorities are given information about
what is going on in the organization.

6. Control procedure and method.

All the factors of production should be properly put to use by studying the cost
relationship between various elements.

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7. Internal audit.
A scrutiny of the affairs of various departments is a regular feature in
management accounting thorough a thorough internal audit control system. This
also helps in identifying and fixing responsibilities.

8. Tax Accounting.
Tax planning is an essential function of management accounting. The tax
burden from Central Government, State Government can well be planned and
accordingly a perfect tax planning can be effected to reduce the tax burden.
9. Office Service.
A management accountant may be required to exercise proper control in the
office by coordinating preparation, copying, duplicating, communicating office
information.

10. Auditing.
The effectiveness of final audit depends in turn on the internal audit system
existing in the business concern.

11. Interpretation of data.

A management accountant‟s major function is to analyze and interpret the
situation about various factors for an effective and efficient decision making.

Summary.
Accounting involves collection, recording, classification and presentation of financial
information for he benefit of the users. The functions of accounting are further
extended to help management in decision making by broadening its presentation.
Here comes the new branches of accounting to supplement financial account i.e.
cost accounting and management accounting. The purpose of management
accounting is to facilitate managerial decision making by a proper analysis and
interpretation of accounting information furnished by financial accounting. In its
process, a management accountant makes use of several techniques like costing,
financial accounting, budgeting, static‟s, Tax planning, auditing, forecasting, etc. By
using all such information a proper planning execution of such plans, verifications of
its implementation, measuring the results, etc., are followed. This ensures as more
efficient organization to combat with the problems of competition. By the analysis
and interpretation of financial information, decisions regarding various factors are
taken which enables achievement of goals and objectives. Thus management
accounting as is defined and opined by many people is an application of account
information to suit various levels of management to ensure a better efficient
functioning by a coordinated effort of planning, execution communication,
coordination and control.

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Self Assessment Questions

(A) State whether the following statements are True or False.

a. Management accounting deals with financial information only.
b. Management accounting is a substitute to financial accounting.
c. Management accounting aims to increase only profitability of the
business.
d. Management accounting is mandatory.
e. An efficient management accounting system makes use of number
of techniques apart from financial accounting.
(B) (1) Answer the following in 10 lines.
a. What is accounting? What are its main branches?
b. Define Management Accounting.
c. What way management accounting is superior to financial
accounting.
(2) Answer the following in three pages.
a. “Management accounting begins where financial accounting ends‟
Elucidate.
b. What is the scope of Management Accounting?
c. What are the objectives of Management Accounting?

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LESSON 2
MANAGEMENT ACCOUNTING An OVERVIEW – 2
Objectives:
 To acquaint the students about the functions of management accounting.
 To distinguish between financial accounting and management accounting.
 To highlight the differences between cost accounting and management accounting.
 To familiarize with the techniques of management accounting.
 To bring out the limitations of management accounting.

Structure:
 Introduction
 Functions of Management Accounting
 Tools/Techniques of Management Accounting
 Financial Accounting Vs Management Accounting
 Cost Accounting Vs Management Accounting
 Limitations of Management Accounting
 Summary
 Self Check questions

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Introduction
The purpose of management accounting is to make available accounting information
in an organized manner to enable decision making by management timely and
situational to ensure better functioning. The science / art of management accounting
helps different levels of management to take strategic decisions which encompasses
a wide range of activities like profit planning, product planning, departmental work
allocations, performance appraisal entering into new markets, introducing new
products and many and more. It makes use of data available from financial
accounting applying various techniques from costing, budgeting forecasting, etc.,
plans the situation implements them and measures performance by adopting several
control strategies Thus it performance several functions as a supplementary
strategy to the functions of financial accounting and cost accounting. Thus where
financial accounting ends, management accounting begins.

Functions of Management Accounting

Management accounting with its origin to facilitate decision making of management
at all stages / levels has inclusive and exhaustive functions to perform. It is
assigned the function of classifying, presenting and interpreting data in such a way
that it helps management in planning, forecasting, execution and controlling. Some
of the functions of management accounting are listed below.

(a) Planning and Forecasting.

One primary functions of management in planning – Short terms or long term. These
necessities envisaging the future i.e. forecasting. The management accountant with
the help of existing financial data and his capacity to look about future arrives at
certain targets oriented towards the objectives of the business.

(b) Modification of data.

The raw data furnished by financial accounting is modified and presented in such a
form as to enable value judgments for example sales data is further analyzed into
periodical sales, season wise sales, territory wise sales, product wise sales, etc., to
identify grey areas and efficient areas.

(c) Financial Analysis and Interpretation.

The data available is presented in such a manner as to facilitate comparisons. The
vertical and horizontal analysis of different items enables comparison over a period
as also the incidence of each element in constituting the cost of the product. The
management accounting enables presentation of technical data as per financial
accounting in a simple form to facilitate managerial decisions which may be taken
even by a non technical person.

(d) Facilitates Management Control.

One of the major functions of Management i.e. control can be properly exercised
with a thorough system of management accounting. Budgetary control and standard
costing are the two main techniques which are used for every cost unit. Targets are
fixed by an individual, department, process, branch, etc., and performance is
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measured. Thus performance appraisal followed by necessary actions / decisions
can be taken depending on the situation.

(e) Communication
Management Accountant performs another function which is equally important i.e.
communicating with different levels of stakeholders, different types of reports are
prepared to suit the requirement of various categories of people like the Board of
Directors, employees, customers, society and the Government.

(f) Use of qualitative information.

Unlike financial accounting, management accounting makes use of qualitative
information. For example if a product is to be introduced in the market an analysis is
made not only of quantitative information but also on other phenomenon like
customer‟s Tastes / Choices / Preferences, existing competition, use of existing
resources, etc. Thus apart from financial data non monetary information also has a
due weightage.

(g) Coordinating
Yet another and different function of management is coordination. The efforts of
every wing in the organization need thorough coordination to ensure efficiency
coupled with cost effectiveness. Management accounting with the help of financial
accounting tries to budget out the performance tries to coordinate all the activities to
achieve targeted results through joint effort.

(h) Enables strategic management through timely

and precise decisions. It supplies necessary information for alternative courses of
action and leave the ground to management to take a right decision.

(i) Supplying information to various levels of management.

With the timely information given by financial accounting, management accounting
interprets it through proper analysis and gives necessary information to various
levels to take proper and timely decisions. This improves the efficiency of the
organization.

Thus with the financial data made available, management accounting methods to
help and facilitate decision making process which will improve the efficiency and
boosts the image of the organization.

Tools / Techniques of Management Accounting

Management account is all inclusive and exhaustive and number of techniques and
adopted in the process following are some of the techniques adopted in
Management accounting.

a. Financial Policy and Accounting

A major decision to be taken by any concern is the source of financing i.e. either
own funds, loan funds i.e. shares vs. debentures. Even in the capital, decision has
to be taken about equity or preference. Again in preference share capital or
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debentures, the type of share or debenture to be issued is to be decided while
deciding about the loans – whether short term or long term, the agency from where it
has to be taken all these need a lot of financial planning which is provided by a
Management accountant.

Tax planning also is one aspect where Management accountant plant it in such a
way as to give maximum benefit to the organization.

b. Analysis of Financial Statements:

Different tools of Management accounting such as fund flow statement, cash flow
statement, ratio analysis, comparative statement, common size statement, period
analysis and many more are used by a management accountant to present the
position of the business in a non-technical for the technical information.

c. Historical cost accounting.

The system of recording actual data on or after it has been incurred is known as
historical cost accounting. The actual cost is compared with standard cost to
appraise the performance of the cost centre.

d. Budgetary Control.
Here budgets are prescribed for all financial departments based on historical data
and projections. The actual performance is compared with the budgeted figures and
differences are accounted for

e. Standard Costing.
Here costs are determined in advance based on a systematic analysis of prevalent
conditions. The actual costs are compared with standard costs variance if any are
analyzed and reasons accounted for standard costing helps to enhance efficiency of
the concern and enables management by exception.

f. Marginal costing:
This is a technique of costing wherein the impact of extra unit of production is
determined in terms of additions to the cost. Here with every increase of unit of
production cost increases on account of variable or direct expenses i.e. material,
labour and other expenses as fixed costs remain the same irrespective of the
volume of production. Managerial costing helps managerial decision making at
various points. For example deciding the level of production, ascertaining the cost
effectiveness of different products, departments, make or buy decisions, alternate
courses of action, etc. This is called decision accounting also.

g. Revaluation Accounting
This is also known as Replacement Accounting. The preservation of capital in the
business is the main object of management. The profits are calculated in such a way
that capital is presented in real terms. During inflationary period, the value of capital
is greatly affected. According to Batty „Revaluation accounting is used to denote the
methods employed for overcoming the problems connected with fixed asset
replacement in a period of rising prices‟.
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h. Control Accounting
This covers all the controlling techniques such as budgetary control, standard
costing, internal check, internal audit, statutory audit variance analysis, etc.

i. Management Information System.

With the development of electronic devices for recording and classifying data,
reporting to management has considerably improved feedback of information and
responsive actions can be used as control techniques.

With all the above devices management accounting assures efficiency, with proper
planning and measurement of performance, increases, profitability coupled with
efficiency improves customer relation through effective management control.

Management Accounting Vs. Financial Accounting.

Accounting is the art of recording, classification, analysis, interpreting the financial
information in a scientific way. Three main branches of accounting are financial
accounting, cost accounting and management accounting. Of the three financial
accounting is the oldest and is the origin and the other two are the modifications or
sophistications. Financial accounting forms the basis for any analysis or
interpretations done by a cost accountant or management accountant.

Financial accounting is concerned with the presentation of profit or loss account for a
particular period and the posting of the business as reflected through Balance Sheet.
Taking the prepared profit and loss account and Balance Sheet and the
supplementary information Management Accountant interprets situations. Following
are the major points of distinctions between Management Accounting and Financial
Accounting.

a. Object: The purpose of financial accounting is to present the income position and
Assets and Liabilities to stakeholders i.e. employees, creditors, shareholders,
Government, etc., whereas the purpose of management accounting is to facilitate
decision making.

b. Nature: The nature of financial accounting is to summarize the past facts and
present conditions about and with the numerical information. Management
accounting deals with projection of such information into future. Thus where
financial accounting uses actual information, Management accounting involves in
projections or estimations.

c. Subject matter: Financial Accounting treat the enterprise as a whole and gives
performance of the entire organization. Management accounting on the other hand
identifies and appraises individuals, departments, sections, processes, segments
separately for future decision making.

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d. Compulsion: Presentation and compilation of financial accounting is compulsory
whereas management accounting information is recommendation and it is adopted
for better functioning.

e. Precision: Financial accounting deals with the accurate figures and precise
conclusions. Management accounting basis its decisions on estimates and
conclusions.

f. Reporting: In financial accounting the final conclusions are drawn in the form of
financial statements represented as Income Statement and Position Statement i.e.
Profit and Loss Account and Balance Sheet. These are meant to be reported not
only to parties inside but also outside investors through publication of accounts. In
management accounting reporting is meant for internal stakeholders.

g. Descriptions: Only monetary items are recorded in financial accounting, whereas

both monetary and non-monetary items are recorded in Management accounting.
For example market competition, political changes, economic situation, business
cycles, etc., are considered for any managerial decision making.

h. Quickness: Reporting of management accounting is simple and faster whereas

financial accounting it is an year long process.

i. Accounting principle: Financial accounting is based on set principle i.e. GAAP.

No set principles are pattern are designed for Management accounting.

j. Period: Financial accounting is time specific i.e. it is prepared for an accounting

year and gives conclusions about working in that period in the form of Income
Statement, and also the state of the business from inception till that day i.e. Balance
Sheet or Position Statement. Management accounting compiles information over a
period of time and even within a year.

k. Publication: Financial accounting need to be published for the benefit of the

public as it is mandatory in most of the cases. Management accounting statements
like cash flow and fund flow are in the interest of internal management can be
published and is only recommendatory.

l. Audit: Audit of financial accounting is compulsory. Management accounting

records cannot be audited as most of it is are budgeting and forecasting.

Thus financial accounts are historical in nature and are based on actual facts and
figures. But Management accounting is futuristic in approach.

Management Accounting and Cost Accounting.

Cost accounting is a technique where cost of the product / process / service /
segment, etc., is analyzed item wise and controlling techniques are adopted. „Cost
accounting is a branch of general accounting and covers the application of
accounting principles relating to the tracing, recording, classifying and analyzing of
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costs within the organization. It measures the functioning of the organization from
the point of view of cost and helps price fixation.

Management accounting covers in its ambit many more techniques to facilitate

decision making.

a. Object: The purpose of cost accounting is to ascertain the cost and analyze
them and exercise cost control. This reduction of costs improves the margin
profit whereas that of management accounting into provide information to the
management for planning and coordinating the activities of the business.

b. Scope: The scope of management accounting is very wide as it covers financial

accounting, cost accounting, budgeting, tax planning, reporting, etc., cost
accounting confines with cost ascertainment and cost control.

c. Nature: Cost accounting uses past and present figures whereas management
accounting has futuristic approach and projections.

d. Data Used: Only quantitative information is recorded in cost accounting whereas

management accounting uses both qualitative and quantitative.

e. Development: Cost accounting is related to industrial revolution with the view of

bringing out quality products at reduced costs. But management accounting and
cost accounting are complementary for each other.

f. Principles followed: Cost accounting is based on certain principles whereas

management accounting is more flexible and situational.

Limitations of Management Accounting.

Though Management Accounting helps organization in decision making there are
certain limitations and constrains inherent in it. Following are the limitations.

(a) Dependence on Accounting Information: Any decision taken by a

management accountant depends on the accounting information produced to
him. Thus any lacuna in this information will have an impact on the decisions
taken by a management accountant. Precision of his decision depends on the
reliability of basic information.

(b) Lack of knowledge: A management accountant is expected to have knowledge

about accounting principles, statistics, budgeting, forecasting, economics,
management engineering, political situation, etc. His lack of knowledge on any
one of these areas makes his decisions erroneous.

(c) Intuitive Decisions: Though a management accountant is supposed to study a

situation from several angles – political, historical, economical, social, financial,
his decisions at times may be intuitive and thus may be inappropriate at times.

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(d) Not an alternative to administration: Management accounting is not an
alternative to administration, the tools and techniques provide only information
and not decisions. Thus it is only a supplementary and recommendary tool.

(e) Expensive: An installation of management accounting system requires and

presupposes a large organization with multifarious activities. It is not suitable to
a smaller firm yet requiring managerial experience.

(f) Evolutionary state: The technique is still in the beginning stages and thus a
thorough system is not yet devised. There can not be a common formula for all
the organizations as it varies from organization to organization.

(g) Personal Bias: The analysis and interpretation here are done by a management
accountant. Thus there is bound to be personal bias.

(h) Psychological Resistance: The installation of management accounting involves

basic change in organizational set up. This means implementation of new rules
and regulations. This may cause displeasure and and resistance from the
existing employees.

Summary
Management accounting which aims to increase efficiency through proper planning,
implementation and control performs several functions like planning and forecasting,
modification of data, analysis and interpretation of financial information, assures a
thorough communication system to exercise proper control by coordinating various
segments – external and internal. It also supplies useful information to management
at different levels which enables strategic decision making process. In this process
it makes use of several techniques like financial planning and accounting, budgetary
control, standard costing, analysis of financial statements, historical cost accounting,
marginal costing, control accounting, management information system, etc. Though
management accounting begins functioning with the financial information made
available from financial accounting it differs from it on several issues like the nature,
periodicity, principles, publications, etc. It also differs from cost accounting as cost
accounting analysis and controls only the cost element. Thus the object, scope,
nature, information used and the principles vary for cost accounting and
management accounting. Management accounting is in fact, a more comprehensive
and all pervasive method of accounting which is useful to management in its
managerial functioning more particularly the decision making. However, its success
is subjective to the accuracy of information furnished by a financial accountant and it
also depends on the competence of management accountant who is supposed to
have an interdisciplinary knowledge. The installation of it itself is expensive and only
large organizations can afford it. The success of a management accountant
depends upon his individual integrity, unbiased nature, his knowledge on various
disciplines and his futuristic approach in the interest of the organization.

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Self Assessment Questions

(A) State whether the statements are true or false

a. The nature of cost accounting and Management accountings are one and
the same ( )
b. Publication of financial accounts is mandatory ( )
c. Budgetary control is used by financial accounting ( )
d. Management accounting has no draw-backs ( )
e. Management accounting begins where financial accounting ends ( )

(B) Answer in Ten Lines.

(a) In what way Management accounting is different from Financial
accounting
(b) What are the techniques of costing used by a management accountant?
(c) What are the limitations of management accounting?

(C) Answer in Three pages.

(a) In what way Management accounting differs from cost accounting and
financial accounting?
(b) Explain the various functions of Management accounting?
(c) What different techniques are used by a Management accountant?

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LESSON 3
MANAGEMENT ACCOUNTING SYSTEM
Objectives:
 To familiarize the students with installation of management accounting
system.
 To acquaint the students with the functions of management accountant
 To explain the duties of management accountant
 To show the operation of management accounting system
 To familiarize with management information system.
Structure:
 Introduction
 Steps for installation of Management Accounting System
 Management Accountant
 Operation of Management Accountant
 Duties of Management Accountant
 Organizational Hierarchy
 Management Information System
 Summary
 Self Assessment Questions

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Management Accounting System

Introduction
Management accounting is gaining popularity as an effective system to facilitate for
managerial functioning. The advantages of management accounting are evident
with managerial planning, organization, communication, coordination and control
which are made more effective with the help of accounting information
supplemented by number of techniques like cost accounting, budgetary control,
standard costing, control accounting, etc. It is in the interest of big organizations to
cope up the competition management accounting system is to be adopted though it
is not mandatory.

Installation of Management Accounting System

The installation of management accounting system involves the following steps
a. Organizational manual
Initially organizational manual has to be prepared and adopted. At the
organizational level from top to bottom hierarchy, duties and rights and
responsibilities attached to each person should be clearly defined. This will not
only do away with the ambiguity but also avoids duplication and facilitates
communication process.
b. Preparing Forms and Returns;
The next step is to devise and design various forms and returns required for
collection and presentation of accounting information required for managerial
needs.
c. Requisite Staffing
Staff required for implementation of management accounting system should be
recruited. They should be given proper training for implementation of the task
assigned to them.
d. Classifying accounts and Integrating the System
The accounts are classified to facilitate collection and analysis of data. There
should be a perfect blend of financial and costing information to come out with an
integrated accounting device useful to managerial decision making.
e. Introduction of standard costing techniques.
The technique of standard costing with costs ideal to that situation are
established. Actual costs are compared with these standards and variance is
accounted for.
f. Setting up budgetary control.
Budgets where an estimate is given to each cost centre depending upon
previous period information is predetermined. Budget of various departments,
units, are integrated to form a master budget which proves useful for
organizational functioning.
g. Setting up operational Research Techniques
The ever changing economic, political, social, business environment demands
the setting up of appropriate operational research techniques.

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ACM – 601 UNIT - I

Management Accountant
A person vested with the responsibility of providing information to different levels of
management and who in course of his functioning pools information analysis
presents and enables managerial decision making is the management accountant.
He is called by different names like Controller, Comptroller, Chief Accountant,
Financial Advisor, Financial Controller, etc. The role of management accountant is
crucial in any organization as the accuracy of managerial decision depends upon his
integrity and ability to present accurate information as any single wrong analysis and
interpretation of him turns the situation topsy-turvy. His position is one of the
combination of line and staff function as he is the person to pool information,
analyze, decide the course of action and also monitor implementing it. It is here
essential to spell out the functions, duties.

Operation of Management Accountant.

The function of the management accountant cannot be specifically defined as it
depends on the size, nature, policy, type, system of the organization. However, as
opined by Financial Executives Institute, America, his functions can be listed as
follows:

a. Planning and Controlling

Management Accountant establishes by coordinating the activities of various
departments through an integrated plan for the organization. This should
provide cost standards, expense budgets, sales forecasts, working capital
requirements, profit planning and an effective implementation schedule.
b. Reporting
Management Accountant measures performance against scheduled plans and
standards. There should be a perfect upward and downward communication
through a proper reporting system. This function necessitates installation of a
perfect blend of costing and accounting system and recording of actual and a
provision to compare with standards.
c. Evaluating
He should be capable of evaluating the policies and alternative courses of action.
The perfection in planning and implementation depends upon the managerial
caliber.
d. Administration of Tax
His functions include reporting to respective Government authorities as required
under different laws and to supervise all matters relating to taxes.
e. Appraisal of External Efforts.
He has to study about several external factors – economical, political and social
and theie impact on organizational function. He should appraise at appropriate
places to appropriate personnel to enable them to act correctly.
f. Protection of assets
One more function of him is to protect business assets. This can be performed
through internal controls, auditing and assuring proper insurance coverage to
assets.

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ACM – 601 UNIT - I
Duties of Management Accountant.
Management accountant is vested with the onerous responsibility of facilitating
timely and apt decision making by the management. This necessitates a
wholesome organizational awareness and interest on his part which may mean a
proper understanding of the inner world and outer world. Following duties of him
can be deduced from this

a. Collection of information.
He is primarily responsible for collecting proper information from accountants,
production department, research and development and such other functional
departments existing in individual cases. Apart from these inner circles outer
circles like Government, competitors, financiers and use outside sources like
market survey, stock exchange reports, trade journals, etc. Initially he has to
identify the information necessary, subsequently the source of information based
on it.
b. Evaluation of information.
Having collected the information both from external sources and internal sources,
he has to evaluate so as to filter and supply only relevant information to facilitate
managerial decisions.
c. Interpretation of information.
Management accountant as a strewed and unbiased person should be able to
analyze and interpret the information so collected and filtered in the interest of
the organization. The success of his functioning depends upon his ability in
making a right interpretation. Apart from providing a functional support to his
suggestions as to the alternative courses of action, he should be able to weight
the pros and corms of each of such alternatives and impact of that on the health
of the organization in futuristic perspective.
d. Reporting of information.
Another duty of the management accountant is to supply information at right time
and situation. Upward and down communication of him play a vital role in the
growth of the organization.

In United States of America the term „Controller‟ or „Comptroller‟ is used for top
management executive. He is considered one in the top executive functionaries‟.
His area of operation and functions are under that of a management accountant
as it includes even financial and legal functions.

Organization Hierarchy
The position of a management accountant may be considered in India at the middle
management level. However, the size type and nature of the organization, its scale
of operations determine his position. In a small organization he is directly under the
owner. In big concerns he may be assigned to financial controller / Director. A
concern with a divisional set up will have a different management division. Keeping
the above in view the organizational hierarchy of a large concern can be seen from
the following flaw chart.

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ACM – 601 UNIT - I

Managing Director

Director Research
Director Production Director Finance Director Marketing Director Personnel
& Development

Chief Management
Accountant

Management Head, Organization &

Budget Controller Internal Auditor Credit Controller
Controller Methods

Planning Marketing Research Costing

Thus management accountant is the coordinating force among all other financial
heads for a successful organization.

Management Information System (MIS)

A good communication system both from within and outside is vital for a successful
decision making process. Outside information is obtained from customers, trade
agencies, market research consultants and Government agencies. Inner information
refers to upward and downward communication within the organization. With the
advent of information technology, all such information is fed after analysis. A data
bank is established under this system called Management Information System in
which factual data is stored accessible at any point of time. This being updated as
and when fresh information is obtained and data as a whole can be used for a
comprehensive planning as the entire data is stored in the memory. Thus speedy
and timely decisions are arrived at which makes a real contribution for a good
organizational functioning. A research assistant also contribute here in filtering the
data and provide only necessary information to top management.

Summary
The quality of timely decisions makes a long way for the success of an organization
in the present competitive set up. Here comes the role of management accountant
who acts as a coordinating link for information pooling from various functionaries of
the organization. Basically to install a management accounting system, an
organizational manual listing the various levels of management has to be deduced.
As information collection is the primary function of a management accountant, his
next duty is to prepare forms and proformas necessary to pool the information.
Necessary staff needs to be recruited for performing the jobs assigned to them. In
the organization, the next step is to classify the accountants for collection of data
and also integrated later. Budgeting control, standard costing, Research technique
should supplement the above primary steps to equip the organization with a
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ACM – 601 UNIT - I
thorough management accounting system. A person who is pivotal for all these is
called a management accountant. His functions include planning and controlling
various business functions, reporting, evaluating the policies, tax administration,
appraisal of external affairs and protection of assets. Thus he is a coordinating force
between external agencies and internal functionaries. His duties derive from out of
his function as collection of information, evaluation, reporting after proper
interpretation. In the managerial hierarchy, the management accountant can be
considered one of a middle management in large business undertaking as a
connecting link between policy makers and policy executors. In small organization,
he can be one as a finance controller as well. The prevalence of information
technology in large business houses brought out the present Management
Information System. Here the data from all sources both internal and external is
stored in a computer and updated periodically. Other functions of filtering
information, supply are necessary information and showing alternative courses of
action are carried through a computer assistant guided by a Research personnel
with a comprehensive knowledge of various functions in the organization. Thus a
modern business organization with all its sophistication can withstand the
competition from the globe through a proper Management Information System
guided by a suitable Management Accountant to establish its organization image.

Self Assessment Questions

A. State whether the statements are True or False.
a. Management accountant is a top level manager in large
undertakings. ( )
b. Management accountant coordinates the activities of only internal
functionaries. ( )
c. Management accounting system is not cost effective for small
organization ( )
d. MIS is Management Integrated System ( )
e. The success of MIS depends on the efficiency of management
accountant ( )
f. In USA management accountant is called Comptroller ( )
B. Answer in Ten lines
1. How does management accounting system operate?
2. What is Management Information System?
3. Where is the role of management accountant in the managerial
hierarchy?
C. Answer in 3 pages
1. “The role of Management Accountant is crucial in large undertakings”
Elucidate.
2. Explain the duties of a Management Accountant.
3. What are the various steps in the installation of Management
Accounting System?

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