SHIVCHHATRAPATI COLLEGE

BBA THIRD YEAR

MANAGEMENT ACCOUNTING
Asst. Prof. Krushna Lagad Sir

1. Introduction of Management Accounting

Meaning of Management Accounting:-

Management accounting also is known as managerial accounting and can be defined

as a process of providing financial information and resources to the managers in
decision making. Management accounting is only used by the internal team of the
organization, and this is the only thing which makes it different from financial
accounting. In this process, financial information and reports such as invoice,
financial balance statement is shared by finance administration with the management
team of the company. Objective of management accounting is to use this statistical
data and take a better and accurate decision, controlling the enterprise, business
activities, and development.

Financial accounting is the recording and presentation of information for the benefit
of the various stakeholders of an organization. Management accounting, on the other
hand, is the presentation of financial data and business activities for the internal
management of the organization. In this article, we will learn what is management
accounting and its functions.

Definition:-

One of the definitions of Management accounting says that it is the application of

professional skills and knowledge in the preparation of financial and accounting
information in a manner in which it will assist the internal management in the
formulation of policies, planning, and control of the operations of the firm.

Robert N. Anthony: “Management Accounting is concerned with accounting

information that is useful to management.”
Nature/Characteristics of Management Accounting.

The following are the chief features of management accounting:

1. Management accounting lays stress on the future: Many schools of thought
feel that management accounting is futuristic accounting. Standard costing, cost
variance, and budgetary control are examples of techniques that focus attention on
the future.
2. Management accounting is selective accounting: The technique of
management accounting selects the best course of action; in particular, the best,
most suitable, and most profitable action is selected.
3. Management accounting provides data and not decisions: Management
makes decisions based on the pieces of information they obtain from financial data.
Thus, management accounting provides data for decision-making.
4. Management accounting studies the nature of cost elements: These elements
are:

 Fixed costs: Related to time, such as work expenses, office expenses, and
selling and distribution expenses.
 Variable costs: Always in proportion to output, these are the costs of
materials, labor, and chargeable expenses.
 Variable costs: These costs can be variable to a fixed level of output and
can be variable, for example, with 60% being fixed and 40% variable.

5. Management accounting studies causes and effects

seriously: Financial accounts only provide information about the amount of profit,
whereas management accounting studies causes and effects and also relates profits
to sales.
6. No set principle: Like financial accounting, management accounting does not
follow set principles; the required data can be changed as and when the need arises.
7. Maximization of profit: Management accounting checks all forms of waste and
seeks to bring efficiency to maximize profit
8. Management accounting increases efficiency: It is a science that always
monitors waste and seeks to promote efficiency.

Importance of Management Accounting

The following points highlight the importance of studying management

accounting:
1. Modification of data: Management needs accounting data for decision-
making. Management accounting serves up this data for both this purpose and
policy framing.
2. Helpful in analyzing and interpreting data: Management accounting is
concerned with the analysis and interpretation of financial data. Thus, data
becomes more useful and reliable when management accounting is used.
3. Helpful for control: Management accounting is a useful technique for
exercising control over various forms of waste. This is achieved using techniques
of setting standards and budgeting, which is a vital part of management
accounting.
4. Helpful when preparing budgets: The techniques of management accounting
are widely used and accepted for preparing budgets. These budgets are compared
with actual results when these are known and thus an effort is made to up-root the
variances if any.
5. Helpful in decision-making: There are always many courses open for
management, where the selection of the best alternative is decided by the
techniques or the management accounting. Thus, it is useful for choosing the best
action.
6. Useful in profit maximization: Management accounting is useful for checking
and encouraging efficiencies. Here, all unwanted expenses are checked, new areas
are studied, and capital is optimally utilized to uplift the profits.
7. Safeguarding against financial decline: The information received from
management accounting illuminates past records. Management can make use of
such data for future planning and can avoid the dangers of trade depressions.

Advantages and Objectives of Management Accounting

There are many objectives but the prime objective is to assist the management team
of an organization in improving the quality of their decisions. The purpose of
management accounting is to help the managerial team with financial information so
that they can execute business operations and activities more efficiently. Following is
the list of all benefits of management accounting –

1. Decision Making
2. Planning
3. Controlling business operations
4. Organizing
5. Understanding financial data
6. Identifying business problem areas
7. Strategic Management
Decision Making
This is the most important benefit of the process of management accounting. In fact,
it is the main purpose of it. In this form of accounting, we use techniques from all
fields like costing, economics, statistics, etc.

It provides us with charts, tables, forecasts and various such analysis that makes the
process of decision making easier and more justified.

Planning
Managerial accounting does not have any strict timelines like financial accounting. It
is, in fact, a continuous and ongoing process.

So financial and other information is presented to the management at regular

intervals like weekly, monthly or sometimes even daily.

Hence managers can use this analysis and data to plan the activities of the
organization. For example, if the recent data shows a dip in the sales for a certain
region, then the sales manager can advise his team and plan some action to rectify the
situation.

Identifying Business Problem Areas

If some product is not performing well, or some department is running into
unexpected losses, etc. managerial accounting can help us identify the underlying
cause.

Actually, if the management is diligent and their data and reports are frequent, they
can identify the problem very early on. This will allow the management to get ahead
of the problem.

Strategic Management
Concept of management accounting is not mandatory by any law. So it can have its
own structure according to the company’s requirements. So if the company feels
certain areas need more in-depth analysis or investigation it can do so freely.

This allows them to focus on some core areas. The information presented to them
allows them to make strategic management decisions.
Like if the company wishes to launch a new product line, or discontinue an existing
one, management accounting will play a huge part in this strategy.

Limitations of Management Accounting

 Data based on Financial accounting – Decisions taken by the management

team are based on the data provided by Financial Accounting
 Less knowledge – Management has insufficient knowledge of economics,
finance, statistics, etc.
 Outdated data – Management team receives historical data, which may change
eventually when management is taking the decisions.
 Expensive – Setting up a management accounting system requires a lot of
investment.

Basis Cost Accounting Management

Accounting

Meaning Cost accounting is an Management

accounting system that Accounting refers to
aspires to capture an the outlining of
enterprise’s costs of financial and non-
manufacturing by financial data for the
evaluating the input utilisation of
costs of every step of management of the
manufacturing as well enterprise. It is also
as the fixed costs, known as managerial
namely, depreciation of accounting.
capital equipment.

Data type Quantitative Both Quantitative

and Qualitative

Scope Focused on distribution, Convey (impart) and

allocation, effect factor of the
determination and cost
accounting factors of
the cost

Objective Determined in cost Furnishing data to

production the managers to fix
 goals and anticipate
strategies

Specific Yes No
procedure

Planning Short term planning Both Short and long

term planning

Recording Records both past and Focuses more on

present data scrutinizing for
future projects

Interdependency Can be installed without Cannot be installed

a Management without cost
accounting accounting

Difference between Financial Accounting and Management Accounting

 The main aim is to
provide information to Generally, management
outside parties to make accounting information
Aim informed decisions. is meant for management
Outside parties include to make informed
creditors, investors, business decisions.
customers, etc.

It is a mandatory
It is at the discretion of
requirement for every
management. There is no
public organization to
mandatory requirement
disclose its financial
Regulatory for its maintenance, but
statements. Thus, they
Requirements institutes like CIMA,
are governed by
ICWAI, etc., still
accounting standard
provide some
boards, companies’ laws
frameworks and formats.
& government.

Financial accounting
statements are prepared There is no standard
based on ‘Generally basis for preparing
Accepted Accounting management accounting
Governing Principles (GAAP).’ This statements, and hence,
Principles
GAAP is different for they are designed based
different countries with on the requirements of
more or less the same the management team.
features.

It has no specific time

The time horizon for
horizon, but the main
financial accounting is
Time Horizon focus is on estimating
‘past, and generally, it is
the future using the past
one accounting year.
data.
 Reports prepared here
It is prepared for outside
are helpful to internal
or external parties, such
Reporting parties like CEO,
as shareholders,
Beneficiaries directors, promoters,
suppliers, customers,
higher-level managers,
government, banks, etc.
etc.

Management accounting
Financial accounting
reports are the monthly,
reports consist of profit
weekly, or yearly
Outputs and loss statements,
analysis of products,
balance sheets, and cash
geographies, functions,
flow statements.
etc.

Data of management
accounting isn’t
Data of financial
necessarily 100%
Relevance & accounting are 100%
verifiable. So, the data
Precision of verifiable and precise.
should be relevant,
Data Here, everything has
timely, and logical. For
evidence to support it.
instance, sales can’t be
forecasted perfectly.

There is no specific
Independent audit of
requirement for an
financial accounting
independent audit. But,
reports is mandatory in
management, at its
Independent most countries. For
discretion, can take the
Audit instance, CPA conducts
initiative to conduct an
such audits in the USA,
independent audit for the
and CA conducts such
sake of efficient &
audits in India.
effective management.

Financial accounting Management accounting

Confidentiality statements are publicly statements are meant for
published and meant for management &
 the public only. So, there confidentiality of the
is no question of statements is the key
confidentiality. concern as they contain
business secrets.

It is concerned with the

It is concerned with a
whole business & it is an
specific area or segment
end in itself. Accounting
Segment for their analysis. Hence,
standards in some
Reporting segments may be a
countries bind companies
product line, geography,
to do such reporting in
manufacturing unit, etc.
defined formats.

It has a historical It has a futuristic

Perspective perspective. perspective.

Both financial and non-

Information required for
financial information is
Nature of Input financial accounting utilized in preparing
Information statements is financial in
management accounting
nature.
reports.