•Origin
The term 'Management Accounting' is of recent origin even in U.S.A. This term was first used by the British Team of Accountants that visited the United States in 1900 under the auspices of Anglo-American Productivity Council. Since then the management accounting has grown into a full fledged subject. It is also otherwise known as "Management oriented Accounting" or "Accounting for Management".
•Meaning
Management Accounting is comprised of 2 words: Management and Accounting. It is the study of managerial aspects of accounting. It's an accounting of managerial decision.
•Definitions
1. "Management Accounting is the presentation of accounting information in such a way to assist management in the creation of policy and the day-to-day operations of an undertaking." - Anglo American Council of Productivity
2. "Management Accounting is concerned with accounting information that is useful to the management." - Robert N. Anthony
» Functions of Management Accounting
1. Modification of Data
Accounting data maybe used on the basis of making future estimates & projections. It modifies the available accounting data by rearranging, resorting and combination which enables retention of the similarities of data.
2. Analysis & Interpretation of Data
The accounting data is analysed meaningfully for effective planning & decision making. For this purpose, the data is presented in a comparative form (analytical tools such as comparative financial statement, commonsize statement & ratio analysis are used).
3. Facilitating Management Control
Management Accounting devices like standard costing and budgetary Control are helpful in controlling performance. The work is divided into different units & seperate goals are set up for each unit. The performance of every unit is made the responsibility of a particular person.
4. Use of Qualitative Information
The management may need qualitative information which cannot be converted into monetary terms quickly. Such information maybe obtained from statistical compilation, case studies of meetings etc.
5. Satisfaction of Information Needs of Different Levels of Management
Different levels of Management such as top, middle & lower level management needs different types of information. The top management needs concise information covering the entire field of business activities at relatively long intervals. The middle level management requires technical date regularly & the lower level management is interested in detailed figures. Therefore, the main function of management accounting is to process accounts & their data in such a way to satisfy the needs of different levels of management.
6. Helpful in Communication
One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. The management is kept informed through regular financial & other reports. The performance of various departments is also regularly communicated to the top management.
» Objects or Purpose of Management Accounting
The main objects of management accounting are:-
1. Helpful in Interpretation of Financial Information.
2. Helpful in Planning & Policy Formation.
3. Helpful in Controlling Performance
4. Helpful in Organising.
5. Helpful in Decision Making.
6. Helpful in Communication.
7. Helpful in Tax Administration.
8. Helpful in Co-ordinating Operations.
9. Motivating Employees.
» Significance / Importance of Management Accounting
Management Accounting does not provide only meaningful accounting information to the various levels of management to enable them well informed but equip them with analytical & measurable tools also. The management accounting provides the following services :-
1. It increases the efficiency of various business functions.
2. It has eliminated the element of intuition from business decisions & extended the use of accounting services to the management.
3. The different tools of management accounting have provided validity, objectivity & reliability in the business management.
4. It brings improved customer relationship & promotes labour management.
5. Creates harmony between employees and management.
» Characteristics of Management Accounting
1. Management Accounting is Concerned with Future
Management Accounting helps in planning for the future because under it, projections are made & decisions are taken for future course of action.
2. Management Accounting is of Selective Nature
It takes into consideration only those data which is relevant & useful to the management.
3. Management Accounting Stress on Cause & Effect Relationship
Financial Accounting is limited to the preparation of Profit and Loss account & finding out the ultimate result i.e., Profit or Loss. Management Accounting goes a step further & discuss the 'Cause & Effect' relationship. If there is loss, the reason for the loss are probed. It there is profit, the factors directly influencing the profitability are also studied.
4. Management Accounting does not follow Set Rules & Formats like Financial Accounting
It stress in the utility of information & not in the formats & legal representation of that information as required in the financial accounting.
5. Management Accounting provides Data, Not the Decision
The function of management accounting is to provide data, not the decision. It can inform, but cannot prescribe. It depends on the efficiency of the management.
6. Management Accounting is Highly Sensetive to Management Needs
Management Accounting is basically an internal information system which helps the management to take better & efficient decisions. It assists the management & does not replace it.
7. It Stresses on the Study of Major of Cost Elements
Management Accounting gives more stress on the study of nature of cost, their classification information - fixed & semi variable cost & their relationship with the volume activities & profits of the firm.
8. Management Accounting is an Integrated System
Different techniques such as Standard Costing, Management Costing & Budgetary Control are used to provide information to the management.
» Limitations of Management Accounting
1. Limitation of Cost & Financial Accounts.
2. Persistence to Intuitive Decision Making.
3. Very Wide Scope.
4. Very Costly.
5. It Invites Opposition from Within the Organisation.
6. It is Comparatively New Discipline & Still in the Process of Development.
7. Lack of Knowledge of Related Subject.
8. Lack of Objectivity.
» Scope of Management Accounting
The scope of management accounting is very wide and broad-based. It includes all the information which is provided to the management for financial analysis. The following field of activities are included in the scope of the subject :-
1. Financial Accounting
It is very useful for future planning & financial forecasting. Transaction I'm financial accounting may belong to income, expenditure, inventory movements, assets, liability, cash receipts & payments.
2. Cost Accounting
It is the process of transaction & technique of ascertaining cost. It includes marginal costing, standard costing, opportunity costing, differential costing etc.
3. Budgeting & Forecasting
Budgeting Control involves the preparation of budget & measuring the actual results against budgeted performance. Forecasting, on the other hand, is prediction of what will happen as a result of a given set of circumstances.
4. Cost Control Procedures and Methods
Control procedures & methods are neeeded to use various factors of production in a most economical way. It involves inventory control, post control, time control, budgetary control, variance analysis etc.
5. Reporting
Management Accounting includes reporting function. Also, the reporting is done at 2 levels ; Interim Reporting to the top management & External Reporting to the outside parties. Interim Reporting of financial result is made to the top management by means of monthly, quarterly, half-yearly. External Reporting is made to the financial institutions or creditors etc.
6. Tax Accounting
Tax planning is an important part of the management accounting. It includes the preparation of income statement, determination of taxable income & filing up the returns of income etc.
7. Internal Financial Control
Internal audit system is necessary to judge the performance of every department. The actual performance of every department and individual is compared with the pre-determined standards. It includes internal audits, efficient office management etc.
8. Interpretation of Data
Management Accounting is closely related to the interpretation of financial data to management & advising them on decision making.
9. Office Services
Management accountant maybe required to control an office. He will be expected to deal with data processing, filing, copying, duplicating, communicating, etc.
10. Other System & Techniques
It includes operation research, statistical techniques like linear programming, sampling, data processing, project appraisal, management audit, zero based budgeting, social accounting, activity based costing etc.
» Tools & Techniques of Management Accounting
1. Financial Planning
Financial Planning is the act of deciding in advance about the financial activities necessary to achieve the primary objectives. It includes both long-term & short-term financial objectives of the enterprise. Financial Policies act we a guide to the firm in achieving this goal.
2. Analysis of Financial Statements
The presentation of comparative financial statements, fund flow techniques & ratio analysis are some of the important techniques of financial statements.
3. Historical Cost Accounting
The statement of actual cost after they have been incurred is called Historical Cost Accounting. These are based on recorded costs & can easily be verified with the help of evidence regarding the transaction.
4. Standard Costing
Standard Costing is an important technique for cost control purposes. In this, costs are determined in advance. The costs are recorded and compared with standard costs.
5. Budgetary Control
It is a system which uses budgets as a tool for planning and control. The budgets of all functional departments are prepared in advance. The actual performance is recorded and compared with the pre-determined targets.
6. Managerial Costing
This is a method of costing which is concerned with changes in costs resulting from changes in the volume. Managerial Costing includes the discussion cost, profit analysis & break even analysis etc.
7. Fund Flow Analysis
It is described as the source from which additional funds were derived. This system helps a lot in financial analysis, comparative studies & controlling future guidance.
8. Decision Accounting
It is the process of selecting the one best alternative for doing a work. It involves choices from various alternatives. Decision Accounting is not a technique, it's a process of an integrated application of different accounting tools like marginal costing, break even analysis & profit volume analysis.
9. Project Appraisal
This technyis used for taking decisions related to economic soundness of capital expenditure projects.
10. Cash Flow Analysis
Cash flow statement shows the inflow and outflow of cash. It is prepared to highlight the impact of financial policies & procedures on the cash position of the firm.
11. Revaluation Accounting
Revaluation is the positive difference between an asset's fair market value and its original cost, minus depreciation. Revaluations are recognized in a firm's equity and do not affect the income statement.
12. Statistical & Graphical Techniques
There is a large number of statistical & graphical techniques which are used in management accounting like Master Chart, Chart of Sales & Earnings, Investment Chart, Chart of Cost Accounting etc.
13. Communication & Reporting
Management Accounting is the only effective method of communication. It involves 3 things:-
1) Proper selection of data to be presented.
2) Organization of data or making reports.
3) Selecting the appropriate method of reporting.
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