CHAPTER – I

INTRODUCTION TO MANAGEMENT ACCOUTING

Accounting and decision making:

The basic purpose of accounting information is
helping someone make decisions. That “someone”
may be a company president, production manager,
a hospital or school administrator, an investor and
so on. Regardless of who is making the decision,
the understanding of accounting information and
better decisions.

Users of Accounting information:

In general, users of accounting information fall into
3 categories:
1.Internal managers who use the information for
short-term planning and controlling routine
operations.
2. Internal managers who use the information for
making non routine decisions (for example,
investing in equipment pricing products and
services, choosing which products to
emphasize or de-emphasize), and formulating
overall policies and long-range plans.
3. External parties, such as investors and
government authorities, who use the
information for making decisions about the
company.

Both internal parties (managers) and external

parties use accounting information, but the ways
in which they use it differ. Therefore, the types of
accounting information they demand may also
differ.

MANAGEMENTING ACCOU NTING

Management accounting refers to accounting
information developed for managers within the
organisation. It is concerned with the provisions
and use of accounting information to managers
within organizations, to provide them with the
basis to make informed business decisions that will
allow them to be better equipped in their
management and control functions.
In contrast to financial accountancy information,
management accounting information is:
• usually confidential and used by management,
instead of publicly reported;
• forward-looking, instead of historical;
• pragmatically computed using extensive
management information systems and internal
controls, instead of complying with accounting
standards.
This is because of the different emphasis:
management accounting information is used within
an organization, typically for decision-making.
Definition

Robert N. Anthony defines management

accounting as “that part of accounting which is
useful to the management”.
According to the Chartered Institute of
Management Accountants (CIMA)International
Federation of Accountants (IFAC), Management
Accounting is "the process of identification,
measurement, accumulation, analysis, preparation,
interpretation and communication of information
used by management to plan, evaluate and control
within an entity and to assure appropriate use of
and accountability for its resources.” Management
accounting also comprises the preparation of
financial reports for non management groups such
as shareholders, creditors, regulatory agencies and
tax authorities (CIMA Official Terminology)

The Institute of Certified Management Accountants

(ICMA), state "A management accountant applies
his or her professional knowledge and skill in the
preparation and presentation of financial and other
decision oriented information in such a way as to
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assist management in the formulation of policies
and in the planning and control of the operation of
the undertaking. Management Accountants
therefore are seen as the "value-creators" amongst
the accountants. They are much more interested in
forward looking and taking decisions that will affect
the future of the organization, than in the historical
recording and compliance (scorekeeping) aspects
of the profession. Management accounting
knowledge and experience can therefore be
obtained from varied fields and functions within an
organization, such as information management,
treasury, efficiency auditing, marketing, valuation,
pricing, logistics, etc."
The American Institute of Certified Public
Accountants(AICPA) states that management
accounting practice extends to the following three
areas:*Strategic Management—Advancing the
role of the management accountant as a strategic
partner in the organization. *Performance
Management—Developing the practice of
business decision-making and managing the
erformance of the organization. *Risk
Management—Contributing to frameworks and
practices for identifying, measuring, managing and
reporting risks to the achievement of the
objectives of the organization.

I.C.W.A, published Glossary of Manageemnt

Accounting terms defining management
accounting as “a system of collection and
presentation of relevant economic information
relating to an enterprise for planning, controlling
and decision making”

There are several similarities and dissimilarities

between Financial accounting, cost accounting and
management accounting. Some of the similarities
are as follows:
1.Financial Accounting, cost accounting and
management accounting are belonging to the

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 same family of accounting. All three are the
feathers of general accounting.
2.All are performing normal functions of general
accounting (i.e collecting, recording,
classifying, summarising, analysing,
interpreting and reporting).
3. All the 3 are providing utility. That means data
information can be used for different purpose.
Data provided is useful for decision making.

Difference between Financial Accounting and

Management Accounting

The distinction is drawn between Financial

Accounting and Management Accounting since
they differ in their emphasize and approaches.
Some of the differences are as follows:

Parameters/Nat Financial Management

ure Accounting Accounting

1.Audience/ Supplys Management

Primary accounting accounting
users/Purpos information. It caters to the
e serves the needs of
interests of internal users
external users (i.e
such as management)
stockholders, by utilizing
creditors and tax accounting
authorities. The data. The
major objective of purpose for
financial which
accounting is to management
prepare balance accounting
sheet and profit collects and
and loss account reports is
to inform the relevant
shareholders and information to
others about the make
firm’s profitability, decisions to
state of resources ensure
and obligations. optimum use
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 of firm’s
resources .
2. Time focus Financial Management
(Emphasis on accounting focuses Accounting
future) on historical represents
information. It past, present
accumulates and and future
reports historical information.
information to M.A being a
various parties. decision
Financial making
accounting reports process,
tell us what has focuses on
happened in past. future. It
Through balance analyses the
sheet and profit past data and
and loss account, adjusts them
investors are in the light of
revealed the future
manner in which expectations
the resources to make plans
entrusted by them (planning and
to the firm have controlling
been utilized. future
profits). It
uses
estimations,
projections
with logic. It is
an educated
guess and not
mere
layman’s
guess. It is
not actual
figure but
estimated
figures.
3.Scope Covers whole Under
(Organizational organisation. management
focus) Highly aggregate; accounting
report on the segment wise
entire analysis is
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 organisation. It possible. It
projects the whole will see where
picture of overall exactly
operation. So loophole lies
segment wise through
analysis not done focusing on
individual
unit.
4.Legal It is It is optional.
requirement mandatory/compul It is the result
(freedom of sory or necessary. of the
choice) It is an outcome of management’
statute. For s needs for
instance, in India, information
it is required under for making
the Companies Act decisions.
to prepare Balance Therefore, it
Sheet and Profit a is optional.
Loss Account for Management
submission to accounting
shareholders and function
others. Moreover would differ
the financial from firm to
statements are firm. A firm
generally required may have a
to be prepared in sophisticated,
the formats elaborate and
prescribed by the comprehensiv
law. e system,
while another
may have a
partial system
only.
5. Emphasis on Financial Here too
Precision accounting much
emphasizes on emphasis is
accuracy of facts. not laid down
It deals with actual on precision.
figures and it is Sometimes
objective in approximated
nature. figures are
much more
significant
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 and valuable
than actual
figur3es. In
short is
having only
approximatio
ns and
estimations.
Besides it
uses future
data which is
subjective in
nature .
6. Reporting Outsiders are Predominantl
looking in, up y insiders can
(predominantly for make use of it
outsiders). It but not as it
presents annual is,
reports for the management
specific date. people should
sense the
problem
before it
occurs (highly
dynamics)
7. description Only monetary Both
transactions are monetary and
taken into non monetary
consideration transactions
are taken into
consideration.
8. Timeliness It is delayed and It is fast and
historical. Position non time
is evaluated only consuming.
after the Controlling
preparation of final process
accounts. become easy
Corrective actions and we can
are not possible incorporate
quickly. corrective
measures
quickly.
9. Accounting Generally It is not based
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 Principles Accepted on any set of
(GAAP) Accounting accepted
Principles. rules of
International principles.
Accounting Every
Standards etc are enterprise
developed. That evolves its
means freedom of own
activity is entailed.procedures
Flexibility is not and principles
possible. Principles for preparing
are barriers ofreports for
freedom. internal users.
Hence
flexibility is
there.
10. Period Usually presents Here reports
annual; reports for are prepared
the particular for both
period. shorter and
longer
durations.
11. Financial No publication
Publications statements MUST
BE SUBMITTED TO
Registrar. Its
publication is
compulsory.
12. Audit Audit is Audit is not
compulsory. possible
because
actual figures
are not
stated.
13. Availability Publicly available Confidential.
14. Main Explanation Planning and
emphasis control.
15. Style and Standardized Tailored to
details the
requirement
and
summarized.
16. Unit of Money Money or
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account physical units
on process,
technologies,
suppliers,
customers
and
competitors.

Difference between Cost Accounting and

Management Accounting

Paramet Cost Accounting Management

ers/ Accounting
Nature
1.Object/ Cost ascertainment, Planning and
Purp allocation, controlling of all
ose distribution, cost business activity.
control and decision (forward planning
making. and managerial
decision making0.
Mgt accounting is
more concerned
with impact and
effect of costs
2. Scope It covers cost It is more
ascertainment and comprehensive.
it will not cover
other aspects of
business activity.
3. Nature Uses both past and Estimates and
present figures. projections are
fundamental
feature.
4. Data Only quantitative Both quantitative
used data is used. and qualitative
data.
5. Owes origin to the It is of recent
Develop industrial revolution origin. It is of
ment and failure of 1950’s.
financial accounting
to take care of
ascertainment of
cost. To supplement
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 financial accounting,
cost accounting has
been developed.
6. From time to time No specific rule or
Principle we may change the specifications.
followed rule. Flexibility is the
virtue of mgt
accounting. It is
result oriented,
application
oriented.
7. Cost accounting Mgt accounting
Interdep system can be cannot be installed
endence installed without without proper
mgt accounting. cost accounting
system.
8. Does not includes It includes both
Coverag financial accounting financial
e and nothing to do accounting and
with tax accounting. cost accounting. It
also embraces tax
accounting.
9. Tools Few. Wide range of
and tools and
Techniqu techniques.
es
10. Placed at lower Placed at higher
Position hierarchy. hierarchy.
in
organiza
tional
hierarch
y

Traditional vs. innovative management accounting

practices

In the late 1980s, accounting practitioners and

educators were heavily criticized on the grounds
that management accounting practices (and, even
more so, the curriculum taught to accounting
students) had changed little over the preceding 60
years, despite radical changes in the business
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environment. Professional accounting institutes,
perhaps fearing that management accountants
would increasingly be seen as superfluous in
business organizations, subsequently devoted
considerable resources to the development of a
more innovative skills set for management
accountants.
The distinction between ‘traditional’ and
‘innovative’ management accounting practices can
be illustrated by reference to cost control
techniques. Cost accounting is a central method in
management accounting, and traditionally,
management accountants’ principal technique was
variance analysis, which is a systematic approach
to the comparison of the actual and budgeted costs
of the raw materials and labor used during a
production period.
While some form of variance analysis is still used
by most manufacturing firms, it nowadays tends to
be used in conjunction with innovative techniques
such as life cycle cost analysis and activity-based
costing, which are designed with specific aspects of
the modern business environment in mind.
Lifecycle costing recognizes that managers’ ability
to influence the cost of manufacturing a product is
at its greatest when the product is still at the
design stage of its product lifecycle (i.e., before the
design has been finalised and production
commenced), since small changes to the product
design may lead to significant savings in the cost
of manufacturing the product. Activity-based
costing (ABC) recognizes that, in modern factories,
most manufacturing costs are determined by the
amount of ‘activities’ (e.g., the number of
production runs per month, and the amount of
production equipment idle time) and that the key
to effective cost control is therefore optimizing the
efficiency of these activities. Activity-based
accounting is also known as Cause and Effect
accounting.

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Both lifecycle costing and activity-based costing
recognize that, in the typical modern factory, the
avoidance of disruptive events (such as machine
breakdowns and quality control failures) is of far
greater importance than (for example) reducing
the costs of raw materials. Activity-based costing
also deemphasizes direct labor as a cost driver and
concentrates instead on activities that drive costs,
such as the provision of a service or the production
of a product component.
Specific Concepts of management accounting

Throughput accounting
The most significant, recent direction in managerial
accounting is throughput accounting; which
recognizes the interdependencies of modern
production processes. For any given product,
customer or supplier, it is a tool to measure the
contribution per unit of constrained resource .
Lean accounting (accounting for lean
enterprise)
In the mid to late 1990s several books were written
about accounting in the lean enterprise (companies
implementing elements of the Toyota Production
System). The term lean accounting was coined
during that period. These books contest that
traditional accounting methods are better suited
for mass production and do not support or measure
good business practices in just in time
manufacturing and services. The movement
reached a tipping point during the 2005 Lean
Accounting Summit in Dearborn, MI. 320
individuals attended and discussed the merits of a
new approach to accounting in the lean enterprise.
520 individuals attended the 2nd annual
conference in 2006.
Transfer Pricing
Management accounting is an applied discipline
used in various industries. The specific functions
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and principles followed can vary based on the
industry. Management accounting principles in
banking are specialized but do have some common
fundamental concepts used whether the industry is
manufacturing based or service oriented. For
example, transfer pricing is a concept used in
manufacturing but is also applied in banking. It is a
fundamental principle used in assigning value and
revenue attribution to the various business units.
Essentially, transfer pricing in banking is the
method of assigning the interest rate risk of the
bank to the various funding sources and uses of
the enterprise. Thus, the bank's corporate treasury
department will assign funding charges to the
business units for their use of the bank's resources
when they make loans to clients. The treasury
department will also assign funding credit to
business units who bring in deposits (resources) to
the bank. Although the funds transfer pricing
process is primarily applicable to the loans and
deposits of the various banking units, this
proactive is applied to all assets and liabilities of
the business segment. Once transfer pricing is
applied and any other management accounting
entries or adjustments are posted to the ledger
(which are usually memo accounts and are not
included in the legal entity results), the business
units are able to produce segment financial results
which are used by both internal and external users
to evaluate performance.
Aims of Management Acounting:

1. Formulating strategies
2.Planning and constructing business activities
3.Helps in making decision
4. Optimal use of resources
5. Supporting financial reports preparation
6. Safeguarding asset

Nature of Management accounting:

That Part of accounting system which facilitates
the management process is called management

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accounting. Today accounting is an integral part of
management.

* Management accounting is a decision –

making system..
* Management accounting is futuristic.

It helps to evaluate future as it become present.

Eg: 1. The use of standard cost and budgetary
control. It provides a very selective and pertinent
information out of the mass data gathered.
2. Whether to buy or to make a product.

Although everyone recognizes the importance pf

management accounting, business executives are
not sure about the role and functions of
management accounting. Promoted by this
confusion, the National Accounting Association of
the USA. Set up the Management Accounting
Practices Committee which has given a very
elaborate and comprehensive definition of the
functions of management accounting:

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 “Management Accounting is "the process of identification,
measurement, accumulation, analysis, preparation,
interpretation and communication of information used by
management to plan, evaluate and control within an entity
and to assure appropriate use of and accountability for its
resources.” Management accounting also comprises the
preparation of financial reports for non management groups
such as shareholders, creditors, regulatory agencies and
tax authorities”.

From the evaluation of the above definition it is clear that

the management accounting process include the following:-

Identification – the recognition and evaluation of business

and other economic events for appropriate accounting action.

Measurement – the quantification including estimates of

business transaction that have occurred or may occur.

Accumulation – the disciplined and consistent approach

to recording and classifying business transactions and
other events.

Analysis – the determination of resources for and the

relationships of the reported activity with other
economic events and circumstances.

Preparation and Interpretation – the logical format to

draw conclusions.

Communication – reporting of pertinent information to

management and others for internal and external users.

Management Accounting is used by the Manageement

to – 1. Plan, 2. Evaluate, 3. Control, 4. Assure
accountability.

Scope of Management Accounting

Management Accounting includes Financial Accounting

and extends to the operation of a system of cost
accounting and financial management. While meeting
the legal and conventional requirements reqarding the
presentation of financial statements (profit and loss
account, Balance Sheet and funds flow statements) it
stresses upon the establishment and operation of
internal controls. Scope of management accounting
includes the following.

Financial Accounting – Management accounting is

rearrangement of the information provided by
financial accounting.

Cost Accounting – Standarad costing, Marginal costing,

opportunity cost analysis, differential costing and
other cost control techiniques play useful role in
operation and control of the business undertaking.

Budgeting and Budgetary control -

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Inventory Control – starting from the time it is acquired till
its final disposal.

Statistical Control – Graphs, Charts, index numbers and

other statistical methods make the infromation more
impressive and intelligible.

Interim Reporting – Monthly, quarterly, half yearly income

statements, cashflow, funds flow statement.

Taxation – computation of income in accordance with the

tax laws, filing of returns and making tax payments.

Office services – This includes maintenance of proper data

processing and other office management services,
reporting on best use of mechanical and electronic
devices.

Internal Audit – Development of a suitable internal audit

system for internal control.

Management Accounting Tasks/ Services Provided

Listed below are the primary tasks/ services

performed by management accountants. The
degree of complexity relative to these activities are
dependent on the experience level and abilities of
any one individual.
• Variance Analysis
• Rate & Volume Analysis
• Business Metrics Development
• Price Modeling
• Product Profitability
• Geographic vs. Industry or Client Segment
Reporting
• Sales Management Scorecards
• Cost Analysis
• Cost Benefit Analysis
• Client Profitability Analysis
• Capital Budgeting
• Buy vs. Lease Analysis
• Strategic Planning
• Strategic Management Advise
• Internal Financial Presentation and
Communication
• Sales and Financial Forecasting
• Annual Budgeting
• Cost Allocation
• Resource Allocation and Utilization
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Functions of Management Accounting
1.Provides Data – Serves as a vital source of data
for management planning. Past data for future
forecasts.
2.Modifies Data – Accounting data must be
properly classified and compiled.
3.Analysis and Interpretation – accounting data is
analysed meaningfully for effective planning
and decision making. For this purpose, the data
is presented in a comparative form. Ratios are
calculated and likely trends are projected.
4.Serves as means of Communicating – It
provides a means of communicating
management plans upwards, downwards and
outwards through the organisation.
5.Facilitates control – Through Budgetary control
and standard costing.
6.Uses also qualitative information.

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Functions of Management Accountants

The financial manager is generally the overall incharge of

financing and accounting activities. Two officers –
Treasurer and Controller. – work under his direct
supervision and control. Financial executives Institute,
association of corporate treasurers and controller,
distinguishes their function;

Controllership (He is chief Treasurership (He is to

accounting offcier) manage firm’s funds)

1. Planning for control. 1. Provision of capital.

2. Reporting and 2. Investor relations.

interpreting.

3. Evaluating and 3. Short term financing.

consulting.

4. Tax administration. 4. Banking and custody.

5. Government reporting. 5. Credits and collector.

6. Protection of assets. 6. Investment.

7. Economic appraisal. 7. Risk management.

The Management accounting is primary

means of implementing the first 3
functions of controllorship. The
treasureship is concerned with mainly
company’s financial matters, the
controller with the operating matters. The
exact division of accounting and financial
duties varies from company to company.
In small organisations same person might
be both the treasurer and controller.
Role of Management Accountants within the Corporation

Consistent with other roles in today's corporation,

management accountants have a dual reporting
relationship. As a strategic partner and provider of
decision based financial and operational
information, management accountants are
responsible to manage business team at the same
time also have reporting relationships and
responsibilities to the corporation's finance
organization.

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The activities management accountants provide
inclusive of forecasting and planning, performing
variance analysis, reviewing and monitoring costs
inherent in the business are ones that have dual
accountability to both finance and the business
team. Examples of tasks where accountability may
be more meaningful to the business management
team vs. the corporate finance department are the
development of new product costing, operations
research, business driver metrics, sales
management scorecarding, and client profitability
analysis. Conversely, the preparation of certain
financial reports, reconciliations of the financial
data to source systems, risk and regulatory
reporting will be more useful to the corporate
finance team as they are charged with aggregating
certain financial information from all segments of
the corporation. One widely held view of the
progression of the accounting and finance career
path is that financial accounting is a stepping stone
to management accounting. Consistent with the
notion of value creation, management accountants
help drive the success of the business while strict
financial accounting is more of a compliance and
historical endeavor.

Limitations of Management Accounting

1.Lack of Objectivity
2.Intuitive Decision Making
3.High cost for Installation and operation
4.Limitations of Financial and Cost
Accounting
5. Wide scope – difficult to prescribe the
boundary
6.Resistance
7.Not a substitute for management.

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