Professional Documents
Culture Documents
Learning Objectives
Management Accounting
The term management accounting refers to accounting to management, i.e. accounting which
provides necessary information to management for the proper discharge of its functions. The key
functions of management are planning, organizing, directing and controlling. Thus, management
accounting provides information to management so that planning, organizing, directing and
controlling of business operations can be done in an orderly manner.
However, above is a very general definition of management accounting. Different authorities have
given different definitions specific to their field. Some of the important definitions are given below:
“The application of professional knowledge and skill in the preparation of accounting information in
such a way as to assist management in the formation of policies and in the planning and control of
the operations of the undertaking.”
The definition given by the Management Accounting Team of the Anglo-American Council of
Productivity seems to be the most precise. It reads, “Management Accounting is the presentation of
accounting information in such a way as to assist management in the creation of policy and in the
day-to-day operations of an undertaking.”
The above definitions clearly indicate that management accounting is concerned with accounting
information which is useful to the management. Efficiency of the various phases of management is,
as a matter of fact, the common head which underlies all these definitions. However, it should be
clearly understood that it does not supplant financial accounting but rather it supplements it in order
to serve the diverse requirements of modern management.
Management accounting rearranges management control to a great extent with the help of
accounting information provided by financial accounting. It, therefore, lies between the following
two activities:
The basic function of management accounting is to assist management in performing its function
effectively. The key functions of management are planning, organizing, directing and controlling.
Management accounting helps in the following ways to perform the above-mentioned functions:
1. Provides Data
Management accounting serves as a vital source of data for management planning. The accounts
and documents are repositories of vast quantity of data regarding past performance of the
enterprise which is necessary for making the forecasts.
2. Modifies Data
The accounting data required for managerial decisions is properly compiled and classified. For
example, purchase figures for different months may be classified to know total purchases made
during each period product-wise, supplier-wise and territory-wise.
The accounting data is analyzed 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.
5. Facilitates Control
Management accounting helps in translating given objectives and strategy into specified goals
for attainment by a specified time and secures effective accomplishment of these goals in an
efficient manner. All this is made possible through budgetary control and standard costing which
are integral parts of management accounting.
Management accounting does not restrict itself to financial data for helping management in
decision-making but also uses such information which may not be capable of being measured in
monetary terms. Such information may be collected from special surveys, statistical
compilations, engineering records, etc.
Management accounting is concerned with the presentation of accounting information in the most
useful way for management. Its scope is, therefore, quite vast. It includes almost all aspects of
business operations. However, the following areas can rightly be identified as falling within the
ambit of management accounting:
1. Financial Accounting
2. Cost Accounting
Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost
techniques play a useful role in operation and control of the business undertaking.
3. Revaluation Accounting
This is concerned with ensuring that capital is maintained intact in real terms and profit is
calculated with this fact in mind.
4. Budgetary Control
This includes framing of budgets, comparison of actual performance with the budgeted
performance, computation of variances, finding their causes, etc.
5. Inventory Control
It includes the control over inventory from the time it is acquired till its final disposal.
6. Statistical Methods
Graphs, charts, pictorial presentation, index numbers and other statistical methods make a piece
of information more impressive and intelligible.
7. Interim Reporting
This includes preparation of monthly, quarterly, half-yearly income statements and other related
reports, cash flow and funds flow statements, scrap reports etc.
8. Taxation
Taxation includes computation of income in accordance with the tax laws, filing of returns and
making tax payments.
9. Office Services
This includes maintenance of proper data processing and other office management services. It
also includes reporting on best use of mechanical and electronic devices.
Management accounting provides invaluable services to management in all of its functions. The
basic functions of management are as follows:
• Planning
• Controlling
• Coordinating
• Organizing
• Motivating
• Communicating
Planning
Planning involves the formulation of policies, setting up of goals and initiating necessary programs
for the achievement of goals. Management accounting makes an important contribution in
performance of this function. It makes available the relevant data after pruning and analyzing them
suitably for effective planning and decision-making.
Controlling
Controlling involves the evaluation of performance by keeping in view that the actual performance
coincides with the planned one and remedial measures are taken in case of variation between the
two. The techniques of budgetary control, standard costing and departmental operating statements
help in performing this function. As a matter of fact, the entire system of control is designed and
operated by a management accountant designated as controller.
Coordinating
Organizing
Organizing involves the grouping of an operative action to identify the authority and responsibility
within an organization. Management accounting plays a prominent role here. A whole organization
is divided into suitable profit or cost centers. A sound system of internal control and internal audit
for each of the cost or profit centers helps in organizing and establishing a sound business structure.
Motivating
Motivating involves the maintenance of a high degree of morale in an organization. The conditions
should be such that each person gives his best to meet the goals of the enterprise. The seniors should
be in a position to find out whom to demote or promote and to reward or penalize. The periodical
departmental profit and loss accounts, budgets and reports go a long way in achieving this objective.
Communicating
Communicating involves the transmission of data, results, etc. both to the insiders as well as
outsiders. The orders of seniors should be communicated to subordinates and the results achieved by
the subordinates should be reported to the seniors. Moreover, management owes a duty to the
creditors, prospective investors, shareholders etc. to communicate about the progress, financial
position etc. of a company. Management accounting helps management to perform this function by
developing a suitable system of reporting which emphasizes and highlights the relevant facts.
Thus, management accounting is helpful to management in every field of activity. This is the reason
why management accountant is considered not only a service arm to management but also a part of
management.
Management accounting, being comparatively a new discipline, suffers from certain limitations
which limit its effectiveness. These limitations are as follows:
2. Persistent Efforts
The conclusions drawn by management accountant are not executed automatically. He has to
convince people at all levels. In other words, he should be an efficient salesman to sell his ideas.
4. Wide Scope
Management accounting has a very wide scope incorporating many disciplines. It considers both
monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the
conclusions obtained through it.
5. Top-Heavy Structure
6. Opposition to Change
Management accounting demands a breakaway from traditional accounting practices. It calls for
a rearrangement of the personnel and their activities which is generally not liked by the people
involved.
7. Evolutionary Stage
Management accounting is still in its initial stage. It has, therefore, the same impediments as a
new discipline will have, e.g., fluidity of concepts, raw techniques and imperfect analyzing tools.
This all creates doubt about the utility of management accounting.
The following steps are taken for the installation of an efficient and effective management
accounting system:
1. An appropriate organizational manual should be prepared and adopted. The manual defines and
confines explicitly the scope of authority of each executive in the organization. This prevents
overlapping of functions, powers and responsibilities. It also depicts the line of communication.
2. The requisite staff will have to be recruited, trained and developed.
3. Appropriate forms, returns etc. should be designed, prepared and made available.
4. Classification and codification of accounts
5. Developing a suitable system for the integration of cost and financial data
6. Setting up a suitable system of budgetary control
7. Setting up of standards and introducing standard costing techniques
8. Setting up of cost, budget and profit centers and introducing operational research techniques
Management accounting uses the following tools or techniques to discharge its duty toward
management:
A Management Accountant
A management accountant has a very significant role to perform in the installation, development and
functioning of an efficient and effective management accounting system. He designs the framework
of the financial and cost control reports that provide each managerial level with the most useful data
at the most appropriate time. At times, he tells executives how to control information and ways of
using it. This is because his position is unique with respect to information about the organization.
Apart from the top management, no one in an organization knows more about the various functions
of the organization than him. He is, therefore, sometimes described as the Chief Intelligence Officer
(CIO) of management. He gathers information, breaks it down, shifts it out and organizes it into
meaningful categories. He separates the relevant and irrelevant information and then ranks relevant
information according to the degree of importance to management. He reports relevant information
in an intelligible form to the management and also sometimes to the outsiders who are interested in
the information.
He also compares the actual performance with the planned one and reports and interprets the results
of operations to all levels of management and to the owners of the business. Thus, in brief,
management accountant or controller is the person who designs the management information system
for an organization, operates it by means of interlocked budgets, computes variances and exhorts
others to take corrective measures. Mr. P.L. Tondon has explained the position of the management
accountant in the following words:
“The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel
and the hub receiving the information. He processes the information and then returns the processed
information back to where it came from.”
Dr. Don Barker sees a very bright future for the management accountants. According to him
“Management Accountants will be presented with many opportunities for innovative actions in the
global economic environment. In addition to their role of providing accurate, timely and relevant
information, management accountants will be expected to participate as business consultants and
partners with management in the strategic planning process.”
Thus, there are tremendous possibilities for management accountants to shine as a professional
group in the years to come. To fit in this role, it is necessary that management accountants develop
effective communication abilities, adopt a structured approach, a flexible accommodation and keep
themselves aware of the latest evolving technologies in the profession.
It is the duty of a management accountant to keep all levels of management informed of their real
position. He has, therefore, varied functions to perform. His important functions can be summarized
as follows:
1. Planning
He has to establish, coordinate and administer an adequate plan for the control of various
operations. Such a plan includes profit planning, programs of capital investment and financing,
sales forecasts, expense budgets and cost standards.
2. Controlling
He has to compare the actual performance with the operating plans and standards and to report
and interpret the results of operations to all levels of management and the owners of the business.
This is done through the compilation of appropriate accounting and statistical records and
reports.
3. Coordinating
He consults all the segments of management responsible for a policy or an action. Such
consultation might be concerned with any phase of the operation of the business, attainment of
objectives and the effectiveness of the organization structure and policies.
4. Other Functions
It should be noted that the functions of a management accountant are more like those of a staff
official. He, in addition to the processing of historical data, supplies a good deal of information
concerning the future operations in line with the management’s needs. Besides serving the top
management with the information concerning the company as a whole, he supplies the detailed
information to the line officers regarding alternative plans and their profitability which assist them in
decision-making. As a matter of fact, a management accountant should not bother himself regarding
the decision taken by the line officials after tendering advice unless he has some reasonable grounds
to believe that such a decision is going to affect the interests of the corporation adversely. In such a
case, he should report it to the concerned level of management with tact, patience and firmness
combined with politeness.
Following are the basic requisites of a management accountant to be successful in the job:
The aim of a management accountant is to process the data that will have a vital influence on the
company policy. Technicalities and red-tape cause delay which may prove very costly to a
business. He should, therefore, report directly to the president or the chief executive of the
company.
The most likely title of a management accountant is that of the controller. He is the principal
officer incharge of accounts and performs such additional duties which the board of directors, the
executive committee or the president of the company may assign to him from time to time. He
cannot possibly measure upto this status if he is immersed in accounting routine or is a slave to
the operation of balancing.
3. Personal Qualities
A management accountant has perhaps the maximum chances of going up high in the
management hierarchy. He can make the best use of opportunities if he possesses the following
personal qualities:
a. A personality acceptable to all types of individuals that may make up the management
group in a company.
b. An ability to receive the views of management with comprehension and to appreciate the
type of information management requires.
c. An understanding of how to fill the role of specialist and adviser.
d. He should have the knowledge of theory as well as practice of management.
e. A balanced outlook on functioning of the business.
f. The capacity to think and confer with top management about matters central to the
profitability and progress of the company.
Controller
The term controller or comptroller is used in the United States of America for the top management
accountant executive in a firm. He is considered as the figure partner in management team since he
has the responsibility for collection of figures (statistical information) both from within and outside
the company. He has also to safeguard the accuracy of such figures and also develop devices needed
for their meaningful presentation and interpretation.
The general functions and duties of a controller have been laid down by the Controllers Institute of
America as follows:
Functions of Controllership
1. To establish, coordinate and maintain an integrated plan for the control of operations through
authorized management. Such a plan would provide to the extent required in the business cost
standards, expense budgets, sales forecasts, profit planning and program for capital investment
and financing together with the necessary procedures to effectuate the plan.
2. To measure performance against approved operating plans and standards, and to report and
interpret the results of operations to all levels of management. This function includes the
following:
• Designing
• Installation
• Maintenance of accounting, cost systems and records
• Determination of accounting policy
• Compilation of statistical records as required
This includes consulting the segments of management responsible for policy or action concerning
any phase of the operation of the business as it relates to the performance of this function.
4. To report to government agencies as required and to supervise all the matters relating to taxes.
5. To interpret and report on the effects of external influences on the attainment of the objectives of
business. This function includes the continuous appraisal of economic and social forces and of
governmental influence as they largely affect the operations of a business.
6. To provide protection for the assets of a business. This function includes establishing and
maintaining adequate internal control and auditing, and assuring proper insurance coverage.
Duties of a Controller
Treasurer
Many people get confused between an officer of controller or a management accountant and a
treasurer. As a matter of fact, both the officers generally work under the direct control and
supervision of a finance manager who is the overall incharge of both finance and accounting
activities. A controller or a management accountant is the chief accountant officer. A treasurer is the
person who has to manage the funds of a firm. Following are some of the duties of a treasurer:
The functions and status of a controller and a treasurer can be shown with the help of an organization
chart.
Besides the basic accounting principles which are accepted generally throughout the accounting
profession, following are the additional conventions or principles that are generally regarded as the
essential parts of management accounting:
Accounting information, records, reports, statements and other evidences of past, present, or
future results should be designed and compiled to meet the needs of a particular business or a
specific problem.
This implies the certain flexibility of a system. When a particular problem is to be solved, the
system should be capable of producing the relevant data. If necessary, there should be departure
from double-entry principles. The accounting and operational research principles should be
linked together. The information should be accumulated and then presented to solve problems.
The accounting information should be modified and adapted to meet every need. However, it is
important to remember that if this principle is carried too far, the cost of management
accountancy system may become excessive. It is partly for the reason that a systematic rather
than an ad hoc method is used for accumulating costing data.
2. Management by Exception
Costs are best controlled at the points at which they are incurred and this is known as “control-at-
source accounting.” Recognition of this convention is acknowledged through the preparation of
departmental operating statements and the design of costing system which control individual
workers, material issues and the usage of services. The inculcation of cost consciousness is also
an essential part of this convention.
5. Use of ROI
Return on investment is used as a criterion for measuring the efficiency of a business. For this
purpose, the capital employed should be calculated with reference to the current replacement
values.
6. Utility
Management accounting systems and related forms should be used only as long as they serve a
useful purpose.
7. Integration
There should be an integration of all management information to use the available facts to their
fullest. At the same time, accounting service should be provided at the minimum cost.
Overhead costs should be apportioned to cost centers and absorbed to products on the basis of
benefits received for fixed costs or responsibilities incurred for variable costs. The method or
methods selected should bring the desired results of recovering the overheads in the most
equitable manner.
9. Utilization of Resources
Management accountancy should endeavor to show whether or not the resources of a business
are being utilized in the most effective manner.
While tracing responsibility, a clear distinction should be made between those costs which are
controllable and those which are uncontrollable by the management of an enterprise or the
department concerned.
A management accountant should seek to anticipate problems and prevent them. There should be
a forward-looking approach and actual costs should be employed only as measures of
achievements realized. This principle recognizes the importance of budgetary control and
standard costing.
12. Appropriate Means
There is always a need to select the most appropriate means of accumulating, recording and
presenting the accountancy information. This normally implies that mechanization should be
adopted as much as possible. It does not mean that every business should employ a computer.
The machines selected should be of a size and type that can economically be employed by the
particular concern to deal with its own problems. If there is insufficient work for a computer, this
should not be acquired.
A personal contact with departmental managers, foremen and others cannot be replaced entirely
by reports and statements.
The above list of conventions is fairly long. However, it is not exhaustive on account of a subject
of management accounting to grow alone. It may be possible that later more suitable conventions
may be developed by the management accountants all over the world which may take the form of
universally acceptable management accounting principles.
Financial accounting and management accounting are closely interrelated since management
accounting is, to a large extent, the rearrangement of data provided by financial accounting.
Moreover, all accounting is financial, i.e. all accounting systems are in monetary terms and
management is responsible for the contents of the financial accounting statements. Inspite of such a
close relationship between the two, there are certain fundamental differences. These differences can
be laid down as follows:
1. Objectives
Financial accounting is designed to supply information in the form of profit and loss account and
balance sheet to external parties like shareholders, creditors, banks, investors and government. A
piece of information is supplied periodically and is usually of such type in which management is
not much interested. Management accounting is designed principally for providing accounting
information for the internal use by management. Thus, financial accounting is primarily an
external reporting process while management accounting is primarily an internal reporting
process.
2. Analyzing Performances
Financial accounting portrays the position of business as a whole. Financial statements like
income statement and balance sheet report on overall performance or status of the business. On
the other hand, management accounting directs its attention to the various divisions, departments
of the business and reports about the profitability, performance etc. of each of them. Financial
accounting deals with the aggregate and therefore cannot reveal what part of the management
action is going wrong and why. Management accounting provides the detailed analytical data for
these purposes.
3. Data used
Financial accounting is concerned with the monetary record of past events. It is a post-mortem
analysis of past activity and therefore out of date for management action. Management
accounting is accounting for future and therefore it supplies data both for present and future duly
analyzed and in detail in the management language so that it becomes a base for management
action.
4. Monetary Management
In financial accounting, only such economic events find place which can be described in money.
However, the management is equally interested in non-monetary economic events viz. technical
innovations, personnel in an organization, changes in the value of money etc. These events affect
management’s decisions and therefore management accounting cannot afford to ignore them. For
example, change in the value of money may not find a place in financial accounting on account
of “going concern concept.” But while affecting an insurance policy on an asset or providing for
replacement of an asset, the management will have to take into account this factor.
5. Periodicity of Reporting
6. Precision
7. Nature
Financial accounting is more objective whereas management accounting is more subjective. This
is because management accounting is fundamentally based on judgment rather than on
measurement.
8. Legal Compulsion
Financial accounting has more or less become compulsory for every business on account of the
legal provisions of one or the other act. However, a business is free to install or not to install a
system of management accounting.
The above points of difference between financial accounting and management accounting prove
that management accounting has flexible approach as compared to rigid approach in the case of
financial accounting. In brief, financial accounting simply shows how a business has moved in
the past while management accounting shows how a business has to move in the future.
Cost accounting is the process of accounting for costs. It embraces the accounting procedures
relating to recording of all income and expenditure and the preparation of periodical statements and
reports with the objective of ascertaining and controlling costs. It is, thus, the formal mechanism by
means of which the costs of products or services are ascertained and controlled.
Management accounting involves collecting, analyzing, interpreting and presenting all accounting
information which is useful to the management. It is closely associated with management control
which comprises planning, executing, measuring and evaluating the performance of an organization.
Thus, management accounting draws heavily on cost data and other information derived from cost
accounting.
Today cost accounting is generally indistinguishable from the so-called management accounting or
internal accounting because it serves multiple purposes. However, management accounting can be
distinguished from cost accounting in one important respect. Management accounting has a wider
scope as compared to cost accounting. Cost accounting deals primarily with cost data while
management accounting involves the consideration of both cost and revenue. Management
accounting is an all-inclusive accounting information system which covers financial accounting, cost
accounting and all aspects of financial management. But it is not a substitute for other accounting
functions. It involves a continuous process of reporting cost, financial and other relevant data in an
analytical and informative way to management.
We should not be very much concerned about the boundaries of cost accounting and management
accounting since they are complementary in nature. In the absence of a suitable system of cost
accounting, management will not be in a position to have detailed cost information and their function
is bound to lose significance. On the other hand, the management cannot effectively use the cost data
unless it has been reported to them in a meaningful and informative form.
Summary