1. Introduction To Management Accounting

1. Introduction To Management Accounting - Transcript

Session Objectives

The Scope of Management Accounting
Comparison between Management Accounting and Financial Accounting
Comparison between Management Accounting and Cost Accounting
The Role of Management Accountant

What is Management Accounting

Management accounting is the accounting for management Management and accountancy are two close but separate disciplines The former is basically concerned with policy formulation and decision making while the latter is concerned with measuring and reporting financial activities The Anglo American committee defines management accounting as the presentation of accounting information in such a way as to assist management in the creation of policy in the day to day operations of an undertaking The credit of introducing this concept in the corporate level can be traced back to Dupont Corporation and the General Motors in the early part of the last century

Evolution of management Accounting

Management Accounting dates back to 1740 when the accountant of Melincryddan Smelting Works provided information to management to assess the profitability of two possible locations
In 1850s Lyman Mills a USA textile company used sophisticated overheads apportionment techniques and also used efficiency reports
Between 1880 1914 the scientific management a method of analyzing factory productivity through time and motion studies was used to establish standards
The development of Management Accounting System in the twentieth century can be attributed to the rise of Du Pont in USA
It was only in 1950 that the term Management Accounting came into practice following an Anglo American Productivity Council Meeting
In India Management Accounting has emerged more recently as a discipline

Definition

The professional society Institute of Management Accountant defines Management Accounting as a value adding continuous improvement process of planning designing measuring and operating non financial and financial information systems that guides management action motivates behavior and supports and creates the cultural value necessary to achieve an organization s strategic tactical and operating objectives
According to CT Horngren Management Accounting is the identification measurement accumulation analysis preparation interpretation and communication of information that assists the executive in fulfilling organizational objectives

Role of Management Accounting

Management Accounting plays a significant role in the following areas
Operational control

Provides feedback about the efficiency and the quality of the tasks performed
Product and customer costing

Measures the costs of resources used to manufacture a product or service and market and deliver the product to the customer
Management control

Provides information about the performance of Managers and operating units
Strategic control

Provides information about the enterprise s financial and long run competitive performance market conditions customer preferences and technological innovations
The scope of management Accounting can be analyzed based on the type of decisions taken using the management accounting information
Financial Accounting Financial Accounting deals with recorded facts which are useful for planning the future course of action The performance appraisal is based on recorded facts and figures
Cost Accounting The systems of standard costing marginal costing differential costing and opportunity costing are all helpful to the management for planning various business activities
Budgeting and Forecasting Both budgeting and forecasting are useful for management accountant in planning various activities
Inventory Control The control of inventory ultimately will help in controlling stocks Management will need effective inventory control to control stocks
Management Reporting Keeping the management informed of various activities of the concern is one of the important functions of the management accountant
Interpretation of Data The management accountant interprets various financial statements to the management These statements give an idea about the financial and earning position of the concern
Internal Audit To judge the performance of every department internal audit system is necessary Internal audit helps management in fixing responsibility of different individuals
Tax Accounting Tax planning is an important part of management accounting Income statements are prepared and tax liabilities are calculated The management is informed about the tax burden from Central Government State Government and local authorities
The major difference lies in the fact that financial accounting is mandatory for an organization where as management accounting is meant solely for the purpose of management decision making and control
Both forms of accounting differ mainly in areas like
The purpose of the accounting statements
The facts matters in which emphasis is laid
The preparation of the statements
The nature of data required for the preparation of statements
The extent of precision provided by both methods
The extent of focus on the organization as a whole
Usage of other disciplines in the preparation of statements and
The freedom of choice involved
The purpose of the accounting statements
The purpose of the financial statements is generally for internal or external uses While management accounting focuses solely on the internal users financial accounting focuses mainly on the external users Internal users don t require the same type of information sought by the external users like share holders creditors etc The information provided by management accounting is sued by managers to solve internal problems of the company and also in making vital decisions which are not given much attention by the external users
The facts matters in which emphasis is laid
The emphasis of management accounting is on the future plans of the organization As a large part of the overall responsibilities of a manager has something to do with planning a manager s information need has a strong orientation towards the future The importance of future plans lies in the fact that the critical factors like economic conditions customer demands competitive conditions etc are so dynamic and thus proper planning is considered as the need of the hour
The preparation of the statements
The preparation of financial statements in accordance with the generally accepted accounting principles is mandatory as per the financial accounting requirements This information projects the performance of the company to the outsiders The users of management accounting however are not required to follow the rules prescribed by any of the accounting standards
The nature of data required for the preparation of statements
The nature and importance of data is different for both forms of accounting While the financial accounting data is to be objectively determined and verifiable management accounting data is more concerned about receiving information that is relevant to a particular decision being taken and also should be flexible enough to be used in a variety of decision making situations
The extent of precision provided by both methods
Precision is a more common term used in financial accounting The financial statements prepared under financial accounting is audited to check the accuracy of the statements In case of data required for management accountants speed is more important than precision
Financial accounting focuses on the business activities of the organization as a whole where as management accounting focuses on the whole and more on the parts or segments of a company
Usage of other disciplines in the preparation of statements
Management accounting uses other disciplines for the preparation of reports for managers for future planning It extends beyond the boundaries of traditional accounting systems and practices and draws heavily from other disciplines
The freedom of choice involved
Financial accounting is mandatory for any organization where as management accounting is not Any organization should compulsorily maintain financial records as per the legal stipulations On the other side there are no regulatory bodies that provide statutes for the preparation of management accounting reports

Cost Accounting and Management Accounting

Cost accounting is a conscious and rational procedure followed by accountants for accumulating cost and relating such costs to specific products or departments for effective management action It establishes budgets standard costs and actual costs The subject matter of cost accounting is the cost and price data It is limited to product costing procedures and related information processing Cost accounting is a management information system that analyzes past present and future data to provide the basis for managerial decision making
Management accounting attempts to fill the information needs of managers with respect to a specific problem or situation It is not confined to the area of product costing cost and price data In order to achieve the management accounting objectives it makes use of the information derived from financial accounting and various other disciplines
Tools and Techniques of Management Accounting
In their functioning the Management Accountants use several tools and techniques such as
Analysis of Financial Statements The techniques used for financial analysis includes comparative financial statements ratios funds flow statements trend analysis etc
Budgetary Control Budgetary control technique is used as a tool for planning and control The management is able to assess the performance of each and every person in the organization
Standard Costing This is one of the important techniques of cost control It is determined in advance based on a systematic analysis of prevalent conditions The standard costing technique helps to enhance the efficiency of the concern and also management by exception
Marginal Costing This is a technique of costing which is concerned with changes in costs resulting from changes in the volume of production The short term utilization of capacity decisions are also assessed with the help of marginal costing
Decision Accounting Decision taking involves a choice from various alternatives Management accounting helps to calculate the financial implications of each alternative
Revaluation Accounting This is also known as replacement accounting The preservation of capital in the business is the main object of management
Management Information Systems With the development of electronic devices for recording and classifying data reporting to management has considerably improved The data pertaining to planning co ordination and control is supplied to the management
Limitations of Management Accounting
It is based on Accounting Information
Management is based on the data supplied by financial accounting and cost accounting The data used for making the future decisions is historical which acts as a major limitation in decision making
Comprehensive Knowledge
The management should have thorough knowledge of the accounting principles statistics principles of management economics etc to have an effective management accounting
It is not an Alternative to Administration
Management accounting does not provide an alternative to administration
Evolutionary Process
Management is only in the evolutionary stage the techniques and tools used by this system give varying results The conclusions taken from analysis and the interpretations are not the same
Personal Judgment
The interpretation of the financial information depends upon the capability of the interpreter and his personal judgment
Resistance
Installation of management accounting involves basic change in the organizational set up
Functions of Management Accountant
The functions of the management accountant or controller relate to the management and control of the firm s resources
Planning and controlling function The management accountant establishes coordinates and maintains an integrated plan for the control of operations
Reporting and interpreting function Compares the actual performance with the operating plans and standards and to report deviations if any to the owners of the business
Tax administration To establish and administer tax policies and procedures
Preparation of reports to government agencies To prepare the report to the government agencies as required under different laws
Protect the assets of the business Performing the function of protecting the assets of the business through internal controls auditing and ensuring proper insurance coverage
Appraisal of external influences on the business Make an appraisal of the influence of economic social and governmental influences and their effect on the business

Summary


In this chapter we have discussed the introductory aspects of Management Accounting evolution of management accounting benefits of management accounting to an organization difference between management accounting and financial accounting and also the distinguishing factor between management accounting and cost accounting The major functions of a management accountant are also discussed here