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BBA 207: MANAGEMENT ACCOUNTING BBA GGS INDRAPRASTHA UNIVERSITY BBA 207: MANAGEMENT ACCOUNTING COURSE CODE: BBA 207 Unit I Management Accounting: Nature and Scope, Financial Accounting, Cost Accounting and Management Accounting, Advantages and Limitations of Management Accounting, Role of Management Accountant. ………………………………………………………………………………………………………………………… MANAGEMENT ACCOUNTING Definition of Management Accounting: The term Management Accounting refers to accounting for the management, i.e., accounting which provides necessary information to the management for discharging its functions. The Chartered Institute of Management Accountants, London, defines Management Accounting as follows: “The application of a professional knowledge and skill in the preparation of accounting information in such a way so as to assist management in the formation of policies and in the planning and control of the operations of the undertaking.” Therefore, Management Accounting is a system for gathering , summarizing, reporting and interpreting accounting data and other financial information primarily for the internal needs of management. It is designed to assist internal management in the efficient formulation, execution and appraisal of business plans. Nature and Functions of Management Accounting: The basic function of management accounting is to assist the management in performing its function effectively. The functions of management are planning, organizing, directing and controlling. Management Accounting helps in the performance of each of these functions in the following ways: 1.

Provides Data: Management Accounting serves as a vital source of data for management planning. The accounts documents are a repository of a vast quantity of data about the past progress of enterprise for making forecasts for the future.

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Modifies Data: The accounting data required for managerial decisions is properly compiled and classified. Eg. Purchase figures for different months may be classified to know total purchases made during each period product-wise, supplier-wise, territory-wise.

3.

Analysis and Interprets Data: The 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 a means of Communication: Management accounting provides a means of communicating management pans upward, downward and outward through the organization.

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 a efficient manner.

6.

Uses also Quantitative information: Management Accounting does not restrict itself to financial data for helping the management in decision-making but also uses non-monetary information which is collected through special surveys, statistical compilations, etc.

7.

Helps in coordinating business activities: Management Accounting tools and techniques such as budgeting, financial reporting, etc. helps in coordinating the various activities of the business.

8.

Helps in Tax Administration: Management Accounting helps in submission of necessary documents and return to the tax authorities.

Scope of Management Accounting: Management Accounting is concerned with presentation of accounting information in the most useful way for management . Its scope is, therefore, quite vast. It includes within its fold almost all aspects of business operations. The following areas fall under the scope of Management Accounting: 

Financial Accounting: Management Accounting is concerned with presentation of information provided by financial accounting in a rearranged manner. In other words, Management Accounting contains tools and techniques and gets the data for analysis and interpretation mainly from financial accounting.



Cost Accounting: Standard costing, marginal costing, Opportunity cost analysis, differential costing and other cost techniques play a useful role in operation of the business.



Budgetary Control: This includes framing of budgets, comparison of actual performance with budgeted performance, computation of variances, etc.



Inventory Control: It includes control over inventory from the time it is acquired till its final disposal.



Revaluation Accounting: this is concerned with ensuring that capital is maintained intact in real terms and profit is calculated with this fact in mind.

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

Statistical Methods: Graphs, charts, pictorial presentation, index numbers, etc. make information more impressive and intelligible.



Quantitative Techniques: It allows managers to develop information from their financial database and uses the techniques such as time series, regression analysis, sampling techniques, etc. for this purpose.



Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income statements and other related reports.



Taxation: The business profit and the tax thereon is to be ascertained according to tax laws. The filing of tax returns & payment of tax in due time is the responsibility of management accountant.



Office Services: A management Accountant has to deal with maintenece of proper data processing, filing and other office management services.



Internal Audit: A management accountant is responsible for the audit of internal control, i.e., fixation of responsibilities, measurement of results, etc.



Inflation Accounting: It devises and implements appropriate methods to analyze and interpret the impact of inflation on the financial information.

Advantages of Management Accounting:

Management Accounting provides invaluable services to management in all of its functions of: i. ii.

Planning Controlling

iii.

Coordinating

iv.

Organising

v.

Motivating

vi.

Communicating

I.

Planning: It involves formulation of policies, setting up goals and initiating necessary programmes for achievement of the goals. Management Accounting makes available the relevant data after pruning and analyzing them suitably for effective planning and decision-making.

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II.

Controlling: It involves evaluation of performance keeping in view that the actual performance coincides with the planned one, and remedial measures are taken in event of variation of the two. The techniques such as budgetary control, standard costing and departmental operating statements greatly help in perform in this function. As a matter of fact, the entire system of control is designed and operated by management accountant designated as a controller.

III.

Coordinating: It involves inter-linking of different activities and divisions of business enterprise in a way so as to achieve objectives o organization as a whole. Effective coordination is achieved through departmental budgets and reports which form the nucleus of Management Accounting.

IV.

Organising: It involves grouping of operative action in a way as to identify the authority and responsibility within the organization. Management accounting here also plays a prominent role. The whole organization is divided into suitable profit or cost centres. A sound system of internal control & internal audit for each of the cost centres helps in organizing and establishing a sound business structure.

V.

Motivation: It involves maintenance of a high degree of morale in the organization. Conditions should be such that each person gives his best to realize the goals of the enterprise. The superiors should be in a position to find out whom to promote or reward or penalize. Periodical departmental P&L Accounts, budgets and reports go a long way in achieving this objective.

VI.

Communicating: It involves transmission of data, results, etc. both to insiders as well as outsiders like employees, creditors, shareholders. Management Accounting helps management in performance of function by developing a suitable system of reporting which emphasizes relevant facts.

Limitations of Management Accounting: 1.

Limitation of Basic accounting records: Management Accounting derives its information from financial accounting and other records. The strength and weakness of the Management Accounting, therefore, depends upon the strength and weakness of these basic records.

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Persistent efforts: The conclusions drawn by the Management Accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.

3.

Management Accounting is only a tool: Management Accounting cannot replace the management. It is only an advisor to the management. The decision regarding implementing management accounting advice is to be taken by management.

4.

Wide scope: Management Accounting has a very wide scope in 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: The installation of Management Accounting system requires heavy costs on account of an elaborate organization & numerous rules and regulations. It can, therefore, be adopted only by big concerns.

6.

Opposition to change: Management Accounting demands a breakaway from traditional accounting practices. It calls for a rearrangement of the personnel & their activities which is 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, example, fluidity of concepts, raw techniques, etc.

8.

Provides only Data: Management Accounting provides only data and not decisions. It only informs not prescribes. This limitation should also be kept in mind while using the techniques of Management Accounting.

9.

Personal Bias: The interpretation of financial information depends upon the capacity of interpreter as one has to make a personal judgment. Personal prejudices and bias affects the objectivity of decisions.

10. Psychological Resistance: The installation of Management Accounting involves basic change in organization set up. New rules and regulations are also required to be framed which affect a number of personnel and hence, there is a possibility of resistance from others.

Role of Management Accountant:

Management Accounting provides significant economic and financial data to the management and the Management Accountant is the channel through which this information efficiently and effectively flows to the management. The Management Accountant has a very significant role to perform in installation, development and functioning of an efficient and effective Management Accounting system. He designs the framework of the financial and cost control reports. He educates executives in need for control information and ways of using it. Apart from top management no one in the organistion, perhaps, knows more about the various functions of the organization than him. He is, therefore, sometimes described as the chief intelligence officer of the management. He gathers information, breaks it down and organizes it into meaningful categories. He separates relevant and irrelevant information and then ranks relevant information according to degree of importance to management. He also compares actual performance with the planned

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BBA 207: MANAGEMENT ACCOUNTING one and reports and interprets the results of operations to all levels of management and to owners of the business. Thus, in brief, Management Accountant or controller is the person who designs the MIS for organization, operates it by means by interlocked budgets, computes variances and exhorts others to institute corrective measures. Mr. P.L. Tandon has defined Management Accountant : “ 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.”

Functions of Management Accountant: It is the duty of Management Accountant to keep all levels of management informed of their real position. 1.

Planning: He has to establish, coordinate and administer as an integral part of management for an adequate plan for the control of operations. Such a plan would include profit planning, programmes of capital investment and financing, sales forecast, expense budget and cost standards.

2.

Controlling: He has to compare actual performance with operating plans and standards and to report and interpret the results of operations to all levels of management.

3.

Co-ordinating: He consults all segments of management responsible for policy or action.

4.

Other functions: (i) administer tax policies; (ii) he supervises & coordinates the preparation of reports to government agencies; (iii) he carries out continuous appraisal of social and economic forces.

Difference between Management Accounting and Financial Accounting: Financial Accounting and Management Accounting are closely interrelated since it is to a large extent rearrangement of the data provided by financial accounting. Moreover, all accounting is financial in the sense that all accounting systems are in monetary term and management is responsible for the contents of the financial accounting system. In spite of such a close relationship between the two, there are certain fundamental differences are: 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, etc. 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 internal use by management. Thus, financial accounting is primarily an external reporting process while management accounting is an internal reporting process.

2.

Analyzing Performance: Financial Accounting portrays the position of business as a whole. The financial statements like income statement and balance sheet report on overall performance, on the

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BBA 207: MANAGEMENT ACCOUNTING 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.

3.

Data Used: Financial Accounting is concerned with the monetary records of past events. Management Accounting is accounting for future and, therefore, it supplies data both for present and future duly analysed.

4.

Monetary Management: In Financial Accounting, only economic events find place which can be described in money. However, the management is equally interested in non-monetary, economic events like technical innovations, personnel in the organization, etc.

5.

Periodicity of Reporting: The period of reporting is much longer in financial accounting as compared to Management Accounting.

6.

Precision: There is less emphasis on precision in case of Management Accounting as compared to Financial Accounting since the information is meant for internal consumption.

7.

Nature: Financial Accounting is more objective while management accounting is more subjective. This is because management accounting is fundamentally based on judgement rather than on measurement.

8.

Legal Compulsions: Financial Accounting is more or less compulsory for every business on account of the legal provisions of one or the other act. On the other hand, a business is free to install, or not to install, a system of management accounting.

Difference between Management Accounting and Cost Accounting:

Cost Accounting is the process of accounting for costs. It embraces the accounting procedures relating to recording of all income and expenditures and the preparation of periodic statements with the object of ascertaining and controlling costs. On the other hand, Management Accounting involves collecting, analyzing and interpreting all accounting information which is useful to management including cost related information. However, Management Accounting can be distinguished from cost accounting in one important respect, i.e., management accounting has a wider scope as compared to cost accounting. Cost Accounting deals with only cost data while management accounting involves the consideration of both cost and revenue.

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BBA 207: MANAGEMENT ACCOUNTING For example- Management Accounting typically does not deal with the details of how costs are accumulated and how unit costs are computed for inventory valuation and income determination. Although, unit cost data are used for pricing and other managerial decisions, the method of computation itself is not a major topic of management accounting, but rather of cost accounting.

Difference between Cost Accounting & Management Accounting S.No

Basis of

Cost Accounting

Management Accounting

Difference 1.

Scope

Scope of cost accounting is limited to Scope of management accounting is providing

cost

information

for broader than that of cost accounting as it

managerial uses.

provides all types of information, i.e., cost accounting as well as financial accounting information for managerial uses.

2.

Emphasis

Main emphasis is on cost ascertainment Main emphasis is on planning, controlling and cost control to ensure maximum & decision-making to maximize profit. profit.

3.

Techniques employed

Various

techniques

used

by

cost

Management Accounting also uses these

accounting include standard costing, techniques used in cost accounting but in variance

analysis,

marginal

costing, addition it also uses techniques like ratio

budgetary control, uniform costing, etc.

analysis, funds flow statement, operations research

&

certain

various branches of

techniques from knowledge like

mathematics, economics, etc.

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