HIMACHAL PRADESH NATIONAL LAW UNIVERSITY, SHIMLA

SEMESTER- III

B.B.A. LL.B. (Hons.) PAPER CODE: B.B.A. LL.B

COURSE TITLE: Management Accounting

CREDITS-04

A- COURSE-CONTENT

Objectives

The objective of the course is to give students a good understanding about the
concepts and techniques of Management Accounting as it is an essential tool that
enhances a manager's ability to make effective economic decisions. These issues
will be explained against the background of a fast changing global market.

Module-1

(Total Lectures – 16)

(Introduction to Management Accounting)

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1.1: Introduction to Management Accounting: Meaning, Features and Scope

1.2: Importance and Functions of Management Accounting, Role of Management Accountant in

Decision Making

1.3: Tools of Management Accounting, Merits of Management Accounting, Demerits of

Management Accounting

1.4: Relationship of Management Accounting with Other Branches of Accounting and Other
Disciplines of Studies

1.5: Differences between Financial Accounting, Cost Accounting and Management Accounting

Preface

Finance and accounting have assumed much importance in today’s competitive world of
business wherein corporate organizations have to show the true and fair view of their financial
position. Thus, the application of accounting in the business sector has become an indispensable
factor. Company Secretary has to provide the complete and accurate information about the
financial operations of the company to management for decision making. This emphasizes that
the books of account are to be maintained accurately, up-to-date and as per the norms. The
subject ‘Cost and Management Accounting’ is very important and useful for optimum utilization
of existing resources. These are branches of accounting and had been developed due to
limitations of financial accounting. It is an indispensable discipline for corporate management, as
the information collected and presented to management based on cost and management
accounting techniques helps management to solve not only specific problems but also guides
them in decision making.

1.1: Introduction to Management Accounting

Meaning of Management Accounting

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In every business enterprise, various transactions and events take place every day; sales are
effected, purchases are made, expenses are met or incurred, payments are received and made,
assets are sold and acquired. These events, arising out of the decisions and actions of
management, exercise their effects and impact on the operational efficiency and position of the
enterprise. Most of these transactions and events have money values or can be measured and
expressed in money values. Since they affect the operation and position of the enterprise, they
need to be measured, recorded, analysed and reported to the management, so that the
management can evaluate their effect upon the enterprise. As compared with financial
accounting and cost accounting, management accounting is a later development. Management
accounting links management with accounting. All such information that is useful to the
management is the subject matter of management accounting. Any information required for
decision making is the concern of management accounting. Management accounting, unlike
financial accounting, provides information for internal users, though the basic data come from
the same accounting system i.e., financial accounting and cost accounting systems. Management
accounting collects and provides accounting, cost accounting, economic and statistical
information to the men at various managerial levels to assist them in the performance of
managerial functions and their evaluations. It is the development and application of various
techniques of recording, analysis, interpretation and presentation, making the financial, costing,
and other data active and effective in the performance of managerial functions, viz., planning,
decision-making and control. It should be noted that management accounting makes use of not
only accounting techniques but also of statistical and mathematical techniques. Management
accounting is forward looking and should, therefore, be able to treat economic information and
data to make it suitable for use by the management. It deals with the processing of financial and
cost accounting data for managerial decision making. It is concerned with providing information
to management in an organisation to enable them to carry out their planning, controlling and
decision-making responsibilities. This also helps the manager to discharge their duties more
efficiently and effectively.

Evolution of Management Accounting

Managerial accounting has its roots in the industrial revolution of the 19th century. During this
early period, most firms were tightly controlled by a few owner-managers who borrowed based

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on personal relationships and their personal assets. Since there were no external shareholders and
little unsecured debt, there was little need for elaborate financial reports. In contrast, managerial
accounting was relatively sophisticated and provided the essential information needed to manage
the early large scale production of textile, steel, and other products. After the turn of the century,
financial accounting requirements grow rapidly because of new pressures placed on companies
by capital markets, creditors, regulatory bodies, and federal taxation of income. Many firms
needed to raise funds from increasingly widespread and detached suppliers of capital. To tap
these vast reservoirs of outside capital, firms' managers had to supply audited financial reports.
Because outside suppliers of capital relied on audited financial statements, independent
accountants had a keen interest in establishing well defined procedures for corporate financial
reporting. As a consequence, for many decades, management accountants increasingly focused
their efforts on ensuring that financial accounting requirements were met and financial reports
were released on time. The practice of management accounting stagnated. In the early part of the
century, as product line expanded operations became more complex, forward looking companies
saw a renewed need for management-oriented reports that was separate from financial reports.
But in most companies, management accounting practices up through themid-1980s were largely
indistinguishable from practices that were common prior to World War I. In recent years,
however, new economic forces have led to many important innovations in management
accounting.

Definitions (Given by various Authors)

The management accounting team of Anglo-American Council on Productivity defined

management accounting as: “The presentation of accounting information in such a way as to
assist management in the creation of policy and in day to day operation of an understanding”.

 American Accounting Association defines management accounting as under: “The

application of appropriate techniques and concepts in processing historical and projected
economic data of an entity to assist management in establishing plans for reasonable
economic objectives and in the making of rational decisions with a view towards these
objectives”.

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  J Batty defines: “Management accounting is the term used to describe accounting
methods, systems and techniques which coupled with special knowledge and ability,
assists management in its task of maximising profits or minimising losses.”
 Brown and Howard define: “Management accounting is that aspect of accounting which
is concerned with the efficient management of a business through the presentation of
management of such information as will facilitate efficient and opportune planning and
control.”
 Robert Anthony has defined management accounting thus: “Management accounting is
concerned with accounting information which is useful to management”
 According to CIMA, London: “Management accounting is an integral part of
management concerned with identifying, presenting and interpreting information used
for: (a) formulating strategy; (b) planning and controlling activities; (c) decision taking;
(d) optimising the use of resources; (e) disclosure to shareholders and others external to
the entity; (f) disclosure to employees; (g) safeguarding assets.

Characteristics of Management Accounting

 Decision-making system: The financial data provided by the management accounting, is

helpful to the management in framing policies and assisting the day to day operations.
 Future-oriented: Management accounting is future-oriented as it helps in planning and
deciding the future course of action.
 Qualitative and Quantitative Information: In management accounting, qualitative
information relating to the performance of the managers and other staff is also
considered, along with the other financial data.
 No set format: There is no set format for the disclosure of the information. Management
accounting usually presents information in the form which is easily understandable to the
managers and other users.
 Discretionary activity: Management accounting is not compulsorily required by the
statute. Indeed, management accounting is done as per the requirement of the
organization and hence, it can be done weekly, monthly, quarterly, half-yearly, etc.

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  Management accounting is a technique of selective nature. It does not use the whole data
provided by financial records. It selects and picks up only that information form different
financial records (such as profit and loss account or balance sheet), which are relevant
and useful to the management to arrive at important decisions on different aspects of the
business.
 Management accounting is concerned with the future. It collects and analyses data to plan
the future. The primary function of management is to decide bout the future course of
action. Management accounting, with the help of different techniques, formats the future
course of action.
 Management Accounting makes available useful information which helps the
management in planning and decision-making. It can only provide information but cannot
proscribe. It is up to management to what extent it. It can make use of the information
depending upon its efficiency and wisdom.
 Management accounting studies the relation between causes and effects. Financial
accounting does and analyses the causes responsible for profits or losses. Management
accounting attempts to study the cause-and-effect relationship by analyzing the different
variables affecting the profits and profitability of the business.
 Management accounting is no bound by the rules of financial accounting. Financial
accounting procedures are designed based on GAAPs.

Objectives of Management Accounting

 Assistance in Planning and Formulation of Future Policies: Management accounting

assists management in planning the activities of the business. Planning is deciding in
advance what is to be done, when it is to be done, how it is to be done and by whom it is
to be done. It involves forecasting on the basis of available information, setting goals,
framing policies, determining the alternative courses of actions and deciding on the
programme of activities to be undertaken.

 Helps in the Interpretation of Financial Information: Accounting is a technical subject

and may not be easily understandable by everyone till the user has a good knowledge of
the subject. Management may not be able to use the accounting information in its raw

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 form due to lack of knowledge of accounting techniques. Management accountant
presents the information in an intelligible and non-technical manner. This will help the
management in interpreting the financial data, evaluating alternative courses of action
available and guiding the management in taking decisions and having the most desired
financial results.

 Helps in Controlling Performance: Management accounting is a useful device of

managerial control. The whole organisation is divided into responsibility centres and each
centre is put under the charge of one responsible person. He will be associated with the
planning and framing of the budgets and be required to execute the plans and standards
and deviations are analysed in order to pinpoint the responsibility. Thus, management
accountant helps in controlling the performance of the different responsibility centres and
take suitable actions in order to correct the adverse deviations by revising the budgets if
need be.

 Helps in Organizing: Thus management accountant recommends the use of budgeting,

responsibility accounting, cost control techniques and internal financial control. This all
needs the intensive study of the organisation structure. In turn, it helps to rationalise the
organisation structure.

 Helps in Coordinating Operations: Management accounting helps the management in co-

coordinating the activities of the concern by getting prepared functional budgets in the
first instance and then co-coordinating the whole activities of the concern by integrating
all functional budgets into one known as master budget. Thus, management accounting is
a useful tool in coordinating the various operations of the business.

 Helps in Motivating Employees: The management accountant by setting goals, planning

the best and economical course of action and then measuring the performance tries his
best to increase the effectiveness of the organisation and thereby motivate the members
of the organisation.

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  Communicating Up-to-date Information: Management accounting assists management in
communicating the financial facts about the enterprise to the persons who are interested
in these facts so that they may be guided to a line of action to be pursued. Management
needs information for taking decisions and for evaluating performance of the business.
The required information can be made available to the management by means of reports
which are an integral part of the management accounting. Reports are means of
communication of facts which should be brought to the notice of various levels of
management so that they may be guided for taking suitable action for the purposes of
control.

The main purpose of management accounting is to utilize the accounting information in solving
the business problems and taking scientific decisions. Moreover, the scope of management
accounting is very wide. Therefore, it is very difficult of pinpoint the exact scope of management
accounting.

However, the scopes of Management Accounting are listed below.

Financial Accounting

Financial accounting is relating to the recording of business transactions immediately soon after
the transaction taken place or afterwards incurring the expenses. The business transaction may be
relating to income, expenses, inventory movement, assets, liabilities, cash receipts and payments
and so on. The process of financial accounting includes the preparation of financial statements
regularly at the end of each accounting year for knowing operating results for a definite period.
The term financial statements includes profit and loss account and balance sheet. Management is
unable to exercise the coordination and control out of the information supplied by financial
accounting system. But, the financial accounting system information is the basis of future
business planning and financial forecasting.

2. Cost Accounting

Cost accounting is concerned with the ascertainment of various elements of costs for different
business operation and activities. These cost data are used in the management accounting system
for further analysis so as to solve business problems and take quality decision.

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3. Budgeting and Forecasting

Management accounting includes budgetary control and forecasting techniques also. Under
budgetary control system, the budgets are prepared on functional basis and measure the actual
performance, find the difference between the actual and standard for taking corrective actions In
this way, budgeting assists the management for identifying responsibility and ensuring
coordination.

4. Revaluation Accounting

This type of accounting system is ensuring that the capital is maintained intact in real terms. By
keeping this fact in mind, correct amount of profit is calculated and used for managerial decision
making.

5. Cost Control Procedures

Cost control procedures are an integral part of management accounting process. In includes
inventory control, cost control, time control, budgetary control, standard costing etc.

6. Statistical Methods

In order to analyze the financial accounting data, tables, diagrams and graphs are used in the
management accounting system. These are nothing but statistical methods.

7. Inventory Control

Inventory control refers to exercising control over the utilization of raw materials, processing of
work in progress and disposal of finished goods for a specific period.

8. Reporting

Reporting is divided into two types. They are interim reporting and external reporting. Interim
reporting is supplying information to the top management. External reporting is supplying
information to outsiders i.e. shareholders, banks and financial institutions. Interim reporting
deals with the submission of financial results by means of weekly, fortnightly, monthly, quarterly
or half yearly accounts or statements to the top management.

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9. Taxation

It includes the computation of corporate income tax in accordance with the tax laws, filing of
returns and making tax payments.

10. Methods and Procedures Design and Installation

Management accounting is relating to the most efficient and economic system of accounting
suitable to any size and type of undertaking. Moreover, it employ best use of mechanical and
electronic devices.

11. Internal Audit

Internal audit is conducted by the business organization with the help of paid employee who has
thorough accounting knowledge. All the relevant records are maintained under the management
accounting system so that the internal audit is conducted in an effective manner.

12. Office Services

It includes maintenance of proper data processing and other office management services.

13. Financial Management

Every owner of the business concern expects fair rate of return on investments. It is possible
through the effective utilization of the finance. Hence, it is termed as financial management and
considered as separate discipline. The tools in financial management are developed through
management accounting system.

14. Interpretation

Management accounting is relating to the interpretation of financial data to management and

advising them on decision-making.

1.2: Importance and Functions of Management Accounting

Helps in Making Plans

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Management accounting assists organization in making better plans for future activities. It
supplies all financial and non-financial data to management on a regular basis. Managers through
the availability of all these information are able to perform better analysis and forecasting which
enables them in framing proper plans.

Assist in Decision Making

Efficient decision making is a major role played by management accounting. It collects and
analyses all financial information available within organization and present them in simplified
charts, tables or graphs. Management gets better understanding regarding organization affairs
and is able to take correct decisions at right time.

Measures the Performance

Management accounting monitors and measures the overall performance of organization. It uses
various tools like variance analysis which measures the company performance with pre-
established standards for finding out the deviations. Managers by identifying all variations in
performance of company are able to take corrective measures accordingly for removing them.

Increases the Efficiency

This accounting branch aims at raising the overall efficiency of business organizations.
Management accounting sets target for each division in advance and checks whether they fulfill
all targets. It ensures that all resources are fully utilized which helps in improving the efficiency.

Better Service to Customers

Management accounting focuses on better service to customers by providing them quality goods
at fair prices. It helps in controlling the prices of products by employing cost control devices. In
addition to that, it sets various quality standards to be met by organization for producing their
goods.

Raises the Profitability

It has an efficient role in enhancing the profitability of organizations. It makes companies cost
conscious and assist in avoiding all extra expenditures. Management accounting uses techniques

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such as budgetary control and capital budgeting for reducing the expenses which helps in earning
better profits.

Provides Reliability

Management accounting adds reliability to management decisions by providing them genuine

information. It uses proper scientific tools and techniques for analysis purposes which helps
managers in the proper management of business operations.

Role of Management Accountant

Management accountants often supervise lower-level accountants who handle basic accounting
tasks, such as recording income and expenses, tracking tax liabilities. This information is used to
prepare income statements, cash flow statements, and balance sheets, In smaller firms, you may
end up performing these tasks yourself. A management accountant performs analysis to forecast,
budget, and measure performance and plans, then presents them to senior management to assist
in operational decision making.

Management Accountant is an officer who is entrusted with Management Accounting function of

an organization. He plays a significant role in the decision making process of an organization.
The organizational position of Management Accountant varies from concern to concern
depending upon the pattern of management system. He may be an executive in some concern,
while a member of Board of Directors in case of some other concern. However, he occupies a
key position in the organization. In large concerns, he is responsible for the installation,
development and efficient functioning of the management accounting system. He designs the
frame work of the financial and cost control reports that provide with the most useful data at the
most appropriate time. The Management Accountant sometimes described as Chief Intelligence
Officer because apart from top management, no one in the organization perhaps knows more
about various functions of the organization than him. Tandon has explained the position of
Management Accountant as follows:

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“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”.

 Management accountants work for public companies, private businesses, and government
agencies.
 Their duties include recording and crunching numbers, helping to choose and manage
company investments, risk management, budgeting, planning, strategizing, and decision
making.
 Management accountants need an aptitude for and interest in numbers, math, business,
and production processes, along with accounting skills, knowledge in GAAP, and
leadership skills.
 The minimum requirement is a bachelor's degree, but experience also helps.
 Management accountants can get a special designation as a certified management
accountant and as a chartered global management accountant.

1.3: Tools of Management Accounting

A management accounting tool is a framework, model, technique or process that enables

management accountants to: improve performance; facilitate decision-making; support strategic
goals and objectives; and otherwise add value.

Tools and techniques of management accounting outlined below:

 Analysis of Financial Statements

 Budgetary Control
 Decision Accounting
 Throughput accounting
 Financial Policy
 Working Capital Management

For this purpose, the Management Accountant takes the helps from the following:

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 (i) Financial Planning:
In order to achieve the primary objectives of a business enterprise, financial planning
helps to determine in advance the financial activities which are necessary. Needless to
mention that it includes to determine the long-term as well as short-term financial
objectives, formulating financial policies and developing the financial proceeding to
attain such objectives of the enterprise.

Historical Cost Accounting:

Historical Cost Accounting provides financial past data relating to cost of each job,
processes and departments etc., so that proper comparison may be made with the standard
cost —which ultimately helps to control cost and makes future planning properly.

(iii) Marginal Costing:

Marginal Costing, particularly Differential Cost Analysis, Break-Even Analysis etc. also
helps the Management Accountant to take decisions about cost control, maximisation of
profit etc.

Standard Costing:

Standard Costs are predetermined, or forecast estimates of cost to manufacture a single

unit or a number of units of a product, during a specific immediate future period and are
used as a measure with which the actual cost, as ascertained, may be compared. As such,
this technique, i.e., the analysis of variance, is considered while controlling costs and
helps to take correct decisions for future.

(v) Budgetary Control:

Budgetary Control is a system of controlling and planning costs. So this technique is

widely used in Management Accounting for planning and controlling different activities
of a business unit. In other words, it helps the management to achieve a desired return on
investment.

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 (vi) Ratio Analysis:

We know ratios are the best tool for measuring liquidity, solvency, profitability and management
efficiency of a firm and it is also equally useful to the internal management, prospective
investors, creditors and outsiders etc. The role of accounting ratios are very significant to
increase the efficiency of the management. As such, it is a very important tool of Management
Accounting also.

Merits of Management Accounting

Management accounting is very useful for every business organizations. The main advantages or
merits of management accounting are interpretation of data and information, performance
comparison, planning, forecasting, controlling, coordinating, better organizing etc. Advantages
of management accounting can be described with the help of following points.

Planning

The management can prepare the plan and execute the same for effective operation of business.
In this context, various functional budgets are prepared and accounting information are
rearranged in department wise, product wise, section wise and the like for proper planning.

2. Controlling

The actual performance of every business activity is measured and compared with the standard
fixed or planned one. If the deviations are found that are controllable, the management can
decide the course of action to exercise control. Both standard costing and budgetary control
system are highly help the management in this aspect.

3. Service to Customers

Better and improved services by management to customers are assured by this system of
accounting.

4. Organizing

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The scope of authority and responsibility of key executives are properly defined and explained
under management accounting system. Hence, everyone knows who is responsible for what and
to whom? It helps for proper organizing the work in an organization.

5. Coordinating

It is the process of integrating the various work performed in an organization to achieve the
objectives effectively. Thus, perfect coordination is required for among production, purchase,
finance, personnel, sales and the like departments. This is achieved through preparing budgets
and reports of performance.

6. Improvement of Efficiency

The management accounting system may eliminate various types of wastage, production,
defectives and other work thereby the workers efficiency may be improved.

7. Motivating

It helps to maintain high degree of morale among the employees. The reports of business
operation are periodically prepared and submitted before the top management periodically.
Based on the report, the management can find out whom to demote or promote or to reward or
penalize. In this way, the employees are motivated.

8. Communication

Two way communication is followed in an organization if management accounting system is

followed. Modified accounting information and reports regarding performance are sent to top
management for decision making. In another way, assignment of work and responsibilities over
employees are communicated to lower level executives.

9. Regulation of Business Activities

Proper planning, organizing, coordination and motivation can bring systematic regularity in the
business activities.

10. Maximization of Profit

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There is a morale among the employees. Standards are fixed and measure the actual performance
to find the deviations. If the causes for deviations are reasonable and controllable, proper action
may be taken by the management. In this way, profit is maximized.

11. Reliability

The tools used in management accounting system are reliable. This procedure usually makes the
data supplied to management accurate and reliable.

12. Taking Corrective Measures

Management accounting often compares the actual performance with the standard and analyze
the reasons for any deviation there have and offers suggestions to take corrective measures.

13. Motivates Employees

Management accounting serves as a tool for motivating employees. It prepares and presents
periodic reports regarding operations of the business to the management team. Managers are
easily able to evaluate the performance of employees and takes decision regarding promoting or
demoting them accordingly.

14. Cost Transparency

Transparency of cost is another important role played by management accounting. It properly

monitors all cash inflows and outflows of business and ensures that there is no misuse of money.
Management accounting works closely with the IT department to ensure that all expenses are
within budget.

Limitations or disadvantages of management accounting

1. Based on Financial and Cost Records

Both financial and cost accounting information are used in the management accounting system.
The accuracy and validity of management account is largely based on the accuracy if financial

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and cost records maintained. These records determine the Strength and weakness of management
accounting.

2. Personal Bias

The analysis and interpretation of financial statements are fully depending upon the capability of
the analyst and interpreter. Hence, personal prejudices and bias of an individual can affect the
objectivity and effectiveness of the conclusions and recommendations.

3. Lack of Knowledge and Understanding of the Related Subjects

Financial accounting, cost accounting, statistics, economics, psychology and sociology are the
related subjects of management accounting. The organization can derive more benefits of
management accounting if the management accountant has thorough knowledge over related
subjects. If not so, the success of management accounting system is questionable.

4. Provides only Data

Under management accounting system, many alternatives are developed to solve a problem and
submitted before the management. Out of the many alternatives available, the management can
select any one of alternatives or even discard all of them. Hence, management accounting can
only provide data and not prescribe any course of action.

5. Preference to Intuitive Decision Making

Scientific decisions can be taken with the help of using management accounting techniques. But,
majority of the management accountant and top level executives prefer their past experience and
intuition in making business decisions. The reason is that an intuitive decision making is very
simple and easy.

Management Accounting is just a tool.

Management accounting must not be regarded as an alternative or substitute for management.

The tools and techniques of management accounting give only information and not decisions.
Decisions should be taken by management, and implementation of decisions is also carried out
by management.

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Persistent Efforts

The conclusions and decisions drawn by the management accountant will not be implemented
automatically. Thus, there is a need for continuous and coordinated efforts of each management
level to execute such decisions.

Not Cost Effective

Management accounting can exist only in those companies which are operating a sound and
appropriate system of cost accounting. While the introduction of a system of cost accounting is
in itself costly, introduction of a management accounting system may not be beneficial when
cost-benefit analysis is made.

Uncertain

Management accounting is linked to the future since it gives data for management and planning
of future activities. But, the future is uncertain and management accounting may not provide
effective results.

1.4 Relationship of Management Accounting with Other Branches

Accounting and Management

Accounting and Management are very closely related because management depends entirely on
accounting for information in financial affairs to make decisions. Accounting provides all kinds
of financial information in project planning and implementation of a business concern. As a
result, management can take decisions comfortably regarding project planning and
implementation. The scope of Management is extended from individual life to various fields of
social life. The overall development of trading, non-trading, government, semi-government,
autonomous bodies, etc. depends on management. In the modem age the responsibilities of
making decisions, planning and management have been shifted from owners to professional-
managerial persons. For this reason, all functions of managers are directed to the development of
business concerns. In this respect Accounting helps the management in taking timely decisions,
interpreting and analyzing overall and information based matters. Managers cannot take the best

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and most dynamic course of action for their respective business concerns without the
information-based financial statements and other statements of accounts.

Accounting and Economics

The relation of Economics with Accounting is very close. Economics is a science related to
human activities to fulfill demand with limited wealth. Economics analyzes how people earn and
spend, how purchasers and sellers behave under different circumstances etc. On the other hand;
accounting records transactions of income and expenditure measurable in terms of money and
provides necessary and relevant information to purchasers and sellers for taking decisions.
Economics studies the behaviors of buyers and sellers as a whole. Accounting provides all
required financial information to individual buyers and sellers for taking an economic decision.
So, these two subjects are interrelated. In this perspective bringing about a synthesis between the
concept of economics and accounting, the concept of social sciences is being applied.

Accounting and Law

The prevailing laws of a land control trade and commerce mostly. So, Accounting and Law are
closely related. The accountant and accounts officer must have a clear knowledge of partnership
law, company law, tax law, industrial law, cooperative law, and other relevant laws. Because
accounts of an organization are kept following accepted principles and by relevant laws. For
example, accounts of every company are kept properly and accurately in light of company law.
In partnership business accounts are maintained in the light of the partnership act or agreement
as the case may be. Keeping accounts, auditing of accounts of a company are mandatory as per
the specific provision of the companies act. Similarly, accounts of other organizations are to be
kept by the provisions of the relevant law. In this context, lawyers are to know the provision of
laws relating to methods of accounting, direction and controlling. Otherwise, it is impossible on
their part to extend their help in settling conflicts and cases properly. Therefore, both Accounting
and Law are closely related subjects.

Accounting and Statistics

Accounting and Statistics are deeply related. The main objective of accounting and statistics is to
make arithmetical figures understandable and logical, then present them in the form of

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statements making them useful to owner, directors or all concerned parties. It makes the act of
planning and decision-making easier. The main duty of statistics is to collect classify, analyses
the quantitative data of various events and to present them to the parties concerned. For this
reason, a statistician presents the data in quite a short form of reports to the individuals or
organization concerned so that they can make decision depending on the information presented
to them. In Accounting, after completion of some accounting processes of transactions, final
accounts and financial statements are prepared and on the basis of various information of such
financial statements; the owners and the directors of the business can take decisions.

1.5: Differences between Financial Accounting, Cost Accounting and Management

Accounting

Difference between Financial Accounting and Cost Accounting

Basis of
Financial Accounting Cost Accounting
difference

Present the financial position and profitability Assess the cost of a product,
Emphasis
of the business as a whole service, or process

Serves the interests of internal

Purpose Serves the interests of all stakeholders
management

Both actual figures as well as with

Deals with Actual facts and figures
pre-determined/ estimated costs

Focuses on proper planning,

Planning and Does not attach any importance to planning
operation, control, and decision-
control and control
making.

External reporting (creditors, shareholders,

Nature of Internal reporting (company’s
government, investors, and persons outside the
reporting management)
management)

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Period Quarterly, half-yearly or annual Daily, weekly, monthly, etc.

Adherence to Comply with the requirements of the According to management’s

Law Companies Act, the Income Tax Act, etc. requirements

Kind of
Operating results and financial position Cost reports
reports

Stock
Cost or market price, whichever is lower At cost
valuation

Take a look at this table below to learn more about the cost accounting and financial
accounting differences –

Parameters Cost Accounting Financial Accounting

Definition It is the branch of accounting that It is the branch of accounting that

helps to compute the cost of product involves recording financial
and production in general. It is transactions effectively. In turn, it
mainly accountable for fixed costs, facilitates the process of analysing the
overhead expenses, capital costs, financial standing and profitability of a
selling price, etc. firm in an accounting period.

Purpose It accounts for cost per unit of It represents the financial position of a
products. firm accurately.

Relative It provides valuable information It is not useful in determining the

Efficiency about efficiency. relative efficiency of workers,
machinery, etc.

Reporting It is frequently prepared and It is reported mostly at the end of an

Time monitored accordingly. accounting period.

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Forecast Budgeting makes forecasting It cannot be forecasted.
possible.

Profit It only measures the profitability of a It helps to measure the overall

measurement product or a service. profitability of a firm.

Stock It always takes into account the cost It always takes into account either the
Valuation price of inventories. cost or market price.

Difference Between Cost Accounting and Management Accounting

Comparison Chart
BASIS OF COMPARISON COST ACCOUNTING MANAGEMENT ACCOUNTING

Meaning The recording, classifying and The accounting in which the both financial and
summarising of cost data of an organisation non-financial information are provided to managers
is known as cost accounting. is known as Management Accounting.

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of production. Providing information to managers to set goals and
forecast strategies.

Scope Concerned with ascertainment, allocation, Impart and effect aspect of costs.
distribution and accounting aspects of cost.

Specific Procedure Yes No

Recording Records past and present data It gives more stress on the analysis of future
projections.

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Recommended Text books

1. Management Accounting – My Khan & P K Jain. Tata Mcgraw hill.

2. Management Accounting – Paresh shaw – Oxford University Press.

3. Management Accounting – A. Murthy and S. Gurusamy – By Tata Mcgraw Hill.

4. Management Accounting – NM Singhvi and Ruzbeh J. Bodhanwala PHI learning PVT

Ltd.,

5. Management Accounting, Principles and Applications – HUGH Coombs, David Hobbs

and Ellis Jenkuis – By Sage www.sagepublications.com

Suggested Readings

1. Advanced Management Accounting Jawaharlal, S. Chand & Co

2. Managerial Accounting – Indian Edition Ronald W.Hicton, G. Ramesh and

M. Jayadev by Tata Mcgraw Hill.

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