NATURE AND SCOPE OF

1
MANAGEMENT ACCOUNTING

1.1 INTRODUCTION
In the simplest sense, Management is defined as ‘what a manager does’ and such as,
Marketing Management is ‘what a marketing manager does?’, Financial Management is ‘what
a financial manager does?’, and Human Resource Management is ‘what a human resource
manager does’?. Accordingly, a question is posed to us. The question is ‘what a manager
does’? The answer is obvious, and the answer is ‘a manager does make decisions’. Financial
manager takes decision with regard to financial affairs of an organization, and human resource
manager is making decisions pertaining to human resources of an organization.
Decision making is a process to arrive at a decision; the process by which an
individual or organization selects one position or action from several alternatives. Decision
making is an integral part of not only an individual’s life but also of an organization’s whole
span of life.
Accounting is an art of science with discipline which records, classifies, summarizes
and interprets financial information about the activities of a concern, so that intelligent
decisions can be made about the concern. Thus, it is clear that accounting is great use in
arriving at decisions as to activities of an organization.
The American Institute of Certified Public Accountants (AICPA) has defined
Accounting as “The art of recording, classifying and summarizing in a significant manner and
in terms of money transactions and events which are, in part at least, of a financial character
and interpreting the results.”
1.2 Management Accounting

1.2 BRANCHES OF ACCOUNTING

Accounting is broadly classified into three branches. They are:
1. Financial Accounting , and
2. Management Accounting
3. Cost Accounting

ACCOUNTING

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Figure 1.1 Branches of Accounting

1. Financial Accounting
Financial Accounting is concerned with the preparation of financial statements,
namely trading account, profit & loss account and balance sheet. This accounts called final
account or other name position statement. The financial statement are income and expenditure
or fund inward and outward position, calculated and measurement of an organization this
position statements.
Financial account help to business results are both of external and internal users of
accounting information. This information useful to investor, creditors, governments,
consumers and research scholars.
Financial accounting provided information helpful in strategic decision making for
future development of an organization. These limitations of financial accounting gave birth to
this new branch of accounting called management accounting.

2. Management Accounting
Management accounting provides necessary and useful information give to the
managers for efficiently decision made. Management accounting is internally financial
oriented. The primary purpose of management accounting is enabling the management
decision by managerial position. The accounting information to management so that planning,
organizing, directing and controlling of a dynamic business operation can be done in an
orderly manner.
Management accounting begins ends from financial accounting or financial statements
or final accounts. Management accounting is primarily concerned with the analysis and
interpretation of financial statement namely profit and loss account and balance sheet.
 Nature And Scope Of Management 1

Management accounting assists to managerial decision for future oriented to make

dynamic decisions and there by active oriented control and enhance organizational
effectiveness, management accounting is also known as “accounting for managers” and
“accounting for managerial decisions”. Further, it is called “internal accounting” as it focuses
more on effective internal management of an organization.

 Cost accounting which is responsible for cost ascertainment and cost control is
an integral part of management accounting.
Origin And Growth of Management Accounting
The term “Management Accounting” was first coined and used by the British team of
accountants that visited the U.S.A. in 1950 under the auspices of Anglo-American
Productivity Council. Since then, Management Accounting has grown into a fullfledged
subject and is looked upon a separate and unique subject distinct form historical accounting
(financial accounting) in recent years.

3. Cost Accounting
Introduction
A business concern is concerned with producing and providing of goods and
services. No goods and services are produced at cost free. Expenses are incurred in
producing and distributing goods and services. Cost means the total expenses incurred in
producing a product or rendering a service. Costing is the process of ascertaining the total
cost incurred in producing and distributing goods and services.
Cost accounting is an integral part of management accounting. It was born in
response to the varied needs of managers for controlling costs and thereby maximizing
profits.

Definition of Cost
The Costing Terminology of the Institute of Cost and Works Accountants, London
defines cost as “the amount of expenditure (actual or notional) incurred on or attributable
to a given thing”.

Definition of Costing
In the words of StaroldJ.Wheldon, “Costing is the classifying, recording and
appropriate allocation of expenditure for the determination of the cost of products or
services, and for the presentation of suitably arranged data for the purpose of control and
guidance of management”.

Definition of Cost Accounting

The costing terminology of I.C.M.A , London defines cost accounting as “ the
process of accounting for cost from the point at which expenditure is incurred or
1 Management

committed to the establishment of its ultimate relationship with cost centres and cost units.
In its widest range it embraces the preparation of statistical data, the application of cost
control methods and the ascertainment of the profitability of activities carried out or
planned”.

1.3 DEFINITIONS OF MANAGEMENT ACCOUNTING

1) “Management Accounting includes the methods and concepts necessary for
effective planning, for choosing among alternatives business actions and for
control through the evaluation and interpretation of performances”
- American Accounting Association

2) “Management accounting is the term used to describe the accounting methods,

systems and techniques which coupled with special knowledge and ability, assist
management in its task of maximizing profits or minimizing losses.”
- Batty. J
3) “Management Accounting is accounting for effective
management.” - Bose N.K

4) “Management Accounting is concerned with management”.

- Harper. W.M
5) “Any form of accounting which enables a business to be conducted more
efficiently can be regarded as management accounting”
- Institute of Chartered Accountants of England and Wales
6) “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 undertaking.”
- Institute of cost and Management Accountants
7) “Management accounting is concerned with accounting information that is useful
to management”.
- Robert N. Antony
8) “Management accounting is the adoption and analysis of accounting information
and itsdiagnosis and explanation in such a way as to assist management.”
- Rose.T.J
9) Management accounting refers to “the application of accounting knowledge to the
purpose of producing and of interpreting accounting and statistical informations
designed to assist management in its functions of promoting maximum efficiency
and in formulating and co-ordinating future plans and subsequently in measuring
their execution.”
- Treasury H.M
 Nature And Scope Of Management 1

1.4 NATURE AND CHARACTERISTICS OF MANAGEMENT

ACCOUNTING
We are done, keenly and carefully look in to the above definitions of management
accounting, we can clearly identify certain characteristics or features of management
accounting.
The salient treasures or characteristic of management accounting are:

1. Provides necessary information

Management accounting provides necessary information to the management level
to managerial efficiently decisions for arrived at. Further, the main focus of management
accounting lies in providing right information, at the right time and in the right manner.

2. Assists to management
Management primarily aims is maximizing benefits and minimizing costs. It is true
that when cost is curtailed profit is enhanced. Management accounting paves a better way
for adopting several tools of analysis and interpretation of financial statements such as
ratio analysis, fund analysis and techniques of cost control like marginal costing and
budgetary control. Thus, eventually, it helps the management in performing its functions
most effectively and efficiently.

3. Enables to Achieves organizational objectives/ goal/ aims

Management accounting enables an organization achieve its objectives. An
Organizational objectives such as providing better customer services, enhancing workers’
efficiency and using resources optimally could be achieved through management
accounting.

4. Enhances efficiency
Management accounting acts as a source for enhancing the overall efficiency of an
organization. As different alternatives are weighed, measured and evaluated in selecting
the best course of action, efficiency goes up. With the help of standard costing another
technique used in management accounting, differences between standard cost and actual
cost are found and necessary actions are taken as regards negative variances. This will
eventually result into better performance and enhanced efficiency.

5. Employs concepts and techniques

Management accounting employs both relevant concepts and appropriate
techniques so as to enable the management in making better managerial decisions. The
concept of fund flow and the technique of fund flow statement also marginal cost concept
and the technique of marginal costing are some of such examples in this regard.
1 Management

6. Drives decision making

Management accounting converts the complex process of decision making as an
easy affair. To manage future is managing data. Required data are supplied in the right
form. Thus, managers at the top as well as middle levels could make timely decision
wisely.

7. Facilitates forecasting
Management accounting is chiefly concerned with the future and it uses not only
past data but also projected data. And to forecast the future performance and thereby to
provide projected data, management accounting serves as a forecaster. For example, trend
analysis is of great use in predicting the future trend as to sales and profit.

8. Follows no fixed norms

While financial accounting is governed by rigid rules, management accounting has
no fixed norms. There are certain common tools of analysis of financial statements for
drawing inferences, Yet, in using such tools and in drawing inferences, there are variations
caused by the analysts’ perception and personal judgment.

9. Covers cause and effect analysis

Management accounting includes both the causes for the occurrence of certain
events along with their effects in business. Financial accounting deals with what had
happened in the past. But, management accounting deals with the reasons why such things
had happened and also deals with the effects of the happening of such things. For
example, cost-volume-profit analysis, an important technique in management accounting,
states the causes of change in volume of output and also its effect in cost and profit.

10. Focuses on internal use

Management accounting focuses on providing accounting information to the
management for using them internally. Management accounting supplies data so as to suit
the informational needs of the management.

11. Involves flexibility

Management accounting has great amount of flexibility in presenting information.
No fixed format has been prescribed/followed. Varied formats have been used so as to suit
the varied needs of organizations.

12. Encompasses fastness

Fastness is one of the uniquenesses of management accounting. Data/reports are
presented to the management as and when they are warranted. Not only daily reports even
hourly reports are made and presented. Such is the fastness of management accounting.
 Nature And Scope Of Management 1

1.5 SCOPE OF MANAGEMENT ACCOUNTING

Management accounting aims are enabling the management for making managerial
decisions. Accordingly, the scope of management accounting is so wide and very vast.
Several disciplines and aspects come under the purview of management accounting as
managerial decision making involves many subjects.
However, the following are some of the major areas included within the ambit of
management accounting:

1. Financial Accounting
As we have seen earlier, management accounting begins where financial
accounting ends. Thus, management accounting is an extension of financial accounting.
Indeed, financial accounting is the base for management accounting. The end product of
financial accounting namely financial statements forms the core aspect of management
accounting. Though management accounting is mainly concerned with the future,
financial accounting, which provides historical data, has become an integral part of
management accounting.

2. Cost Accounting
Cost accounting is an internal part of management accounting. It is concerned with
the ascertainment of cost and cost control. The techniques of cost accounting such
marginal costing and standard costing are also used in management accounting for
arriving at managerial decisions such as make or buy decision, selecting the suitable
product mix and avoiding negative cost variances.

3. Statistical methods and quantitative techniques

Statistical tools such as percentages, charts, diagrams and graphs are of great use in
management accounting for presenting data in the most appropriate and desired form.
Thus, statistical methods have become an integral part of management accounting.So also
quantitative techniques such as probability distribution, regression analysis,linear
programming, decision tree analysis are of great use in arriving at managerial decisions. In
this way, quantitative techniques come under the purview of management accounting.

4. Financial Management
Financial management is concerned with financial decisions such as an investment
decision, financial decision and dividend decision. All the financial decisions are basically
managerial decisions in the sense such are the decisions taken by the managers helm of
affairs in general and by financial managers in specific.

5. Budgeting and Forecasting

Budgeting and forecasting are the two major areas that are closely associated with
management accounting. To set aside funds for performing several business activities like
1 Management

advertising, investment, advertising budget and capital budgeting are of great help. The
management of any business concern is very much concerned with the aim of satisfying
the needs and wants of its customers. In fulfilling this end, forecasting plays a vital role.
For example, demand forecasting and sales forecasting are the essentials for achieving
success in this highly dynamic and competitive business world.

6. Inventory Management
The term ‘inventory’ refers to stock of raw materials, stock of work in progress
and stock of finished goods. Indeed, inventories involve huge amount of working capital.
The success of an organization heavily relies upon its inventory management. Inventory
management includes activities like determining inventory levels, arriving at economic
order quantity. Thus, the study of inventory management will be assisting management
accountants in arriving at relevant inventory decisions.

7. Tax Accounting
Business concerns do exist to serve and eventually to earn profit. And, income
earned by a business concern is taxable as per tax laws. Tax accounting includes arriving
at taxable income, filing of tax returns, paying tax to the respective authorities like central
government, state government and local bodies. Tax accounting has become an integral
part of management accounting since acts and laws relating to business income such as
direct taxes, indirect taxes and goods and service taxes do affect managerial decision-
making.

8. Internal Audit
In internal accounting i.e management accounting, internal audit plays an
important role. Internal audit is concerned with the development of a suitable audit system
for internally controlling both business operations and managerial activities.

9. Management Information System

Management accounting is primarily concerned with the provision of accounting
and qualitative information for making complex decision making process ease.
Management information system deals with the provision of required information in the
most suitable form. In management accounting, reports are presented to the management
as to many aspects in many forms. For instance, reports are presented in the form of funds
flow statement, quantitative statement, statement of proprietors’ funds. Further, interim
reporting is another important aspect of management accounting. Thus, management
information system has become an indispensable part of management accounting.

10. Office Management

The main or general office is the pivot point of any organization as it is the
reservoir of information. The effective way of disseminating right information to the right
manager at the right time and in the right place heavily depends upon proper office
management. Office management is concerned with filing and indexing of records,
 Nature And Scope Of Management 1

circulars and the like. Office methods and procedures are closely related to the functions
of management accountant.

11. Computer Applications

Managers of today arrive in managerial decisions with the support of computer –
aided data analysis. Management accountants are expected to possess knowledge and skill
as to accounting packages like Tally and wings and they are also expected to be good
atSPSS(Statistical Packages for Social Sciences). Basically, management accountants are
expected to have sound knowledge and adequate skill on ‘excel’. Thus, the study of
computer application in business and computer – aided analysis of financial statements
has become an integral part of management accounting.

1.6 OBJECTIVES OF MANAGEMENT ACCOUNTING

The primary objective of management accounting areto assist management in
formulating policies and also in arriving at managerial decisions. In the process of achieving
this primary objective, some other objectives have been fulfilled by management accounting.
The main objectives of management accounting are following:

1. To formulate plans and policies

Planning is the first and foremost function of management. Planning precedes
decision-making. Plans are the tools through which organizational goals are achieved.
Management accounting aims in formulation of plans that are essential to carry out
business operations. Further, management accountants formulate policies as to production
and marketing with the help of both past and projected data.

2. To assist the process of interpretation

Analysis of financial statements is one of the crucial aspects of management
accounting. Interpretation is possible only with analysis and analysis becomes useless
without interpretation. Management accounting aims in analysis of financial statements
and business situations by using appropriate tools and techniques like ratio analysis, funds
analysis and capital budgeting. And such analysis is of great use in interpreting business
results and eventually in drawing inferences and conclusion.

3. Help to Managerial Decisions

Managerial decisions are the end product of management accounting. It helps to
management accountants for managerial decisions like product decision, pricing decision,
channel decision and decision as to promotion of the business. Formation of centres like
cost centres and profit centres is a hallmark of management accounting. And, such centres
are made responsible in cost estimation cost control and also in profit planning.
1. Management

4. To direct and motivate to employees

Employees’ morale is an essential in enhancing organizational efficiency. To boost
employees’ morale, they must be duly directed and persistently motivated. As targets are
laid down by the management with the help of data given by management accountant,
employees are encouraged to achieve such set targets.

5. To present reports
Management accounting is presenting reports to the managers concerned. The
performance of the organization as a whole and also the performance of each
division/department of an organization are presented in the form of varied reports. Interim
reports are also presented to the management wherever and whenever such reports are
required.

6. Help to Organization
Organizing the activities of an organization is one of the functions of management.
To help an organization in organizing its operation is one of the objectives of management
accounting. Business operations need to be organized in a systematic and scientific
manner. Management accounting by establishing responsibility centres and also by
establishing methods and procedures helps a lot in organizing business operations.

7. To co-ordinate operations
Management accounting has the objective of co-ordinating business operations so
that organization’s efficiency could be enhanced. Business operations begin with the task
of identifying customers’ needs and end with the task of fulfilling them with competitive
advantage. Management accounting provides necessary tools such as budgets and reports
for co-ordinating various business operations.

8. To facilitate effective control

Management accounting is useful not only for making decisions but also for
exercising control over business operations and workers’ performance. Management
accounting includes devices like variance analysis to control cost, break-even analysis to
control volume of output, flexible budget to control the desired level of activity. With the
help of various tools and techniques of management accounting, complete control is made
possible.

9. To increase productivity and efficiency

Management accounting aims is maximizing profits and minimizing losses. In the
processing of achieving this end, workers’ productivity and organizational efficiency must
have been enhanced. Without enhancing workers’ productivity and organizational
efficiency no organization could increase its profits. Management accounting ensures
increased productivity and efficiency by adopting suitable methods and measures, tools
and techniques.
 Nature And Scope Of Management 1.

Objectives of Management Accounting

 To formulate plans and policies
 To assist the process of interpretation
 Help to managerial & decision
 To direct and motivate employees
 To present reports
 Help to organizing
 To co-ordinate operations
 To facilitate effective control
 To increase productivity and efficiency

1.7 FUNCTIONS OF MANAGEMENT ACCOUNTING

Every business concern is composed of resources. The major resources are: men,
machines, materials, methods, markets and money. They are called 6 M’s of an organization.
In general, such resources are not found in plenty but always there is paucity in such
resources. Accordingly, there are resource constraints and the management has the challenge
of using them the appropriate level. It is in this context, modern management accounting
focuses more on function that will eventually ensure better solution and appropriate course of
action so that business problems could be solved with sound decisions.
Management accounting performs the following functions are:
1. Planning and forecasting
Management accounting provides information in such a way which is useful for
proper planning and forecasting both for short-term as well as long-term and forecasting is
done with the help of tools of management accounting like budgetary control, standard
costing, marginal costing and trend analysis.

2. Presentation of modified data

Financial accounting just provides past or historical data which are not enough to
take appropriate managerial decisions. Management accounting modifies such historical
data through devices like comparative statements, common-size statements, trend analysis,
ratio analysis and fund analysis. And, such as modified data are duly presented to the
management through relevant reports.
1. Management

3. Analysis and interpretation of data

Management accounting does perform the function of analysis and interpretation
of data. Analysis is done by several tools like variance analysis, cost-volume profit
analysis, ratio analysis, for giving due interpretation to the management about business
progress and performance of a department/division. Based on such as analysis and
interpretation, inferences, i.e. managerial decisions are taken.

4. Helpful in strategic decision making

The role of management accountant is chiefly concerned with making strategic
decisions. Such decisions may be related to expansion of business, increasing volume of
output, keeping of inventory and the like. Several decision tools are being used for
arriving in strategic decisions. For example, flexible budget is helpful in taking decision as
to expanding volume of output, ABC analysis (Always Best Control), VED analysis
(Vital, Essential and Desirable), and JIT technique (Just – in –time ) are helpful in taking
decision with regard to inventory management.

5. Facilitates Managerial Control

Management accounting is for managerial decisions and managerial control.
Decision – making and controlling are the two managerial functions which go hand in
hand. Cost is controlled through budgetary control, standard costing and responsibility
accounting. With the help of strategic decisions that are made possible by management
accounting, managerial control is made possible eventually.

6. Use of qualitative data

Financial accounting uses only the data which are quantifiable. In other words, it
does not include non-monetary transactions and events that occur in the ordinary course of
every business concern. To arrivein managerial decisions and also to facilitate managerial
control, management accounting uses qualitative information too. For example, the work
environment that prevails within the organization, degree of competition that exists in the
market are being taken into account in management accounting.

7. Communicating management policies

Management accounting is also responsible for effective managerial
communication. On the other hand, management accounting is an instrument for
formulating management policies like production policy, pricing policy and on the other
hand, such formulated management policies are duly communicated to all the managers
who are concerned with such policies. For instance, the newly formulated production
policy is communicated to the manager in-charge of production department.

8. Monitoring business results

Management accounting is accounting for effective management. Exercising
effective management demands monitoring business results. Management accounting
 Nature And Scope Of Management 1.

paves a better way for monitoring business results through progress reports, interim
reports, performance budgets, variance analysis and the like.

9. Adopting remedial measures

With the help of continuous monitoring system of management accounting,
necessary remedial measures could be easily adopted. To make error is human So every
organization which is composed of human beings. Committed errors could be corrected by
adopting remedial measures. Management accounting provides enough scope for adopting
remedial measures mainly through perpetual inventory system, internal control, revised
budgets and the like.

10. Helpful in tax administration

Management accountants play an important role in administering issues related to
tax. In the determining taxable income and in filing tax returns, management accountants
contribute a lot. Tax administration is carried out of course by the company auditor but
always in consultation with the management accountant.

Functions of Management Accounting

 Planning and forecasting  Presentation of modified data
 Analysis and interpretation of data  Helpful in strategic decision making
 Facilitates managerial control  Use of qualitative data
 Communicating management  Monitoring business results
policies  Helpful in tax administration
 Adopting remedial measures

1.8 TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING

Management accounting consists of tools and techniques that are used for analysing of
data and drawing inferences. One cannot imagine management accounting without such tools
and techniques. Management accounting directs the management as to the areas where the
management should pay immediate and more attention. Further, management accounting aims
in solving problems which exist in the course of carrying out business operations. In
performing these tasks, application of tools and techniques has become an indispensable one.
The important tools and techniques used in management accounting are given below:

1. Cash Flow Analysis

This is a technique for analyzing the movement of cash between two dates of
balance sheets. It deals with both cash inflows and cash outflows for a given period of
time. Cash from operation is also found out while preparing cash flow statement. Cash
flow analysis is of great help for short term financial planning. The various sources
1. Management

through which cash comes into business and the various purposes for which cash goes out
of business have been located and accordingly due control is exercised as to cash control.

2. Fund Flow Analysis

‘Funds’ refers to many things. While in a narrow sense funds refers to ‘cash’, in a
broader sense funds means ‘all financial resources’. Nevertheless, by funds what we
popularly mean is net working capital. Funds flow analysis is done by preparing a
statement of changes in financial position called ‘funds flow statement’. This statement
consists of both sources of funds and uses of funds. Funds from operations are also arrived
in analyzing the movement of funds between two dates of balance sheets. It is of great use
for long-term financial planning and decision- making.

3. Ratio Analysis
Ratio refers to mathematical relationship between two variables. There are various
types of ratios. Liquidity ratios such as current ratio, quick ratio are useful for ascertaining
the liquidity position of a firm at a given period of time. Activity ratio like inventory
turnover ratio, debtors velocity, creditors velocity are of great use in determining the
efficiency of an organization. Solvency ratios such as debt-equity ratio and interest
coverage ratio are helpful in deciding upon the ability of a firm in settling its long-term
liabilities. Eventually, profitability ratios like net profit ratio and return on investment are
useful in deciding upon the profit earning capacity of an organization.

4. Trend Analysis
As the name implies trend means the position and progress of something over a
certain period of time. Trend might be of either upward trend or downward trend. For
example, the trend of sales and profit could be assessed over a particular range of time say
2005 – 2010. Thus, trend analysis is of great use in predicting and forecasting future sales,
profit and the like.

5. Marginal Costing
Marginal cost is the additional cost incurred in producing an extra unit. The
process of ascertaining marginal cost is called marginal costing. Marginal costing
technique is useful in determining the point of no profit and no loss called break – even
point. This technique is widely applied in making many managerial decisions like make or
buy, key or limiting factor, whether to expand or shut – down business and etc.

6. Standard Costing
Standard cost is the pre-determined cost. In other words, it is the cost set in
advance by the management as to producing some goods and/or some services. The whole
process of ascertaining stand cost is called standard costing. This technique is very much
useful in controlling costs. Differences between the standard costs and actual costs called
variances are found out with regard to all elements of cost namely material, labour and
 Nature And Scope Of Management 1.

overheads. And remedial measures could be taken in order to redress negative or

unfavorable variances.

7. Budgetary Control
Controlling costs by preparing budgets is called budgetary control. A budget is a
quantitative statement as to something prepared for a definite period of time. For example:
Production and sales budgets are prepared for a certain period say for the first quarter
ending 30th June, 2017.

8. Responsibility Accounting
Responsibility accounting is an accounting system under which managers are
given decision-making authority and responsibility for each activity occurring within a
specific area of the company. Under this system, managers are made responsible for the
activities of their own segments. These segments may be called departments or divisions
or sections. In responsibility accounting, responsibility centres are made and this
technique gives focus on such established responsibility centres. The managers of
different responsibility centres are responsible for controlling the costs of their centres.
Thus, responsibility accounting is used as a controlling device.

9. Inflation Accounting
Inflation accounting deals with changes in prices of assets of a company. Rise in
general price level is termed inflation. The direct effect of inflation is the reduction in the
purchasing power of money. The following are the generally accepted methods of
inflation accounting: Current Purchasing Power Method, Current Cost Accounting
Method,and Hybrid Method. Inflation accounting shows current profit based on current
prices and the balance sheet under inflation accounting exhibits a fair view of the financial
position of a firm.

10. Capital budgeting

Capital budgeting is concerned with capital expenditure proposals. Capital
expenditure is long-term in nature. Examples of capital expenditure are construction of a
new building, purchasing a sophisticated machine, launching a new product and the like.
This technique of capital budgeting is of great use in choosing the best capital expenditure
proposals by using appraisal tools like pay-back period and net present value method.

11. Management Information System

Information is the input to managerial decisions. In the process of enabling
managers in taking decision in their respective departments, information should be
presented in an appropriate form and at the right time and place. To disseminate and
present information in such a way that works are carried out smoothly and decisions are
arrived at effectively, a management information system is the tool used in management
accounting. MIS takes care of presentation of right information to the right manager in the
right form at the right place and at the right time.
1. Management

12. Statistical Tools and Techniques

Management accounting includes a lot of tools and techniques including statistical
tools which facilitate the process of decision making. There are statistical tools like
percentages, charts, diagrams, and statistical techniques like probability distribution,
decision-tree analysis that have been used by management accountants in arriving at
managerial decisions.

1.9 INSTALLATION OF MANAGEMENT ACCOUNTING SYSTEM

Management accounting system is properly installed in the organization.
The installation of management accounting system will depend upon the many factors
such as nature of business, accounting needs, scale of operations etc. Further, the installation
of management accounting system should be done in a comprehensive manner under the
guidance of management accountant who is otherwise called controller of accounts.
The following steps will have to be taken for installation of an efficient and effective
management accounting system:
1) An appropriate organizational manual should be prepared for the entire
organization. This scope of authority and responsibility of each managerial level.
Thus, it prevents overlapping of function.
2) The required staff should be recruited, trained, placed and developed.
3) Appropriate forms, returns, statements should be designed, prepared and made
available.
4) A complete integration of all systems such as cost accounting, financial
accounting, financial planning, economics and statistics must be given effect.
5) Cost-centres, investment centres, profit-centres and budget-centres should be
clearly set up.
6) The appropriate system of budgetary control should be introduced.
7) The technique of standard costing laying down standards of performance should
also be set up.
8) Adopting operational research techniques so as to cope with the changing need of
the hour.
 Nature And Scope Of Management 1.

1.10 MANAGEMENT ACCOUNTANT STATUS, FUNCTIONS AND

DUTIES
The executive who is entrusted with the functions of management accounting is
known as 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 the installation,
development and functioning of an efficient and effective management accounting system.
In large concerns, his designation may be that of a “Controller”, “Chief Accountant”,
“Chief Accounts Officer”, “Finance Controller”. Management accountant plays an important
role in gathering, compiling, reporting and interpreting internal accounting information.

Status of Management Accountant

The organizational status of management accountant varies from concern to concern
depending upon the individual character of the management accountant and upon the pattern
of management system that prevails in that concern. Shri P.C. Tandon has vividly described
the status of management accountant as under:
“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.”
However, the Controllers’ Institute (now known as Financial Executive Institute) has
suggested the following organizational status of the controller (Management Accountant):
(i) He should be an executive officer at the policy-making-level responsible directly
to chief executive officer of the business. His appointment or removal should
require the approval of the Board of Directors.
(ii) He should be required by the Board of Directors to present directly periodic
reports covering the operating results and financial conditions of the business.
(iii) He should preferably be a member of Board of Directors and all other top policy-
making groups. At the minimum, he should be invited to attend all meetings of
such groups with a right to be heard.
(iv) 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.”
1. Management

A management accountant or controller can exercise better influence and

control more by his personality, mental ability, industrial background, competence
and integrity than by virtue of his holding the office.

Functions of Management Accountant

The functions of management accountant heavily depend upon the concern and also
upon the individual needs of the concern. Yet, the Financial Executive Institute of America
has laid down the following functions of a management accountant:

1. Planning for control of accounting functions

The management accountants will plan, co-ordinate and control the accounting
functions by using various tools and techniques. Manager can establish an effective
system of internal control with the help of budgets, sales forecasts, capital budgeting and
tax planning.

2. Interpreting and reporting

The management accountant has to analyze and interpret the financial data and the
inferences have to be reported by managerial levels of management. This function will
include integration of financial accounting and cost accounting and recording of actual
performance to ascertain deviations.

3. Evaluating and counseling

The management accountant evaluates various plans and programmes. This
account operations and activities in order to establish their relative importance for
managerial interpretation. In the account provides counseling service to the management
and the manager educates the executives on the need and importance of management
information system.
4. Tax administration
The management accountant is expected to look after all matters relating to taxes.
The manager has to report to government agencies a required under different tax laws.

5. Protection of assets
The management accountant is the custodian of the assets of the business concern.
The manager protects the assets of the business concern through an efficient system of
internal check and also by exercising internal audit.

6. Economic appraisal
The management accountant is expected to have a comprehensive study on the
socio-economic factors affecting business operations. The manager to report the impact of
such varying socio-economic factors and government policies to the economic policy of
the concern.
 Nature And Scope Of Management 1.

7. Government reporting
The management accountant supervises the returns and reports to be sent to the
government agencies.

Duties of Management Accountant

The primary duty of management accountant is to help management in arriving at
appropriate managerial decisions. Further, it is the duty of the management accountant to keep
all levels of management informed of their real position.
Controllers’ Institute of America has defined the following duties of Management
Accountant or Controller:
1) The installation and supervision of all accounting records.
2) The preparation and interpretation of financial reports and statement.
3) The continuous audit of accounts and records.
4) The compilation of production cost.
5) The compilation of costs of distribution.
6) The taking and costing of all physical inventories.
7) The preparation and filing of tax returns and the supervision of all matters relating
to taxes.
8) The preparation of annual budget as budget director covering all activities for
submission to the Board of Directors.
9) The ascertainment that all properties are properly and adequately insured.
10) The initiation, preparation and issuance of standard practices relating to all
accounting matters and procedures and the co-ordination of the system.
11) The maintenance of adequate records of authorized appropriations and the
determination that all sum expanded pursuant thereto are properly accounted for.
12) The ascertainment that financial transactions covered by minutes of the Board of
Directors and/or executive committees are properly executed and recorded.
13) The maintenance of adequate records of all contracts and leases.
14) The approval for payment (and/or countersigning) of all cheques, promissory notes
and other negotiable instruments.
1. Management

15) The examination of all warrants for the withdrawal of securities from the vaults
and the determination that such withdrawals are made in conformity with the bye-
laws and regulations established.
16) The preparation or approval of the regulations or standard practices required to
assure compliance with orders of regulations issued by duly constituted
government agencies.

1.11 ADVANTAGES OF MANAGEMENT ACCOUNTING

In the present day complex business world, management accounting has become an
integral part of the management. Further, management accounting has become an
indispensable part of the management. The following are the advantages of management
accounting:

1. Proper Planning
Proper planning and effective implementation of formulated plans are made
possible by management accounting. By formulating, policies, preparing budgets and
establishing norms and procedures planning function is effectively carried out in
management accounting.

2. Effective Organization
Effective organization is one of the end products of management accounting.
Organizing involves grouping of business activities in a way as to identify the authority
and responsibility within the organization. The entire organization is divided into suitable
cost and/or profit centres, responsibility and/or investment centres. A sound system of
internal control for cash of such centre paves way for effective organization.
3. Continuous Co-ordination
The purpose of management accounting i.e. maximization of profit/benefit and
minimization of loss/cost is made possible mainly by continuous co-ordination of all the
business activities of a concern. Through departmental budgets and reports, effective co-
ordination is achieved.

4. Competitive Controlling
Every business concern is expected to exercise competitive control over its
operations. Competitive controlling refers to controlling the activities of an organization in
the more appropriate manner than that of its competitors. By arriving in variances and also
by evaluating performance of each department, competitive controlling is made possible.

5. Maximum Return
Maximum return on capital employed is ensured by the use of management
accounting because it helps in the functions of planning, co-ordination and control.
 Nature And Scope Of Management 1.

6. Regular Motivation
Employee morale is one of the essentials of successful business concern. Based on
the interim reports and performance budget, the management duly honours the authorities
who are responsible for optimum achievement. The under achievers are given necessary
punishment for improving their efficiency in the days to come.

7. Better and Improved Service

Better and improved services by management to customers are assured by
management accounting. This is made possible by management information system
performance budgeting and responsibility accounting.

8. Improved Industrial Relations

Unacceptable standards or sub-standard which often is responsible for unhealthy
and bad relations between management and labour class can be removed by the use of
management accounting. Thus, industrial relations may be improved and made healthier.

9. Commendable Communication
Management accounting helps in communicating up to date information to various
parties interested in successful functioning of the business concern. Through proper
reporting system, necessary data are given to managers concerned. By providing right
information to the right manager at the right place in the right time and in the right form,
management accounting paves way for commendable communication.

10. Helps to Decision – Making

Management accounting helps the management in decision-making process by
taking into account the effect of changes in socio-economic and commercial conditions by
using both quantitative and qualitative information.

Advantages of Management Accounting

 Proper Planning
 Effective Organization
 Continuous Co-ordination
 Competitive Controlling
 Maximum Return
 Regular Motivation
 Better and Improved Services
 Commendable Communication
 Helps in Decision-Making
1. Management

1.12 LIMITATIONS OF MANAGEMENT ACCOUNTING

Like every coin has two sides, management accounting too has its own negative
aspects. It is true that management accounting promotes efficiency and eventually it leads to
effective management. Nevertheless, it suffers from certain limitations. Some limitations are
due to its reliance on financial accounting. Yet, the other limitations are due its evolutionary
stage.
The major limitations which limit the effectiveness of management accounting are
given below:

Limitations of Management Accounting

 Evolutionary Stage
 Limitations of Basic Records
 Warrants persistent efforts
 It is only a tool
 Costly installation
 Wide Scope
 Personal Bias
 Resistance from many quarters
 Lack of knowledge
 Presents only data

1. Evolutionary Stage
Management accounting is comparatively a new concept in accounting. It is still in
a developing stage. It is not a perfectly developed discipline. Thus, it has the same
impediments as a new discipline will have e.g. fluidity of concepts, raw techniques and
imperfect analyzing tools.

2. Limitations of Basic Records

Management accounting is nothing but an extension of financial accounting.
Financial accounting is the base for management accounting. Therefore, almost all the
limitations of financial accounting have become the limitations of management
accounting.
 Nature And Scope Of Management 1.

3. Warrants Persistent Efforts

The inferences and conclusions drawn by a management accountant are not
implemented automatically. Continuous and concerted efforts are warranted to execute
such inferences and conclusions. In this regard, the management accountant has to take a
lot of efforts in convincing all the managers concerned before a final decision is taken as
to the execution of such inferences and conclusions.

4. It is only a tool
It is true that management accounting acts as a tool to arrive at managerial
decisions. However, it is not an alternative of management. Management accountant just
provides data and presents information. The final decisions and corrective steps are taken
by the management.

5. Costly Installation
The installation of management accounting systems requires huge costs on account
of an elaborate organization and numerous rules and regulations. Thus, it can be adopted
only by big concerns.

6. Wide scope
The scope of management accounting is very wide and diverse. It includes several
disciplines like quantitative techniques, managerial economics, financial management etc.
Management accounting considers both monetary as well as non-monetary factors. If the
knowledge in any of these subjects is adequate, the genuiness and authenticity of the
inferences drawn are impaired.

7. Personal Bias
Though management accounting facilitates managerial decision making, the final
decision is taken by the managers concerned. So the objectivity of the decision is
influenced by such persons’ capacity to judge and ability to make decisions. As final
decision is taken by responsible persons, personal prejudices and biases are always there
which eventually affect the objectivity of such decision.

8. Resistance from many quarters

The installation of management accounting system does require radical changes at
almost all levels in the entire organization. It calls for a rearrangement of the personnel
and the activities which is generally not liked by the people concerned. Moreover, it
involves complete mental change over the preview pattern, in the absence of which
psychological resistance is but inevitable.
1. Management

9. Lack of Knowledge
A management accountant is expected to have complete knowledge in related
subjects like accounting, management, law, statistics, managerial economics etc. which is
generally not possible. The imperfect and inadequate knowledge of such subjects may
lead to wrong decisions.

10. Presents only data

Management accounting is primarily concerned with the presentation of data to the
management. Management accountant can only inform and of course advise the
management at the maximum. But the final decision is not taken by manager.

1.13 DISTINCTION BETWEEN FINANCIAL ACCOUNTING AND

MANAGEMENT ACCOUNTING
Financial accounting and management accounting are closely interrelated since
management accounting is an extension of financial accounting. Management accounting is
basically based on the historical data provided by financial accounting. Management
accounting is made possible mainly by financial accounting and without management
accounting no managerial decision is made possible. While financial accounting ends with the
preparation of financial statements, management accounting begins with the analysis of given
financial statements.
In spite of the close relationship that exists between financial accounting and
management accounting, there are several points of distinction between these two branches of
accounting and they are given below:

Point of
Financial Accounting Management Accounting
Distinction
Objective The primary objective is to make The primary objective is to assist
periodical reports to external internal management.
parties like owners is a internal
party, creditors and government.
Accounting Governed by Generally Accepted There are no such GAAPs in
Principles Accounting Principles (GAAPs) management accounting.
Audit Under the company law, auditing Auditing is not possible as there
is compulsory. are no GAAPs.
Coverage Covers the entire range of business Covers only certain parts of the
business which are relevant to
managerial decision- making.
Data used Actual and past data Projected and estimated data
Description Anything which cannot be Anything which cannot be
 Nature And Scope Of Management 1.

described in accounting figures is described in accounting figure is

outside the scope of financial also included in the scope of
accounting. management accounting
Development Financial accounting has been Management accounting is still in
developed as a full-fledged its evolutionary stage.
discipline.
Flexibility Existence of rigid rules makes As there are no GAAP,
financial accounting less flexible. management accounting has
greater flexibility.
Focus Focus is on external parties. It is Internally oriented. Focus is on
externally oriented. It is otherwise internal management. It is also
called external accounting. known as internal accounting.
Information Only quantitative information is Both quantitative and qualitative
applied used. information are used.
Legal Financial accounting has become Management accounting is
compulsion compulsory for every business. optional. It is adopted on voluntary
basis to enhance managerial
efficiency.
Performance Financial accounting merely shows Management accounting tells the
the overall performance divisions/departments which
(results achieved during a underperform.
particular period)
Period Financial statements are prepared Management accounting provides
for a particular period say for one information whenever it is required
year. during the whole year.
Precision Financial accounting provides Management accounting allows
precise and accurate data and there approximation and there is less
is more emphasis on precision. emphasis on precision.
Presumptions Financial accounting does not Management accounting presumes
presume the existence of the existence of financial
management accounting. accounting.
Publication Financial statements like profit and All the reports, statements and
loss account and balance sheet are forecasts made by management
published for the use of general accounting are for the internal use
public. of management and they are not
published.
Quickness Reporting of financial accounting Reporting of management
is slow and time consuming. accounting is very quick and so
fast.
1. Management

Reporting Reporting is done for the outsiders Reporting is done for internal use
like bankers, investors and only and for the benefit of different
government agencies. level of management.

Values Financial accounting lays emphasis Management accounting lays

on certain values such as emphasis on certain values like
objectivity, validity and accuracy. flexibility, comparability and
relevancy.

1.14 DIFFERENCES BETWEEN FINANCIAL ACCOUNTING AND

COST ACCOUNTING
1. Purpose
The purpose of financial accounting is to provide information to external parties.
But, the purpose of cost accounting is to provide cost data to the authorities concerned in
the organization.

2. Mandatory requirement
As per the Companies Act and Income Tax Law, financial accounting is
obligatory/mandatory for all business concerns. For certain industries, cost accounting is
mandatory/obligations as per the Companies Act.

3. Purview
All commercial transactions come under the purview of financial accounting. In
cost accounting, focus is on transaction relating to manufacturing and sales of goods and
services.

4. Reveal of results
Financial accounting reveals the results of the business as a whole. Cost
accounting shows profit and profitability of each product, process and operation.

5. Reporting
Financial accounting provides financial data once in a year. Cost accounting
provides cost data at different intervals. Reports are presented bi-annually, quarterly,
monthly, fortnightly, weekly and even daily.

6. Beneficiaries
Financial accounting is primarily beneficial to external parties. Cost accounting is
chiefly beneficial to managers at different levels in the organization.
 Nature And Scope Of Management 1.

7. Pricing
Financial accounting fails to provide information useful for pricing. Cost
accounting provides adequate and necessary data useful for formulating pricing policies.

8. Evaluating efficiency
Financial accounting has no scope for evaluating efficiency of the different
department/division of a business concern. In cost accounting, there is enough room for
measuring/evaluating efficiency of each department division of a business concern.

1.15 DISTINCTION BETWEEN MANAGEMENT ACCOUNTING AND

COST ACCOUNTING
Management Accounting and Cost Accounting
Both management accounting and cost accounting are the expanded forms of financial
accounting. There are similarities among these two branches of accounting on certain aspects
like periodicity of reporting, use of techniques. Nevertheless, on certain other aspects, there
are differences between management accounting and cost accounting. While cost accounting
focuses on cost control, management accounting pays emphasis on managerial decisions.
Indeed, the limitations of financial accounting first gave birth to cost accounting and then the
inadequacy of cost accounting for arriving at managerial decisions caused the emergence of
management accounting.
The following are certain important points of distinction between cost accounting and
management accounting:

Point of
Cost Accounting Management Accounting
Distinction
Purpose The main purpose is to provide The main purpose is to provide
data as to current and projected required data to the management
cost of product, service or process in specific for arriving at
managerial decisions.
Principles A few principles and procedures No much principles and
are followed in cost accounting. procedures are being followed in
management accounting. The data
are prepared and presented as they
are wanted by the management.
Scope The scope of cost accounting is The scope of management
primarily concerned with cost accounting is very wide. It
ascertainment and control. includes both financial accounting
and cost accounting. Further, it
includes tax planning and analysis
and interpretations of financial
1. Management

data.
Data used Cost accounting considers only Management accounting uses both
quantitative data. Further, cost qualitative as well as quantitative
accounting uses past and present data. Further, management
data. accounting uses past, present and
projected data.
Beneficiaries Both the internal management and Management accounting serves
the external parties are benefited only the needs of internal
from cost accounting management. So, the only
beneficiary of management
accounting is the internal
management.