L2 Management Accounting

Learning objectives
Meaning of management accounting
Objectives of management accounting
Nature of management accounting
Limitations of management accounting
Management Accounting vs Financial Accounting
Management Accounting vs Cost Accounting

MEANING OF MANAGEMENT ACCOUNTING:
It is concerned with collection and presentation of accounting information

required by management for decision making.
The process of preparing management reports and accounts that provide

accurate and timely financial and statistical information required by
managers to make day-to-day and short-term decisions.
MA is the branch of accounting which provides accounting information to the

management in a systematic way so that managerial functions of planning,
controlling and decision making can be performed in an efficient manner.
‘Any form of accounting that enables a business to be conducted more
efficiently’ may be regarded as management accounting. Management
accounting information can help managers identify problems, solve
problems and evaluate performance.
Institute of Chartered Accountants of England

‘Management accounting is the process of identification, measurement,
analysis, preparation and communication of financial information used by

management to plan, evaluate and control within the organization and to
assure appropriate use and accountability for its resources.
National association of accounts (USA)

‘Management accounting is the integral part of management concerned with identifying,
presenting and interpreting information used for –
(I) Formulating strategy;

(II) Planning and controlling activities;
(III) Decision making;
(IV) Optimizing the use of resources;
(V) Disclosure to shareholders and others external to the entity;
(VI) Disclosure to employees;
(VII) Safeguarding assets.
Chartered Institute of Management Accountants

Management Accountant
Management Accountant is called ‘Controller’ or ‘Financial
Controller’.
And part of the top management team.
Objectives of Management
Accounting
1. Presentation of Data
2. Forecasting
3. Analysis and interpretation of data
4. Helps in organizing
5. Means of Communication
6. Planning
7. Decision making
Nature/features of management accounting
Useful in decision making
Financial and cost information
Internal use
Purely optional
Concerned with future
Flexibility in presentation of information

Limitations
1) Based on historical data
2) Lack of wide knowledge
3) Complicated approach
4) Not a substitute of management
5) Costly
6) Developing stage
7) Lack of objectivity
8) Resistance from staff

Tools for decision making in
management accounting
• Financial statement analysis
• Ratio analysis
• Fund flow analysis
• Cash flow analysis
• Marginal costing system
• Budgetary control
• Variance analysis
Relationship of Management
Accounting to Cost and
Financial Accounting
Preparing Profit and
Loss Account and Financial Accounting
Balance Sheet
Analysis of Cost for

control and
maximizing Cost Accounting
efficiency
Assisting
Management for
Planning, Decision Management
making and control Accounting
Differentiation between:
(I) Management and Financial

Accounting
(ii) Management and Cost Accounting

Basis Financial Accounting Management Accounting
External and internal Information is mainly meant for Information is mainly meant
use external users like investors, for internal users i.e;
shareholders, creditors, Govt. Management
authorities etc.
Accounting method It is based on double entry system It is not based on double

for recording business entry system.
transactions.
Statutory requirement Under Company law and taxation It is optional although its
laws, financial accounting is utility makes it highly
obligatory to satisfy various desirable to adopt it.
statutory provisions.
Analysis of cost and Financial Accounting Management Accounting

profit shows profit/loss of business as a provides detailed information
whole. It does not show the cost about individual products,
and profit for individual products, plants, departments or any
processes or departments etc. other responsibility centres.
Past and future data It is concerned with recording It is future oriented and
transactions which have focuses on what is likely to
already taken place, i.e; happen in future though it
represents historical data. uses past or historical data.
For future projections.
Periodic and continuous Financial reports (P/L and B/S) Management reports are
reporting are prepared usually on a year prepared frequently i.e;
to year basis. monthly, weekly or even daily
as per management
requirements.
Accounting standards Companies are required to No such need.

prepare financial accounts in
accordance with accounting
standards.
Types of statement In financial accounting, Profit In management accounting
prepared and Loss account and Balance special purpose statements are
Sheet are prepared which is prepared eg; performance
used by external users. report of sales manager
Publication and Financial statements are Management accounting

audit published for general public statements are not published
use and are also sent to as these are for internal use
shareholders. These are and also are not required to be
required to be audited by audited by Chartered
Chartered Accountants. Accountants
Monetary and non- Financial accounting provides Management accounting may

monetary information in terms of apply both monetary or non-
management money only. monetary measurements.
Basis Cost Accounting Management Accounting
Scope Scope of cost accounting is limited Scope of management accounting is

to providing cost information for wider as it provides all types of
managerial uses. information i.e; cost accounting as
well as financial accounting
information for managerial uses.
Emphasis Main emphasis is on cost Main emphasis is on planning,

ascertainment and cost control to controlling and decision making to
ensure maximum profit. maximize profits.
Techniques employed Various cost controlling techniques Management accounting also uses the
are used in cost accounting, such techniques used in cost accounting
as standard costing, variance but in addition it also uses techniques
analysis, marginal costing and cost like ratio analysis, operations
volume profit analysis, budgetary research and certain techniques from
control, uniform costing and inter branches of knowledge like
firm comparison etc. mathematics, economics etc.
whatsoever may help management in
rational decision making.
Evolution Evolution of cost accounting is Evolution of cost accounting is due to

mainly due to the limitations of the limitations of cost accounting.
financial accounting.
Basis Cost Accounting Management Accounting
Statutory Maintenance cost records has It is purely voluntary and its use
requirement been made compulsory in depends upon its utility to the
selected industries as notified by management.
Govt. from time to time.
Database It is based on data derived from It is based on data derived from

financial accounts. cost accounting and financial
accounting and other sources.
Status in In the organizational set-up, cost Management accountant is

organization accountant is placed at a lower generally placed at a higher
level hierarchy than the level of hierarchy than the cost
management accountant. accountant.
Installation Cost accounting system can be Management accounting cannot

installed without management be installed without a proper
accounting. system of cost accounting.
MCQ’s
Q1) Management Accounting is for:
a) Formulating strategy
b) Optimizing the use of resources
c) Disclosure to shareholders
d) All of the above

Q2)Management Accounting helps
management in making decisions for the
future, based on ………..
a) Current data
b) Future data
c) Historical data
d) None of the above

Q3) Management Accountant is a part of:
a) Top level
b) Middle level
c) Lower level
d) Lower level than cost accountant

L2 Management Accounting

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Learning objectives

Meaning of management accounting

Objectives of management accounting

Nature of management accounting

Limitations of management accounting

Management Accounting vs Financial Accounting

Management Accounting vs Cost Accounting

It is concerned with collection and presentation of accounting information

The process of preparing management reports and accounts that provide

MA is the branch of accounting which provides accounting information to the

Institute of Chartered Accountants of England

analysis, preparation and communication of financial information used by

National association of accounts (USA)

(I) Formulating strategy;

Chartered Institute of Management Accountants

Useful in decision making

Financial and cost information

Concerned with future

Flexibility in presentation of information

2) Lack of wide knowledge

4) Not a substitute of management

8) Resistance from staff

• Fund flow analysis

• Cash flow analysis

• Marginal costing system

Analysis of Cost for

(I) Management and Financial

(ii) Management and Cost Accounting

Accounting method It is based on double entry system It is not based on double

Analysis of cost and Financial Accounting Management Accounting

Accounting standards Companies are required to No such need.

Publication and Financial statements are Management accounting

Monetary and non- Financial accounting provides Management accounting may

Scope Scope of cost accounting is limited Scope of management accounting is

Emphasis Main emphasis is on cost Main emphasis is on planning,

Evolution Evolution of cost accounting is Evolution of cost accounting is due to

Database It is based on data derived from It is based on data derived from

Status in In the organizational set-up, cost Management accountant is

Installation Cost accounting system can be Management accounting cannot

b) Optimizing the use of resources

d) All of the above

d) None of the above

d) Lower level than cost accountant

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