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What is Management Accounting?

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Management accounting is a modern concept of accounting as a tool of management. The ICMA London has defined management accounting as – “the presentation of accounting information in such a way so as to assist management in the creation of policy and in day to day operations of an undertaking.”

Management accounting makes use of various techniques which include marginal costing, standard costing, budgetary control, break-even analysis, cost- volume-profit relationship, ratio analysis, inter-firm comparison and uniform costing, internal audit, etc. Most of these techniques are also employed by a cost accountant.

As the CIMA Official Terminology itself points out, management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation of communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of accountability for its resources.

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      Contents

  1. Introduction to Management Accounting
  2. Meaning and Definitions of Management Accounting
  3. Emergence of Management Accounting
  4. Nature and Concept of Management Accounting
  5. Scope of Management Accounting
  6. Importance of Management Accounting
  7. Facets, Functions and Activities of Management Accounting
  8. Requirements of Management Accounting
  9. Tools and Techniques of Management Accounting
  10. Qualification and Qualities of Management Accountant
  11. Functions of Management Accountant
  12. Difference between Financial and Management Accounting
  13. Difference between Cost Accounting and Management Accounting
  14. Advantages of Management Accounting
  15. Limitations of Management Accounting
  16. Criticisms of Management Accounting

Management Accounting: Introduction, Meaning, Definitions, Differences, Functions, Scope, Nature, Importance, Advantages, Limitations, Tools, Techniques and More

Management Accounting – Introduction

Management accounting is a modern concept of accounting as a tool of management. The ICMA London has defined management accounting as – “the presentation of accounting information in such a way so as to assist management in the creation of policy and in day to day operations of an undertaking.”

Thus any form of accounting which enables management to conduct business more efficiently is regarded as management accounting. In brief, management accounting is concerned with all such accounting information that is useful to management for performing its functions.

Management accounting makes use of various techniques which include marginal costing, standard costing, budgetary control, break-even analysis, cost- volume-profit relationship, ratio analysis, inter-firm comparison and uniform costing, internal audit, etc. Most of these techniques are also employed by a cost accountant.

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Thus, the objectives of cost accounting are quite similar to those of management accounting. In fact management accounting is an extension of cost accounting.

The scope of management accounting is wide and broad based and includes financial accounting, cost accounting, budgeting, taxation and a lot more.

As the CIMA Official Terminology itself points out, management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation of communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of accountability for its resources.

Management accounting is thus, 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 undertaking. It comprises accounting methods, systems and techniques which, coupled with special knowledge and ability, assist management in the task of maximising profits or minimising losses.

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Management accounting is mainly concerned with provision of appropriate information for managerial personnel within an organisation to help them run the organisation and make better decisions.

Modern business is complex in nature. Apart from their size and nature of activities, their management is in the hands of professional managers who are not the owners. Managerial functions of planning, organising, coordination, direction, control, staffing and decision making are not personal. A management information system is required to assist management to evaluate efficiency and control every segment of the organisation.

Even the development of cost accounting has not been sufficient enough to provide all that is needed by management for the efficient performance of their functions. It is management accounting which meets the information needs of managerial personnel.

Management Accounting – Meaning and Definitions

According to its literal meaning, management accounting may be defined as accounting for management. It is, in other words, accounting designed and used for managerial purposes. It is the accounting activity which assists management at all levels in their efficient performance of functions undertaken by them.

Management accounting has been defined in different ways by different authorities. But yet, the central point in these definitions is the provision of accounting information to management for the efficient discharge of their functions of planning, organising, directing, controlling the operations of business. In this context, it is worthwhile to examine some of the well-known definitions of management accounting.

The simplest definition of this developing branch of knowledge is the one given by Ian Tricker. R, in his book “The Accountant in Management”. The definition is “Management Accounting is concerned with the provision of information for managers to manage.”

The same view was also held by the President of the then Institute of Cost and Works Accountants, London, in the editorial to Management Accounting, while announcing the change in the title of the Institute’s Journal from ‘Cost Accountant’ to ‘Management Accountant’ in the year 1956. He defined Management Accounting as “The use of accounts of an undertaking, extended by most accounts, to provide information for management action.”

Equally popular is the definition given by the Management Accounting Team that visited the United States in 1950, under the auspices of the Anglo-American Council on Productivity. The definition runs thus: “the presentation of accounting information in such a way as to assist management in the creation of policy and in the day-to-day operation of an undertaking.”

Brown and Howard, in their Book entitled “Principles and Practice of Management Accountancy”, define the discipline thus: “Management Accounting may be defined broadly as that aspect of accounting which is concerned with the efficient management of a business through the presentation to management of such information as will facilitate efficient and opportune planning and control.”

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According to Kohler, Management Accounting is “that portion of accounting which attempts to supply management with quantitative information as basis for decisions.”

The definition coined by the National Association of Accountants is similar to the Kohler’s definition. The subject-matter is defined as “that subset of the accounting process which provides planning and control information to the firm or components thereof.”

Batty, J. gives a more comprehensive definition of Management Accounting. In his Book, Management Accountancy, Batty defines the subject thus: “Management Accountancy 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 maximising profits or minimising losses.”

In his view, obtaining finance, managing the financial resources, controlling costs and providing data, for decision making are just as important in maximising profit as any other function.

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The above definition of Batty, which is sufficiently comprehensive, makes the field of activity of the management accountant very wide in its application. Batty himself states that “Management Accountancy is now a wide and diverse subject. It is the blending together into a coherent whole, financial accounting, cost accounting and all aspects of financial management.”

The CIMA Definition:

The Official Terminology of the CIMA defines management accounting as “The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of accountability for its resources. Management Accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities.”

The above definition is the most comprehensive one. According to this definition, Management Accounting is an all-embracing discipline, taking within its fold, not merely cost accounting and financial accounting but also financial management, auditing and taxation, besides mathematics, economics, statistics and law.

It is a process of identification, measurement, accumulation, analysis and interpretation of information used by management in the efficient performance of their functions. The discipline is concerned with both internal and external reporting of financial information relating to a business entity.

Emergence of Management Accounting

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Till the emergence of cost accounting, financial accounting information communicated through the medium of financial statements was being used even by management. The information conveyed assisted management to control the affairs of their business in a general way. Further, managerial decisions were also based on such information.

With the emergence of cost accounting, however, it was possible for management to ascertain cost per unit of a product, process or operation. Direct costs could be traced to products. As such, the resources consumed by products could also be accurately measured.

In the case of indirect costs, however, the overhead resources consumed could only be estimated since specific items of overheads cannot be traced to individual products. Consequently, product costs are less likely to be accurate.

In spite of the fact that product costs ascertained as above are not accurate, they can still be used for financial accounting requirements. In fact, such costs were used for the purpose of allocating manufacturing costs incurred during a given period, between the cost of goods sold and inventories.

Even in the case of a multiproduct concern, product costs arrived at, although inaccurately by overstatement of costs some products and understatement of costs of others were used for the same purpose.

Besides the use of product costs to meet financial accounting requirements, cost information provided by cost accounting was also used by management for their own decision making. However, it was soon realised that inaccurate product costs which are sufficient to meet the financial accounting requirements of allocating manufacturing cost between cost of goods sold and inventories, are inadequate and unsuitable for managerial decision making.

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This was the main reason for accumulating cost data for use by management in their function of decision making, in a different manner than that for purpose of financial accounting. The shift in emphasis from cost accumulation for stock valuation necessary to meet financial accounting requirements to cost data for managerial decision making, was responsible for the emergence of management accounting.

Management Accounting – Nature and Concept

The CIMA Official Terminology, prior to its revision in the year 1996, defined management accounting as 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;

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(e) disclosure to shareholders and others external to the entity;

(f) disclosure to employees;

(g) safeguarding assets.

The above involves participation in management to ensure that there is effective –

(i) formulation of plans to meet objectives (strategic planning);

(ii) formulation of short-term operation plans (budgeting/profit planning);

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(iii) acquisition and use of finance (financial management) and recording of transactions (financial accounting and cost accounting);

(iv) communication of financial and operating information;

(v) corrective action to bring plans and results into line (financial control);

(vi) reviewing and reporting on systems and operations (internal audit, management audit).

According to Batty, “this subject is no longer in its infancy; but neither has it reached complete maturity”, management accounting has certainly emerged, as Murphy puts it, as the intelligence arm of management and in itself a part of management.

It is not merely an extension of cost accounting but something more than that. It is a wide and diverse discipline. It is, in fact, a blend of financial accounting, cost accounting, financial management, production management, operations research, engineering, data processing and statistics.

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Nature of Management Accounting:

Management accounting discipline is a wide and diverse branch of knowledge. As such, it is difficult to say what it is exactly. But yet, it may be said that this discipline is not a mere method, technique or art of presentation of accounting information to management.

It is a science comprising some basic principles and concepts which have been deduced by scientific method. Being a science, it lends itself to scientific collection and processing of data, establishing significant relationships amongst them and drawing inferences.

Concept of Management Accounting:

In fact, the CIMA Terminology itself mentions the fundamental management accounting concepts such as:

i. Accountability Concept:

According to this concept, management accounting presents information measuring the achievement of the objectives of an organisation and appraising the conduct of its internal affairs in that process. On the basis of this information, the responsibilities and key results of individuals within the organisation are identified.

ii. Controllability Concept:

Management accounting identifies activities which management can or cannot influence. Risk and sensitivity factors are also assessed for purpose of control, analysis, comparison and interpretation of information which can be used in the control, evaluation and corrective functions of management.

iii. Interdependency Concept:

Management accounting should tap both external and internal information sources from interactive functions such as marketing, production, personnel, procurement and finance. This is necessary in the light of increasing complexity of business and ensuring proper balancing of information.

iv. Relevancy Concept:

It is necessary to maintain flexibility in assembling and interpreting information. Flexibility facilitates exploration and presentation of many alternatives for decision making.

v. Reliability Concept:

Management accounting information should be reliable. Its reliability to the user is dependent upon its source, integrity and comprehensiveness.

Management Accounting – Top 8 Scope

The ‘functional’ definition of management accounting given by the Official Terminology of the CIMA is quoted above. This definition sufficiently demonstrates the fact that the domain of the management accountant is very wide. It includes within its fold, almost every activity necessary to enable management to achieve the objective for which it is called upon to manage a specific enterprise.

It is, therefore, difficult to circumscribe the scope of management accounting within specific limits.

But yet, the following activities may be considered to be falling within the scope of management accounting:

Scope # i. Financial Accounting:

According to CIMA Official Terminology, management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. External reporting is thus a part of management accounting.

The information conveyed by financial accounting is made use of by the management accountant for making external reporting. Further, the same information is re-arranged in such a way as the management may make use of the same for internal control of operations.

Thus, financial accounting assists management accounting and enables the management accountant to discharge his functions efficiently.

Scope # ii. Cost Accounting:

Financial accounting assists management accounting in making historical financial information available to its end users. Cost accounting, however, satisfies financial accounting requirements of product costing and inventory valuation.

It focuses attention on internal reporting of cost data with the help of which management formulate strategic and short-term operation plans, establish standards of performance, ascertain deviations and take corrective action. It also facilitates managerial decision making by doing away with intuition and hunch.

Scope # iii. Financial Management:

Management accounting is also concerned with ensuring appropriate use of and accountability of its resources. Acquisition and use of finance and optimising the use of the same is as important as safeguarding the assets of an undertaking. No concern, whether small or big, can come into existence, continue and expand without the requisite amount of finance.

It is equally necessary that the available amount of finance is properly and profitably used. It is, in this context, that management accounting is related to financial management.

Scope # iv. Statistics:

It is within the purview of management accounting that the information conveyed to both external and internal users should be effective, precise and timely. Non- management groups being composed of laymen should be in a position to comprehend the information conveyed and take appropriate decisions with regard to disposal of their relatively scarce resources.

As such, statistics should be made use of in analysis, interpretation and reporting of accounting information. Frequently, the information conveyed will be in the form of charts, graphs and diagrams which are intelligible and easily understood by the recipients.

Scope # v. Engineering:

Right from the days of Scientific Management, there is a close connection between accounting and engineering. The plant engineer has to assist the management accountant where a process consists of a number of operations and some or all of them are performed at variance with the established standards of performance, or, there is no ready means of relating the performances to their combined effects.

Scope # vi. Taxation:

Determination of tax to be paid to the Government, making the payment and providing the supportive evidence also fall within the domain of management accounting. It is also within this field, the task of determining the amount of tax to be deducted from wages and salaries of employees and pay the same to the Government.

A growing concern feels the necessity of reducing paperwork and, at the same time, save time and labour. For this purpose, it installs a computer. Besides, it may make use of computer for receiving and storing accounting information as well as for inventory control. In a number of concerns, the work of data processing is assigned to the management accountant.

In some concerns, however, a separate department is established under the management accountant. In either case, management accounting utilises the facility of computers for its accounting and reporting functions.

Scope # vii. Electronic Data Processing:

A growing concern feels the necessity of reducing paperwork and at the same time save time and labour. For this purpose it installs a computer. Besides it may make use of computer for receiving and storing accounting information as well as for inventory control.

In a number of concerns, however, a separate department is established under the management accountant. In either case, management accounting utilizes the facility of computers for its accounting and reporting functions.

Scope # viii. Quantitative Techniques:

Quantitative techniques involving mathematics, and going by the name Operations Research, are also a part of management accounting. Linear programming, game theory and queuing theory, etc., have been increasingly made use of in recent times as important tools in many fields of managerial decision making.

Importance of Management Accounting – Increase in Efficiency, Proper Planning, Measurements of Performance and More

The importance of management accounting is explained as under:

1. Increase in Efficiency:

Management accounting enhances efficiency in business operations. The targets of different departments are fixed in advance and the achievement of these goals is the tool for measuring their efficiency.

2. Proper Planning:

Management is enabled to plan various operations with the help of accounting information. The technique of budgeting is helpful in forecasting various activities.

3. Measurements of Performance:

The systems of budgetary control and standard costing enable to measure the performance. In standard costing, standards are determined. Thereafter, actual cost is compared with standard cost.

It enables the management to find out deviations between the standard cost and the actual cost. The performance will be good in case the actual cost does not exceed the standard cost. Budgetary control system is used to help in measuring efficiency of all employees.

4. Maximizing Profitability:

The thrust of various management techniques is to control cost of production and increase efficiency of each and every individual in the organization. The steps of controlling costs are able to reduce cost of production. The profits of the enterprise are maximized with the help of management accounting system.

5. Improves Service to Customers:

The cost control devices employed in management accounting enable the reduction of prices. All the employees in the concern are made cost conscious. The quality of products improves as the quality standard is predetermined.

The customers are supplied with good quality goods at reasonable prices. The increase in production of goods also enhances supply of goods to customers.

6. Effective Management Control:

In planning, coordinating and controlling activities of the concern the tools and techniques of management accounting are helpful to the management. The setting of standard and assessing actual performance regularly enables the management to have “management by exception”.

Management Accounting – Facets, Functions and Activities

At a time accounting and management were interdisciplinary; management had to depend upon the information supplied to them by the accountant functioning outside the managerial hierarchy. The accountant satisfied the information needs of management by supplying such accounting information as was necessary for the efficient performance of their functions.

In course of time, however, with the integration of accounting and management, the accountant became a member of the management team with the designation ‘management accountant’, carrying different labels in different organisations. The function of management accounting became a service phase of management rather than a service to management from outside the management group.

With this change in the position of the management accountant, and management accounting becoming an integral part of management, there has been a shift in emphasis from the historical to the control and planning aspects of the accounting activities.

It is, in the light of this change that the Seventh International Congress of Accountants held at Amsterdam in 1957 emphasised the following facets of management accounting:

1. Cost Accounting, including standard costs.

2. Materials control, extending to material usage during manufacturing, besides inventory control.

3. Budgetary control, including preparation of fixed and flexible operating budgets and their use as standards of performance.

4. Interim reporting, including monthly or quarterly profit and loss accounts.

5. Determination of the most efficient and economical accounting system applicable to the particular business, including the best use of mechanical and electronic devices.

6. Special cost and economic studies in the context of increased output or additional lines of activity cost-volume-profit relationship and break­even analysis.

7. Assisting management in the interpretation of financial data and rendering advice in connection with decision making.

The CIMA Official Terminology of 1991 has, in its definition of management accounting, a pointed reference to the following functions of this discipline:

(a) Formulation of plans to meet enterprise objectives-both strategic and short-term operation plans;

(b) Acquisition and use of finance;

(c) Recording financial and cost accounting transactions;

(d) Planning and controlling activities;

(e) Decision making;

(f) Optimising the use of resources;

(g) External reporting; and

(h) Safeguarding assets.

The Official CIMA Terminology, as revised in the year 1996, observes that management accounting, in practice, involves a set of core activities which are consistent with the main practical functions of the management accountant.

These core activities comprise the following:

(i) Participation in the planning process at both strategic and operational levels. This involves the establishment of policies and the formulation of plans and budgets which will subsequently be expressed in financial terms.

(ii) The initiation of and the provision of guidance for management decisions. This involves the generation, analysis, presentation and interpretation of appropriate relevant information.

(iii) Contributing to the monitoring and control of performance through the provision of reports on organisational performance, including comparisons of actual with planned or budgeted performance, and their analysis and interpretation.

Through these activities, the management accountant fulfills a central role in the financial management of the organisation. In addition to this work, the management accounting function includes responsibility for the establishment, review and maintenance of appropriate information systems to fulfill the above activities, and for the management of staff involved in providing these services.

In the course of defining management accounting, the revised Official Terminology observes that the discipline is the “process of identification, measurement, accumulation, analysis, preparation interpretation and communication of information used by management to plan, evaluate, and control within an entity and to ensure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities.”

The above is a broad review of the functions of management accounting. The subject-matter is concerned with provision of information, both external and internal by the management accountant functioning within the managerial group.

Internal reporting is to facilitate managerial planning and control of operations as well as proper use and accountability of the entity’s resources. The information supplied is also to enable management to make appropriate and better decisions.

Management Accounting – Requirements

A well-defined organisation structure is one of the fundamental requisites of an efficient management accounting system.

Accordingly, it is necessary to prepare an Organisation Manual which clearly lays down authority and responsibility of everyone in the organisation. Such a manual prevents overlapping of functions. It clearly explains the powers and functions of executives besides specifying the channel of communication.

Besides this prerequisite, it becomes necessary to pay particular attention to the following requirements also:

(i) The various forms used for the purpose of reporting to the various levels of management should be standardised and made available for immediate use;

(ii) The staff of the management accountant’s department should be properly trained in the usage of the forms and also in the matter of conveying information;

(iii) Institution of a budgetary planning and control system;

(iv) Fixation of standards for different elements of cost and introduction of standard costing technique together with variance accounting;

(v) Classification and codification of accounts;

(vi) Introduction of data processing equipment to speed up reporting and ensuring accuracy;

(vii) Introduction of an efficient system of internal control;

(viii) Motivating the personnel of the management accountant’s department to give their best to promote the interests of their undertaking;

(ix) Introduction of operations research technique; and

(x) Computerisation of accounting, financial and costing, as also internal and external reporting.

Management Accounting – Important Tools and Techniques

To enable the management accountant to perform the above functions, he is equipped with one important technique viz., accounting. It is with the help of this technique that he “originates, classifies, shapes and circulates information.” All the other tools in his kit are only a means of detailing, accelerating, selecting, or supplementing the information so provided.

Till recently, accounting was both “the channel and structure of the information.” Other useful tools were developed specially after the Scientific Management era and by about the year 1950.

These tools are now at the disposal of the management accountant as enumerated by Murphy are:

(a) Expansion of Accounts    

Accounting for internal transactions such as materials, Labour and overheads, accounting by products, processes, operations, departments, cost centers and such other segments of the organisation.

(b) Inter-period Comparison  

Comparison of the previous accounting period figures with those of the current period for the purpose of knowing the trend.

(c) Ratios    

Financial and cost ratios for internal and external use.

(d) Unit Costs    

Product costs ascertained for purpose of financial accounting, specially for inventory valuation, used for cost estimation, pricing and cost control.

(e) Standard Costs    

Introduced by engineers by time and motion study and originally used for valuation of work  in-progress inventory as well as closing inventories, standard costs are now used for measuring operating performance. As a cost appraisal tool, standard costs are used for purpose of variance accounting.

(f) Forecasting    

Intelligent and careful anticipation of things likely to happen has replaced intuition and hunch. First applied to long-term financial requirements and later to earnings, this tool constitutes the foundation upon which managerial function of planning depends.

(g) Fixed Budgeting    

It is an extension of forecasting as applied to the field of cost control. As a control plan, it is applicable to a particular level of activity. It facilitates comparison with the actual and reveals deviations.

(h) Flexible Budgeting    

It is also a control plan. It is applied to changing volumes of production or different levels of activity. It enables study of cost behaviour at different levels on the basis of distinction between fixed, variable and semi-fixed costs.

(i) Marginal Costing    

A technique of accounting and reporting by differentiating fixed and variable costs and ascertaining contribution margin and showing inventories at variable cost.

(j) C.V.P Analysis    

Study of cost-volume-profit relationship and representation in the form of break-even charts.

(k) R.O.I.    

Return on investment as a measure of enterprise performance. It is also applied to evaluate capital expenditure proposals.

(I) Statistical Techniques    

Control charts for studying cost behaviour, operations research and linear programming.

(m) Data Processing    

Use of computers, electronic data processing both for recording transactions and reporting accounting information.

Management Accounting – Qualification and Qualities of Management Accountant

In the past, accountants were not trained for management. They were concerned with maintenance of accounting records and ensuring that the annual financial statements meant for outsiders were not misleading. They were not even concerned with interpretation of accounts.

With the evolution of management accounting, however, accounting was geared to the needs of management. Accounting data became indispensable for managerial decisions. Consequently, accounting came to be designed for managerial purposes.

With the development of management thought, especially after the publication of Henry Fayol’s book ‘General and Industrial Management’, accounting became “the eye of an undertaking.”

In fact, Fayol himself has observed in his book that accounts must enable one to tell at any time where one stands and in what direction one is heading. They must give clear, accurate, and detailed information as to the economic position of the business.

In order that the management accountant might use the tools in his kit to originate, classify, shape and circulate accounting information, he was given a particular place in the concern’s organisation structure.

It is this place that has enabled him to come into close contact with management and perform his functions in the best interests of his concern. Today, the same management accountant is a part of management. He performs the same managerial functions as those of any other manager of the management team.

Qualification of Management Accountant:

Although the management accountant caters to the needs of all levels of management, he is the brains, eyes and ears of the Managing Director. As such, he should always remain aware of the ingredients of management. He should willingly participate in the managerial process of setting enterprise goals, short-run and strategic planning, organising, coordinating, controlling and decision making.

In his task of reporting to managerial personnel as well as those outside the organisation, he has to come into contact with complex set of people, of a complex environment. It is, therefore, necessary that he should have an adaptable temperament and not a dictatorial or pressuring attitude. He should never adopt an attitude of dominance or direction, but an attitude of sharing in an over-all process to which he could also contribute his mite.

The management accountant should get himself acquainted with the nature of his concern’s business, the nature of the product produced, the type of materials required, the sources of supply, the type of labour required, methods of recruitment, methods of marketing, etc., It is equally necessary for him to have a clear knowledge of his concern’s organisation, policies, programmes and its technical operation.

More than these, it is necessary that the management accountant should have an expert knowledge of the different branches of accounting. It is the management accountant who has to decide what costing and statistical records should be maintained to ensure production control. Even if there is a plant or production engineer who organises the flow of work, it is necessary for the management accountant to have some knowledge of the production process and the flow of work.

Qualities of Management Accountant:

Besides the above qualifications, the management accountant should possess the following attributes or qualities as enumerated by Murphy:

(i) A personality acceptable to all types of individuals with whom the management accountant comes into contact, specially the management team;

(ii) The ability to welcome and receive the view of the managerial personnel and appreciate the type of information that they require;

(iii) Knowledge of theory and practice of management;

(iv)Functioning of business with which he is concerned;

(v) Capacity to fill the role of a specialist and adviser; and

(vi) Capacity to think and confer with top management about matters of vital interest which is necessary for the profitability and progress of his concern.

Management Accounting – Functions of Management Accountant Operating at Middle Level

In the case of a large undertaking, the work of the management accountant is performed by two or three persons. For instance, the chartered accountant performs the function connected with financial accounting, including preparation of financial statements for external reporting.

Similarly, the cost accountant performs the cost accounting function of maintenance of cost records, internal reporting of cost information and meeting financial accounting requirements of inventory valuation. There may also be another accountant performing the function of fixing standards of performance and computing variances; yet another for getting feed-back information.

In such an organisational arrangement, the coordinating work is performed by a person designated finance manager, finance director of chief financial controller, depending upon the practice prevailing in the concern.

In an organisation of a moderate size, having a separate management accountant as one of the functional executives reporting to the managing director, the functions of the management accountant operating at the middle level are the following –

(a) Financial Accounting  

Recording transactions and events external to business, preparation of payroll, and preparation of financial statements and external reporting.

(b) Cost Accounting  

Application of cost accounting principles and techniques to internal transactions, ascertainment of cost of jobs, operations, processes and departments, development of standards, and variance accounting.

(c) Forecasting and Budgeting    

Budgetary planning, use of budgets as standards, ascertainment of deviations, preparation of projected statements.

(d) Cost Control Procedures  

Measurement of actual performance against budgeted and standard performance, ascertainment of significant variances, corrective measures, inventory control and cost control measures.

(e) Internal Audit  

Appraisal of the effectiveness of accounting and other internal control techniques, internal check, review of organisation, methods and procedures to assess effectiveness to prevent fraud and evaluation of managerial performance.

(f) Statistics  

Techniques of analysis and interpretation, preparation of graphs, charts, diagrams, ratios, percentages, index numbers, etc., for making the information to be conveyed more clear and intelligible to the non-accounting directors.

(g) Reporting  

External and internal reporting, different reports for different levels, interim and final, cash flow and funds flow statements, statements of current assets and current liabilities, break-even charts and cost-volume-profit relationships and interpreting accounting data.

(h) Taxation  

Preparation of income tax returns, deduction of tax at source from salaries, wages, investment, dividends, etc., payment of income tax and amounts withheld.

(i) Office Service  

Electronic computing and data processing in the departments where necessary, cash registers, accounting machines, mechanisation of inventory control, etc.

(j) Financial Management  

Raising finance, cost of capital, optimum use of capital, capital budgeting, control, return on investment, building reserves, ploughing back, dividend policy, etc.

(k) Decision Making  

Problem solving and decision making, both tactical and strategic, developing alternative solutions, evaluating alternatives, cost-benefit analysis, etc.

Difference between Financial Accounting and Management Accounting

Provision of accounting information is the main function of accounting, whether financial, cost or management accounting. Whether small or big, business concerns face the same problems. However, in the case of big concerns, an attempt is made to devise and provide accounting techniques to be used as a tool with which business could be conducted efficiently.

Financial accounting is sufficient to guide the destiny of small concerns. However, management accounting becomes necessary in the case of a large concern. But yet, both are concerned with the impact of business transactions and events of an enterprise. Both report and interpret the results thereof.

Financial accounting classifies and records the transactions of a business entity in terms of money and in accordance with established concepts, principles, accounting standards and legal requirements.

It also aims at presenting a true and a fair view of the affairs of the entity. Management accounting, on the other hand, is the application of appropriate techniques in processing historical and projected data of a business entity.

The underlying object is to assist management in establishing plans in achieving enterprise objectives and also making rational decisions towards this end. The management accountant plays the key role as a provider of financial information to support managerial decisions.

It could thus be seen that both financial accounting and management accounting are closely related.

However, the emphasis of each of these differs significantly in respect of the following aspects:

i. Nature:

Financial accounting shows monetary record of past events. In other words, it reflects factual financial information. This accounting information is historical in nature. It is useful to management in analysing past events and making use of the same for shaping the concern’s future policy.

Management accounting, on the other hand, analyses transactions as they occur and also anticipates the future events. It focuses attention on the future and is concerned with planning, control and decision making functions of management. It is not at all concerned with post mortem of historical facts.

ii. Scope:

Financial accounting portrays the position of the business entity as a whole. As such, the information conveyed by the financial statements can be used to control the entity in a general way. Management accounting, on the other hand, directs its attention to various segments of the entity such as departments, divisions, products, operations, sales territories, etc., and report about the profitability and performance.

iii. Object:

The main object of financial accounting is to supply accounting information to external end-users. Information which is supplied enables them to make decisions regarding the disposal of relatively scarce resources in their hands.

Management accounting, on the other hand, is mainly concerned with making internal reporting of accounting information to enable managerial personnel to perform their functions effectively and efficiently.

iv. Need:

Maintenance of financial accounting records is, more or less, compulsory in almost all large-scale business entities. The law of the land has made it mandatory for these business entities to maintain appropriate financial books of account.

Installation of a management accounting system is purely optional. If management is willing, it may install one such system.

v. Periodicity:

Financial accounting conveys the intended information at specified periods of time, such as the end of the accounting period. The period may comprise six months or one year. The periodicity of reporting is much longer in financial accounting.

In the case of management accounting, however, internal reporting is accomplished weekly, fortnightly or monthly. Thus, the work of reporting is continuous and quick so that management is enabled to act whenever it deems necessary in the interests of the entity.

vi. Principles:

Financial statements prepared for purpose of external reporting have to conform to the Generally Accepted Accounting Principles. Besides, they are subject to conformity with legal provisions also.

Management accounting reports furnished for internal use by managerial personnel are not subject to any such principles. Management has a free hand in making its own rules and determines the procedures and forms for purpose of internal reporting.

It is only in recent years that we refer to the evolution of management accounting concepts such as accountability, interdependency, relevancy and reliability in the preparation of management accounting information.

vii. Contents:

Financial statements prepared from financial accounting records contain only monetary information. Management accounting statements, on the other hand, contain, in addition to monetary information, non-monetary information also. For instance, quantity of materials consumed, number of workers paid for, quantity of output, etc., also form part of management accounting statements.

viii. Accuracy:

Financial accounting statements report factual financial information. They are prepared subject to legal provisions and their reliability should be authenticated by the auditor. As such, the information conveyed should be accurate and precise.

Accuracy and precision are not emphasised in the case of management accounting reports. Since the information is meant for internal use only, there is the need for it is more subjective than objective. Being subjective, the information is based more on judgment than measurement.

Difference between Cost Accounting and Management Accounting

i. Origin:

Both cost accounting and management accounting are the branches of general accounting, the main function of which is the provision of accounting information to interested parties, both external and internal.

In providing cost information, cost accounting makes use of financial accounting information and makes suitable changes in the classification of accounts. Management accounting, on the other hand, originated from cost accounting. It is, even today, dependent on cost accounting and it cannot function without an efficient cost accounting system.

ii. Purpose:

The main purpose of cost accounting, as pointed out by the CIMA Official Terminology, is the establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, profitability or the social use of funds. The main focus of cost accounting is thus cost ascertainment, budgeting, fixing standards, analysis of variances and profitability of the entity.

According to the same Official Terminology, management accounting is concerned with analysis, accumulation, preparation interpretation and communication of information to management to enable them to plan, evaluate and control and, at the same time, ensure appropriate use and accountability for the resources of the entity. It is also concerned with external reporting to non- management groups.

iii. Scope:

The scope of management accounting is much wider than that of cost accounting. Cost accounting provides only cost information for managerial purposes. Management accounting provides information regarding both cost and revenue.

As management information system, management accounting is concerned with providing information not merely for management but non-managerial groups also, outside the organisation. Unlike cost accounting which provides only historical information about past costs, management accounting is forward looking.

iv. Installation:

A concern may install a suitable cost accounting system without any system of management accounting. However, it is impossible to think of any system of management accounting without an efficient system of cost accounting.

v. Status:

In most cases, the cost accountant is only a line manager reporting to the finance manager or chief accountant. A management accountant, however, functions at a higher level in the managerial hierarchy. He is, in fact, a member of top management, reporting to the managing director or chairman of the board.

Management Accounting – Main Advantages

The following advantages of management accounting may be enumerated:

(a) By presenting accounting, costing and statistical data to the managerial personnel, management accounting facilitates forecasting, planning and budgeting.

(b) It facilitates introduction of budgetary control by which actual performance may be compared with the targets set by the budgets.

(c) It also facilitates setting standards and adoption of standard costing to promote efficiency of performance of operations.

(d) Permits regulation of business activities and prevention of deviations.

(e) By presenting the financial implication of alternative courses of action, it enables decision making on sound lines.

(f) Assures maximum return on capital employed.

(g) Facilitates optimum use of relatively scarce resources.

(h) Assures better service to customers.

Management Accounting – Limitations

(i) Not a substitute/or management    

Management accounting took its origin in order to render assistance to management in the efficient performance of their functions. As such, it is only a tool which cannot replace management.

(ii) Does not furnish solution    

Management accounting does not supply ready- made answers to managerial problems in the form of solutions. Consequently, management may, sometimes, depend upon intuition and hunch in decision making.

(iii) New Discipline    

Management accounting is still in its infancy. It is yet to develop as a full-fledged mature discipline. Having had its origin in financial and cost accounting and assisted by other branches of knowledge, it is still a growing discipline. It has to develop its own principles, theory, concepts and standards which sharpen its tools and give them glaze. Till then, the discipline is bound to remain hazy.

(iv) Subjectivity    

Management accounting takes into consideration not merely monetary factors but also qualitative or non-monetary factors. The inclusion of non-monetary factors introduces subjectivity in making decisions.

(v) Not Cost Effective    

Management accounting can exist only in such concerns as are operating a sound and suitable system of cost accounting. While the introduction of a system of cost accounting is in itself expensive, introduction of a management accounting system may not be worthwhile when cost-benefit analysis is made.

(vi) Employee Resistance    

Installation of a management accounting system and working it successfully, demand a change of attitude of personnel involved in the system. They have to adapt themselves to the changed circumstances. Quite likely, the persons involved may resent such a change having been accustomed to the traditional method of recording and reporting accounting information.

(vii) Dependence on Basic Records    

Management accounting is concerned not merely with internal reporting but also reporting to non-managerial groups outside the organisation. For this purpose, the management accountant has to depend upon financial and costing records. It is but natural; therefore, that the weakness of these records is reflected in management accounting records also.

Management Accounting – Criticisms

Apart from the limitations inherent in this new branch of knowledge, its current accounting practices have also been subject to the following criticisms:

(a) Most business concerns still use the same management accounting systems which were developed 40 years ago. Those systems were quite relevant for the then existing environment.

(b) Conventional management accounting is no longer relevant to the needs of competitive and manufacturing environment.

(c) Traditional methods of product costing provide misleading information for decision making.

(d) Management accounting practices have become subservient to financial accounting requirements.

(e) Management accounting concentrates only on activities which are internal to an organisation. It pays little or no attention to the external environment in which the business operates.

The above criticisms stemmed from the fact that by about 1980, the production processes of many business concerns underwent a tremendous change due to the adoption of advanced manufacturing and just-in-time techniques.

Many concerns started investing huge amounts in response to the demand for advanced manufacturing techniques. Quite a number of them implemented just- in-time manufacturing and emphasised in their corporate objectives “quality, delivery, innovation and a flexibility to meet customers’ needs.”

It was also recognised that the traditional costing systems of product costing, performance measurement and cost control had become outmoded. Owing to heavy investment the cost behaviour pattern had changed and many items of cost had become fixed in the short-run.

Overhead costs had become predominant and labour cost represented only a small portion of total manufacturing costs. What was, therefore, necessary was the controlling of overhead costs more effectively than before. In fact, some concerns even felt that their existing costing systems hindered their adaptation to changing environment.

In the backdrop of the developments mentioned above, and the criticisms leveled against the existing management accounting systems, the Chartered Institute of Management Accountants caused an investigation into the current state of development of management accounting.

In its report of the findings, published in 1989, the authors of the report Bronwich and Bhimani, felt that there was no general crisis in the management accounting profession vis-a-vis the changing manufacturing environment to justify radical reforms in management accounting.

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