Meaning of Management Accounting: Management accounting is not a specific system of accounting. It could be any form of accounting which enables a business to be conducted more effectively and efficiently. It is largely concerned with providing economic information to mangers for achieving organizational goals. It is an extension of the horizon of cost accounting towards newer areas of management. Much management accounting information is financial in nature but has been organized in a manner relating directly to the decision on hand.

Management Accounting is comprised of two words „Management‟ and „Accounting‟. It means the study of managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formation of policy, control of execution and appreciation of effectiveness.

Management accounting is of recent origin. This was first used in 1950 by a team of accountants visiting U. S. A under the auspices of Anglo-American Council on Productivity

“Management accounting is techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting”

— The Institute of Chartered Accountants of India 

• OBJECTIVES OF MANAGEMENT ACCOUNTING:

 The fundamental objective of management accounting is to enable the management to maximize profits or minimize losses. The evolution of management accounting has given a new approach to the function of accounting. The main objectives of management accounting are as follows:

1.      Planning and policy formulation: 

Planning involves forecasting on the basis of available information, setting goals; framing polices determining the alternative courses of action and deciding on the programme of activities. Management accounting can help greatly in this direction. It facilitates the preparation of statements in the light of past results and gives estimation for the future.

2.      Interpretation process:

Management accounting is to present financial information to the management. Financial information is technical in nature. Therefore, it must be presented in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

3.      Assists in Decision-making process:

With the help of various modern techniques management accounting makes decision-making process more scientific. Data relating to cost, price, profit and savings for each of the available alternatives are collected and analysed and provides a base for taking sound decisions.

4.      Controlling:

Management accounting is a useful for managerial control. Management accounting tools like standard costing and budgetary control are helpful in controlling performance. Cost control is affected through the use of standard costing and departmental control is made possible through the use of budgets. Performance of each and every individual is controlled with the help of management accounting.

5.      Reporting:

Management accounting keeps the management fully informed about the latest position of the concern through reporting. It helps management to take proper and quick decisions. The performance of various departments is regularly reported to the top management.

6.      Facilitates Organizing:

“Return on Capital Employed” is one of the tools of management accounting. Since management accounting stresses more on Responsibility Centres with a view to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it is helpful in setting up effective and efficiently organization framework.

7.      Facilitates Coordination of Operations:

Management accounting provides tools for overall control and coordination of business operations. Budgets are important means of coordination.

8.      Motivating employees.

Management accounting helps the management in selecting best alternatives of doing the things; targets are laid down for the employees. They feel motivated in achieving their targets and further incentives may be given for improving their performance.

9.      Helpful in tax administration:

The complexities of tax system are increasing every day. Management accounting helps in assessing various tax liabilities and depositing correct amount of taxes with the concerned authorities. Various tax returns are to be filed under different tax laws. Tax administration is carried on with the advice and guidance of the management accountant.

•   NATURE OF MANAGEMENT ACCOUNTING: 

Management accounting involves furnishing of accounting data to the management for basing its decisions. It helps in improving efficiency and achieving the organizational goals. The following paragraphs discuss about the nature of management accounting.

1.      Provides accounting information: 

Management accounting is based on accounting information. Management accounting is a service function and it provides necessary information to different levels of management. Management accounting involves the presentation of information in a way it suits managerial needs. The accounting data collected by accounting department is used for reviewing various policy decisions.

2.      Cause and effect analysis.

The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; management accounting goes a step further. Management accounting discusses the cause and effect relationship. The reasons for the loss are probed and the factors directly influencing the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payables, share capital, etc.

3.      Use of special techniques and concepts.

Management accounting uses special techniques and concepts according to necessity to make accounting data more useful. The techniques usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.

4.      Taking important decisions.

It supplies necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taken into account.

5.      Achieving of objectives.

Management accounting uses the accounting information in such a way that it helps in formatting plans and setting up objectives. Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can be taken at once with the help of budgetary control and standard costing.

6.      No fixed norms.

No specific rules are followed in management accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most.

7.      Increase in efficiency.

The purpose of using accounting information is to increase efficiency of the concern. The performance appraisal will enable the management to pin-point efficient and inefficient spots. Effort is made to take corrective measures so that efficiency is improved. The constant review will make the staff cost – conscious.

8.      Supplies information and not decision.

Management accountant is only to guide and not to supply decisions. The data is to be used by the management for taking various decisions. „How the data to be utilized‟ is will depend upon the caliber and efficiency of the management.

9.      Concerned with forecasting.

The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.

• SCOPE OF MANAGEMENT ACCOUNTING:

Management accounting is a new approach to accounting. It provides techniques for the interpretation of accounting data. It also helps in developing realistic approach to future course of action. The main aim is to help management in its functions of planning, directing and controlling. Management accounting is related to a number of fields. At the Seventh International Conference of Accountants held in Amsterdam in 1957, the main emphasis was on Cost Accounting, Budgetary Control, Materials Control, Interim Reporting, Determination of the most efficient and economical accounting system, Special cost and economic studies and assisting management in interpreting financial data. The following facts of management accounting are of a great significance and form the scope of this subject.

1.      Financial Accounting.

Financial accounting deals with the historical data. The recorded facts about an organization are useful for planning the future course of action. Though planning is always for the future but still it has to be based on past and present data. The control aspect too is based on financial data. The performance appraisal is based on recorded facts and figures. So management accounting is closely related to financial accounting.

2.      Cost Accounting.

Cost accounting provides various techniques for determining cost of manufacturing products or cost of providing service. It uses financial data for finding out cost of various jobs, products or processes. The systems of standard costing, marginal costing, differential costing and opportunity costing are all helpful to the management for planning various business activities. Cost accounting also helps in finding out economical and none—economical fields of production. The efficiency of different departments is judged by setting up standards and finding out variances. So cost accounting is an essential part of management accounting.

3.      Financial Management.

Financial management is concerned with the planning and controlling of the financial resources of the firm. It deals with rising of funds and their effective utilization. Its main aim is to use business funds in such a way that earnings are maximized. Finance has become so much important for every business undertaking that all managerial activities are connected with it. Financial viability of various propositions influences decisions on them. Although. Financial management has emerged as a separate subject management accounting includes and extends to the operation of financial management also.

4.      Budgeting and Forecasting.

Budgeting means expressing the plans, policies and goals of the enterprise for a definite period in future. The targets are set for different departments and responsibility is fixed for achieving these targets. The comparison of actual performance with budgeted figures will give an idea to the management about the performance of different departments.

Forecasting, on the other hand, is a prediction of what will happen as a result of a given set of circumstances. Forecasting is a judgment whereas budgeting is an organizational object. Both budgeting and forecasting are useful for management accountant in planning various activities.

5.      Inventory Control.

Inventory is used to denote stock of raw materials, goods in the process of manufacture and finished products. Inventory has a special significance in accounting for determining correct income for a given period. Inventory control is significant as it involves large sums. The management should determine different levels of stocks, i.e., minimum level, maximum level, re—ordering level for inventory control. The control of inventory will help in controlling costs of products. Management will need effective inventory control for controlling stocks. Management accountant will guide management as to when and from where to purchase and how much to purchase. So the study of inventory control will be helpful for taking managerial decisions.

6.      Reporting to Management.

One of the functions of management accountant is to keep the management informed of various activities of the concern so as to assist it in controlling the enterprise. The reports are presented in the form of graphs, diagrams, index numbers or other statistical techniques so as to make them easily understandable. The management accountant sends interim reports to the management and these reports may be monthly, quarterly, half—yearly. The reports may cover profit and loss statement, cash and fund flow statements, stock reports, absentee reports aid reports on orders in hand, etc. These reports are helpful in giving a constant review of the working of the business.

7.      Interpretation of Data.

The management accountant interprets various financial statements to the management. These statements give an idea about the financial and earning position of the concern. These statements may be studied in comparison to statements of earlier periods or in comparison with the statements of similar other concerns. The significance of these reports is explained to the management in a simple language. If the statements are not properly interpreted then wrong conclusions may be drawn. So interpretation is as important as compiling of financial statements.

8. Control procedures and Methods

Control procedures and methods are needed to use various factors of production in a most economical way. The studies about cost, relationship of cost and profits are useful for using economic resources efficiently and economically

9.      Internal Audit

Internal audit system is necessary to judge the performance of every department- The actual performance of every department and individual is compared with the pre—determined standards. Management is able to know deviations in performance. Internal audit helps management in fixing responsibility of different individuals.

10.  Tax Accounting.

In the present complex tax systems, tax planning is an important part of management accounting. Income statements are prepared and tax liabilities are calculated. The management is informed about the tax burden from central government, state government and local authorities. Various tax returns are to be filed with different departments and tax payments are to be made in time. Tax accountant comes under the purview of management accountants duties.

11.  Office Services.

Management accountant may be required to control an office. He be expected to deal with data processing, filing, copying, duplicating, communicating, etc. He also be reporting about the utility of different office machines

 

• MANAGEMENT ACCOUNTANT 

Management Accountant is an officer who is entrusted with Management Accounting function of an organization. He plays a significant role in the decision making process of an organization. The organizational position of Management Accountant varies from concern to concern depending upon the pattern of management system. He may be an executive in some concern, while a member of Board of Directors in case of some other concern. However, he occupies a key position in the organization.

In large concerns, he is responsible for the installation, development and efficient functioning of the management accounting system. He designs the frame work of the financial and cost control reports that provide with the most useful data at the most appropriate time. The Management Accountant sometimes described as Chief Intelligence Officer because apart from top management, no one in the organization perhaps knows more about various functions of the organization than him. Tandon has explained the position of Management Accountant as follows:

“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”.

 

• Role of Management Accountant 

Management Accountant, otherwise called Controller, is considered to be a part of the management team since he has the responsibility for collecting vital information, both from within and outside the company. The functions of the controller have been laid down by the Controller’s Institute of America. These functions are:

 

1. To establish, coordinate and administer, as an integral part of management, an adequate plan for the control of operations. Such a plan would provide, to the extent required in the business cost standards, expense budgets, sales forecasts, profit planning, and programme for capital investment and financing, together with necessary procedures to effectuate the plan.

2. To compare performance with operating plan and standards and to report and interpret the results of operation to all levels of management, and to the owners of the business. This function includes the formulation and administration of accounting policy and the compilations of statistical records and special reposts as required.
3. To consult withal segments of management responsible for policy or action conserving any phase of the operations of business as it relates to the attainment of objective, and the effectiveness of policies, organization strictures, procedures.
4. To administer tax policies
5. To supervise and coordinate preparation of reports to Government
6. The assured fiscal protection for the assets of the business through adequate internal; control and proper insurance
7. To continuously appraise economic and social forces and government influences, and interpret their effect upon business.

• Duties and Responsibilities of Management Accountant 

The primary duty of Management Accountant is to help management in taking correct policy- decisions and improving the efficiency of operations. He performs a staff function and also has line authority over the accountants. If management accountant feels that a decision likely to be taken by the management based on the information tendered by him shall be detrimental to the interest of the concern, he should point out this fact to the concerned management, of course, with tact, patience, firmness and politeness. On the other hand, if the decision taken happens to be wrong one on account t of inaccuracy, biased and fabricated data furnished by the management accountant, he shall be held responsible for wrong decision taken by the management.

Controllers Institute of America has defined the following duties of Management Accountant or controller:

1. The installation and interpretation of all accounting records of the corporative.

2. The preparation and interpretation of the financial statements and reports of the Continuous audit of all accounts and records of the corporation
3. The compilation of costs of distribution.
4. The compilation of production costs.
5. The preparation and filing of tax returns and to the supervision of all matters
6. The preparation and interpretation of all statistical records and reports
7. The preparation as budget director, in conjunction with other officers and department heads, of an annual budget covering all activities of the corporation of submission to the Board of Directors prior to the beginning of the fiscal year.
8. The ascertainment currently that the properties of the corporation are properly and adequately
9. The initiation, preparation and issuance of standard practices relating to all accounting, matters and procedures and the co-ordination of system throughout the corporation including clerical and office methods, records, reports and procedures.
10. The maintenance of adequate records of authorized appropriations and the determination that all sums expended pursuant there into are properly accounted for.
11. The ascertainment currently that financial transactions covered by minutes of the Board of Directors and/ or the Executive committee are properly executed
12. The maintenance of adequate records of all contracts
13. The approval for payment(and / or countersigning ) of all cheques, promissory notes and other negotiable instruments of the corporation which have been signed by the treasurer or such other officers as shall have been authorized by the by=laws of the corporation or form time to time designated by the Board of Directors.
14. The examination of all warrants for the withdrawal of securities from the vaults of the corporation and the determination that such withdrawals are made in conformity with the by-laws and /or regulations established from time by the Board of  Directors.
15. The preparation or approval of the regulations or standard practices, required to assure compliance with orders of regulations issued by duly constituted governmental agencies.

• Differences between Cost accounting and management accounting

BASIS             OF COMPARISON	COST ACCOUNTING	MANAGEMENT ACCOUNTING
Meaning	The recording, classifying and summarizing of cost data of an organization is known as cost accounting.	The accounting in which the both financial and non-financial information    are    provided    to managers       is       known       as Management Accounting.

Information Type	Quantitative.	Quantitative and Qualitative.
Objective	Ascertainment of cost of production.	Providing information to managers to set goals and forecast strategies.
Scope	Concerned                      with ascertainment, allocation, distribution and accounting aspects of cost.	Impart and effect aspect of costs.
Specific Procedure	Yes	No
Recording	Records past and present data	It    gives    more    stress    on    the analysis of future projections.
Planning	Short range planning	Short    range    and    long    range planning
Interdependency	Can   be    installed          without management accounting.	Cannot be installed without cost accounting.

 

• Differences between Financial accounting, management accounting

BASIS OF COMPARISON	FINANCIAL ACCOUNTING	MANAGEMENT ACCOUNTING
PRIMARY USERS	External( Investors,     government authorities, creditors)	Internal(Managers    of    business, employees)
PURPOSE OF INFORMATION	Help investors, creditors, and others make investment, credit, and other decisions	Help managers plan and control business operations
TIMELINES	Delayed or historical	Current and future oriented
RESTRICTIONS	GAAP FASB AND SEC	GAAP does not apply, but information should be restricted to strategic and operational needs
NATURE OF INFORMATION	Objective,     auditable,     reliable, consistent and precise	More subjective and judgmental, valid, relevant and accurate
SCOPE	Highly    aggregated    information about the overall organization	Disaggregated     information     to support local decisions
BEHAVIOURAL IMPLICATIONS	Concern     about     adequacy                   of disclosure	Concern about how reports will affect employees behaviour
FEATURES	Must be accurate and timely Compulsory   under    company law Is an end in itself	Usually approximate but relevant and flexible Except for few companies, it is not mandatory Is a mean to the end
SEGMENTS OF ORGANISATION	It is primarily concerned with reporting for the company as a whole	Segment reporting is the primary emphasis.