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Management and Cost Accounting Unit - I

Management Accounting

Management & Cost Accounting, Unit 1

Unit 1 - Contents
I. BASICS OF MANAGEMENT ACCOUNTING Introduction to Management Accounting - Meaning, Characteristics, Objectives, Advantages and Limitations Distinction between Financial Accounting and Management Accounting II. MANAGEMENT ACCOUNTING SYSTEM - INSTALLATION Role of Management Accountancy department - Structure and Functions Management Accountant - Role of Management Accountant, Functions, Duties

Management & Cost Accounting, Unit 1

Basics of Management Accounting


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 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 & Cost Accounting, Unit 1

Basics of Management Accounting


Meaning of Management Accounting: The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in creation of policy and in the day to- day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information. In a nutshell, management accounting is accounting (i.e. producing useful information) for management (

Management & Cost Accounting, Unit 1

Basics of Management Accounting


Definition: Anglo-American Council on Productivity defines Management Accounting as, the presentation of accounting information in such a way as to assist management to the creation of policy and the day to day operation of an undertaking The American Accounting Association defines Management Accounting as the methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances. The Institute of Chartered Accountants of India defines Management Accounting as follows: Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting

Management & Cost Accounting, Unit 1

Basics of Management Accounting


Objectives of Management Accounting: 1. Planning and policy formulation 2. Interpretation process 3. Assists in Decision-making process 4. Controlling 5. Reporting 6. Facilitates Organizing 7. Facilitates Coordination of Operations

Management & Cost Accounting, Unit 1

Basics of Management Accounting


Characteristics of Management Accounting: 1. Provides accounting information 2. Cause and effect analysis 3. Use of special techniques and concepts 4. Taking important decisions 5. Achieving of objectives 6. No fixed norms 7. Increase in efficiency 8. Supplies information and not decision 9. Concerned with forecasting

Management & Cost Accounting, Unit 1

Basics of Management Accounting


Scope of Management Accounting: Budgeting, planning and forecasting Calculating the profitability of products, services and operations Measuring organisational, divisional and departmental performance Comparing results and performance within and between organizations Assisting in the process of increasing effectiveness and efficiency Assessing the performance of past and future capital investments Advising on decisions about product mix, markets to be served and selling prices Advising on decisions on whether to outsource products, components, activities and services Advising on decisions involving the investment of scarce funds between a range of possible alternatives Assisting in the making of a wide range of strategic decisions

Management & Cost Accounting, Unit 1

Basics of Management Accounting


Advantages: Planning Formulation of Policies, Fixation of goals, and implementing important programmes. Controlling Evaluation of performance through comparison of actuals with planned and initiating remedial measures. Co-ordinating- Efficient utilization of resources is closely linked with co-ordination of business activities. Organizing Management accounting plays a key role in division of organization into cost centres and Profit centres. Motivating Communicating The expectations of management are to be communicated to the subordinates and the performance of the subordinates is to be reported to the superiors.

Management & Cost Accounting, Unit 1

Basics of Management Accounting


Limitations: Limitations of Accounting Records (Weakness of Source of records) It is only a Tool not a substitute accounting system Heavy Cost of Installation Personal Bias Psychological Resistance Evolutionary stage Provides only Data not decisions Broad-based Scope - The scope is wide and this creates many difficulties in the implementations process. Management requires information from both accounting as well as non-accounting sources. Difficult to collect.

Management & Cost Accounting, Unit 1

Distinction between Financial & Management Accounting


1. Objectives: The main objective of financial accounting is to supply information in the form of profit and loss account and balance sheet to outside parties like shareholders, creditors, government etc. But the objective of management accounting is to provide information for the internal use of management. 2. Performance Analysis: Financial accounting is concerned with the overall performance of the business. On the other hand management accounting is concerned with the department or divisions. It reports about the performance and profitability of each of them. 3. Data Used: Financial accounting is mainly concerned with the recording of past events whereas management accounting is concerned with future plans and policies.

Management & Cost Accounting, Unit 1

Distinction between Financial & Management Accounting


4. Nature: Financial Accounting is based on measurement while management accounting is based on judgment. Because of this, financial accounting is more objective and management accounting is more subjective. 5. Accuracy: Accuracy is an important factor in financial accounting. But approximations are widely used in management accounting. This is because most of the information is related to the future and intended for internal use. 6. Legal Compulsion: Financial Accounting is compulsory for all joint stock companies but management accounting is only optional.

Management & Cost Accounting, Unit 1

Distinction between Financial & Management Accounting


7. Monetary Transactions: Financial Accounting records only those transactions, which can be expressed in terms of money. On the other hand, management accounting records not only monetary transactions but also non monetary events, namely technical changes, government policies etc., 8. Control: Financial accounting will not reveal whether plans are properly implemented. Management accounting will reveal the deviations of actual performance from plans. It will also indicate the causes for such deviations.

Management & Cost Accounting, Unit 1

Management and Cost Accounting Unit - I


II. MANAGEMENT ACCOUNTING SYSTEM - INSTALLATION

Management & Cost Accounting, Unit 1

Structure of Management Accounting Department

Managing Director Director Production

Director Finance

Director Marketing

Director Personnel

Management Controller

Budget Controller

Internal Auditor

Head Organization & Methods

Credit Controller

Management & Cost Accounting, Unit 1

Installation of Management Accounting System


Steps in Installation of Management Accounting System: Organizational Manual Duties, responsibilities and Organisational hierarchy Preparing Forms and Returns Requisite Staffing Recruiting and Training Classifying Accounts and Integrating the System Facilitate to collect and analysis the data Introducing Standard Costing Techniques Setting up Budgetary Control System Setting up operational Research Techniques

Management & Cost Accounting, Unit 1

Management Accounting Process


Financial Accounting Cost Accounting Other Sources

Management Accounting

Data Identification, Measurement, Analysis and Interpretation

Data

Process

Feed Back

Planning and Decision Making Implementation Control

Communication of Information to Management and Others

Management & Cost Accounting, Unit 1

Management Accountant
A person responsible for the supply of accounting information to management is known as management accountant. He is known by different names in different organization, i.e., Controller, Comptroller, Chief Accountant, Financial Adviser, Financial Controller, etc., Management Accountant is an officer who is entrusted with Management Accounting function of an organization. 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.

Management & Cost Accounting, Unit 1

Management Accountant
Functions of the Management Accountant: Planning and Control Reporting Evaluating Administration of Tax Appraisal of External Effects Protection of Assets

Management & Cost Accounting, Unit 1

Management Accountant
Duties of the Management Accountant: Collection of Information Evaluation of Information Interpretation of Information Reporting and Communicating Informations

Management & Cost Accounting, Unit 1