SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

Prof. Nagashree L, Department of Commerce and Management, SVFC Page 1

 SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

OBJECTIVE

The objective of this subject is to enable the students to understand the analysis and interpretation
of financial statements to prepare management reports for decision-making

MEANING OF MANAGEMENT ACCOUNTING

The term Management Accounting is the modern concept of accounts as a tool of

management.

Management Accounting is the presentation of accounting information to management in

order to formulate policies and assist in its day-to-day activities.

DEFINITION

The Institute of Cost and Management Accountants, London has defined it as, “ the
application of professional knowledge and skill in the preparation of accounting information
in such a way as to assist management in the formulation of policies and in the planning and
control of the operation of undertaking”.

OBJECTIVES OF MANAGEMENT ACCOUNTING

1. To present financial information to the management in a way that is easily understandable.

2. To supply necessary data to the management for formulating future plans. The data
includes statements pertaining to past results and estimates for the future.
3. To help in keeping the actual performance as per the plans made by the management.
4. To establish a strong, working relationship amongst different individuals pertaining to
different departments, of the same organisation.
5. To maximise the wealth of the organisation.
6. To motivate the employees, by fixing targets and providing incentives.
7. To keep the tax burden of the organisation minimum.
8. To keep the management fully informed about the latest position of the organisation.

Prof. Nagashree L, Department of Commerce and Management, SVFC Page 2

 SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

CHARACTERISTICS OR NATURE OF MANAGEMENT ACCOUNTING

1. Useful in Decision Making: The essential aim of management accounting is to assist

management in decision-making and control. It is concerned with all such information that
can prove useful to management in decision-making.
2. Financial and cost accounting information: Basic accounting information useful for
management accounting derived from financial and cost accounting records.
3. Internal use: Management Information provided by management accounting is
exclusively for use by the management for internal use. Such information is not to be given
to parties external to the business like shareholders, creditors, banks etc.
4. Purely optional: Management accounting is a purely voluntary technique and there is
no statutory obligation. Its adoption by any firm depends upon its utility and desirability.
5. Concerned with the future: As management accounting is concerned with decision-
making, it is related to the future because decisions are taken for future courses of action
and not the past.
6. Flexibility in the presentation of information: Unlike financial accounting, in
management accounting, there are no prescribed formats for the presentation of
information to management.

SCOPE OF MANAGEMENT ACCOUNTING

1. Financial Accounting: It provides basic historical data which helps management to

forecast and plan its financial activities for the future period.
2. Cost Accounting: Many of the techniques of cost control like standard costing and
budgetary control and techniques of profit planning and decision making.
3. Budgeting and Forecasting: In order to plan business activities for the future,
forecasting and budgeting play a very significant role. Forecasting helps the preparation of
budgets and helps the management accountant in exercising budgetary control.
4. Tax planning: In order to take advantage of various provisions of tax laws, the
management accountant has to depend upon tax accounting and planning to minimize tax
liabilities and save more funds for the business.
5. Reporting to Management: For effective and timely decisions, there should be a
system of prompt and intelligent reporting to the management.
6. Cost Control Procedure: Any system of management accounting is incomplete
without effective cost control procedures like, inventory control, labour control, overhead
control, budget control etc.

Prof. Nagashree L, Department of Commerce and Management, SVFC Page 3

 SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

7. Statistical Tool: Various tools for analyzing and presenting statical data like graphs,
tables, charts etc, are used in preparing reports for use by the management.
8. Internal Control and Internal Audit: Management accountant heavily depends on
internal financial control like internal audits and internal checks.
9. Financial Analysis and Interpretation: A management accountant employs various
techniques to analyse and interpret financial data to make it understandable and useable to
the management.

ROLE OR FUNCTIONS OF MANAGEMENT ACCOUNTANT

1. Planning: Information and data provided by management accounting help the

management to forecast and prepare short-term and long-term plans for the future
activities of the business to formulate corporate strategy.
2. Coordinating: Management accounting techniques of planning also help in coordinating
various business activities. For example, while preparing budgets for various departments
like production, sales, purchases etc, there should be full coordination so that there is no
contradiction.
3. Controlling: It is a very important function of management and helps in controlling
performance by control techniques such as standard costing, budgetary control etc.
4. Communication: The Management Accounting system prepares reports for presentation
to various levels of management which show the performance of various sections of the
business.
5. Financial Analysis and Interpretation: In order to make accounting data easily
understandable management accounting offers various techniques of analysing,
interpreting and presenting this data should be easily understandable.
6. Qualitative Information: Management Accounting provides qualitative information
which helps in making better decisions.
7. Decision Making: Correct decision-making is crucial to the success of a business.
Management accounting has certain special techniques which help management in short
term and long term decision.

Prof. Nagashree L, Department of Commerce and Management, SVFC Page 4

 SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND MANAGEMENT

ACCOUNTING

Basis Financial Accounting Management Accounting

External & Financial Accounting Management Accounting
Internal users information is mainly intended information is mainly meant for
for external users like investors, internal users i.e. Management.
shareholders, creditors, govt etc.
Accounting It is based on the double-entry It is not based on the double-entry
Method system for recording business system.
transactions.
Statutory Financial Accounting is Management accounting is optional
Requirements mandatory under company law though its utility makes it highly
and tax law, financial accounting desirable to adopt it.
is obligatory to satisfy various
statutory provisions.
Past and It is concerned with recording It is future-oriented and concentrates
Future Data transactions that have already on what is likely to happen in future
taken place i.e. represents past or though it may use past data for future
historical data. projection.
Development It is well well-developed and It is a recent development
very old system in practice.
Consideration It considers only monetary It sometimes considers non-
transactions monetary aspects also like, quality,
machine hours, no of working people
etc.

Prof. Nagashree L, Department of Commerce and Management, SVFC Page 5

 SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

DIFFERENCE BETWEEN COST ACCOUNTING AND MANAGEMENT

ACCOUNTING

Basis Cost Accounting Management Accounting

Focus It is focused on cost It is focused on the effective
identification and cost control. decisions for optimum.
Statutory It is necessary to maintain the It is purely optional to management
Compulsions cost records in a systematic way
in certain manufacturing
industries.
Data Used It derives certain data from It derives data from financial books,
financial records. cost books as well as certain other
sources.
Users of the It is used by both internal as well It is used by only internal parties.
Information as external parties.
Scope The scope of cost accounting is The scope of management
limited to providing cost accounting is broader than that of
information for managerial uses. cost accounting, as it provides all
types of information.
Consideration It considers only monetary It sometimes considers non-
transactions monetary aspects also like, quality,
machine hours, no of working people
etc.

ADVANTAGES OF MANAGEMENT ACCOUNTING

1. Decision Making: It is the primary objective and the most important advantage of
management accounting various proven analytical tools are used in the decision-making
process.
2. Increase in Efficiency: Management Accounting increases the working efficiency of the
management and the supporting staff.
3. Identifying Problem Areas: If the performance of any department or product line is
satisfactory, the management accounting can identify at the early stage the causes of
such a situation remedial action can be taken in time.
4. Strategic Management: As Management accounting is an internal process, it is not
bound by law in order to perform better and improve its competitive position in the

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 SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

business world the management can develop adequate strategies such as launching a new
product or service etc.
5. Maximizing Profitability: Management accounting uses certain techniques, such as
budgetary control and standard costing which are used to control the operating cost and
result in maximization of profit.

DISADVANTAGES OF MANAGEMENT ACCOUNTING

1. Based on historical data: Management accounting helps management in making

decisions for the future but it is mainly based on historical data supplied by financial and
cost accounting.
2. Lack of wide knowledge: The management accountant should have knowledge of not
only financial and cost accounting but also many allied subjects like economics, taxation,
statistical and mathematical techniques etc. Lack of knowledge of these subjects the
management accountant limits the quality of management accounting.
3. Complicated Approach: Management accounting provides mass data using various
accounting and non -accounting subjects for the decision-making process.
4. Not a substitute for Management: Management accounting only provides information
only for the management decision and not for the administration.
5. Costly system: The installation of management accounting in an organization is a costly
affair as it requires a wide network of management information systems, rules and
regulations.
6. Developing Stage: Management accounting is a relatively recent development and it is
not fully developed. This limits the utility of this system to management in making
perfect and correct decisions.
7. Lack of Objectivity: The interpretation of information provided by management
accounting may be influenced by personal bias of the interpreter of data.
8. Resistance from staff: The existing accounting and management may not welcome the
introduction of the management accounting system. This may be because they look at the
system with suspicion that it will add to their work and responsibilities.

Prof. Nagashree L, Department of Commerce and Management, SVFC Page 7

 SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE 64

MEANING OF MANAGEMENT REPORTING

It is the collection of data that informs managers on how to efficiently run their
departments. A successful business implements managerial reports not only to track a
department’s but also help its managers toward making accurate, driven decisions.

PRINCIPLES OF GOOD REPORTING SYSTEM

1. Information Flow: Information should flow freely from the proper place to the correct
end user of the report.
2. Accurate Information: Reports should contain only accurate information, it may lead
to taking good decision.
3. Proper Timing: A report should be submitted at the required time at any cost. The
absence of information at required time contributes to making wrong decision.
4. Relevant Information: Only relevant information should be included in the report. It
provide truth to preparing sound managerial reports.
5. Report should be clear and simple: The purpose of preparing report is to help the
management in planning, coordinating and controlling. The report should be presented
in straight forward terms that can be clearly understood.
6. Principle of Consistency: Consistency is adhered in a good reporting system. Format
should not frequently be changed and any changes should be justified.

Prof. Nagashree L, Department of Commerce and Management, SVFC Page 8