• MEANING OF MANAGEMENT ACCOUNTING:-
Management Accounting is the accounting which provides in non-technical language accounting, cost profit & other information necessary to the management for discharging its functions. Management accounting covers all those services by which the accounting department can assist the top management & other department in the formulation of policy, control of execution & appreciation of effectiveness. It is designed for use in the operational needs of the firm. It has forward looking aspect.
• DEFINITION OF MANAGEMENT ACCOUNTING:-
• In the words of Batty, “Management Accountancy is the term used to describe the accounting methods, systems & techniques which, coupled with special knowledge & ability, assist management in its task of maximizing profits or minimizing losses.”
• T.G.ROSE defines Management Accounting as, “The adaptation & analysis of accounting information, & its diagnosis & explanation in a way to assist management.
From the above definitions it can be stated that any form of accounting quantitative & other information which enables the management to discharge its functions effectively to take decisions & frame policies can be regarded as “Management Accounting”. It is blending together into a coherent whole, financial accounting, cost accounting & all aspects of financial management.
• FUNCTIONS OF MANAGEMENT ACCOUNTING
1) Forecasting & Planning: These processes involve determining policy & formulating plans to achieve the predetermined goals. Forecasting means anticipation of future events .Planning is done on the basis of forecasting. It involves the selection of objectives, policies, procedures & programmes from among alternatives.
Management Accounting makes available forecasts of sales, production, cash & other relevant factors to enable the persons in management to determine policy & formulate plans. The management selects the best possible course which will maximize the profit. For this purpose use of techniques of statistics (such as probability, standard costing, marginal costing etc. ) is made by the management accountant.
2) Controlling: Plans are prepared in advance. It is therefore, necessary to see that activities at each stage are carried out according to plans. Once a plan is put into operation, control is necessary to measure progress, to uncover deviations from plan & to indicate corrective action to avoid recurrence of deviations.
Management Accounting plays an important role in respect of this process of management. For the purpose of effective statements, funds-flow statements are made. These techniques not only help in evaluating the performance but also measure the effectiveness of the plans & policies of the enterprise.
• Co-ordination: To achieve the desired goals it is necessary to co-ordinate the functions of various departments or sectors. Thus, it is a process of inter-linking of various departments or sectors of the organization to maximize the profits.
Thus perfect co-ordination is required to be secured among the department such as production department, purchase department, sales department, advertising department, accounting & financial department etc. Such co-ordination is facilitated by management accounting through the means of budgeting, financial reporting, financial analysis & interpretation.
• Organizing: It relates to the organization of human & non-human resources of business. It determines authority-responsibility relationship. The total profit earned, expressed as a percentage on capital employed, indicates the effectiveness of the organization. The management accounting helps the management in performing this function also. The management accounting increases the efficiency of the organization by making use of budget & cost-centre’s, standard costing & conduct of internal audit.
• Communication: It means transmitting instructions & information within the organization & to outsiders, such as creditors, investors, customers etc.
The Management accountant communicates the operating results to the management by incorporating them in his reports & communicates to the outsiders the progress of the business through published accounts & returns.
• Motivation: It means a process of stimulating people to action to accomplish desired goals. The various instruments of financial reporting like profit & loss a/c, balance sheet & budgets are of much help to direct & guide the subordinate, & get their co-operation.
From the above, it is clear that management accounting is the integral part of management. In addition to above functions of the management accounting, following are the additional functions.
• Analysis & Interpretation of data: The top personnel in the management are not expected to be experts in accountancy, & as such the accounting information supplied by the financial statements in their traditional form, is not of significant use to them. They therefore want somebody to analyze and interpret the items and figures in non-technical language & in an intelligible manner. This work is done by management accountant. He analyses & interprets the accounting data to the management & advises the management on decision making.
• Special Cost & Economics Studies: The fundamental object of the management accounting is to assist the management in its main task of maximizing profits. In this direction the management accountant conducts various cost & economic studies. He tries to determine the needs of long term & short term capital. Marginal cost analysis assist in policy decisions regarding utilization of spare capacity, sales mix, cost control etc.
The management accountant makes use of economics to understand how prices & interest rate are determined, why finance is difficult or relatively simple to obtain, what are the economic conditions prevailing at present & what changes are likely to take place, what is the market trend etc.
• Use of Qualitative Information: The management accounting does not confine itself to financial data only, but it makes use of such information also, which cannot be measured in terms of money to assist the management in its decision-making function & in formulating policies. .Such information may be collected from statistical compilations, special surveys, engineering records, reports of productivity.
• Miscellaneous Functions: In addition to above functions, the management accounting supplies useful information on various matters to different functional authorities, help in making strategic decisions like temporary suspension of production, make or buy decisions, replacement decision etc.
From the above functions of Management Accounting, it is quite clear as to how it invaluable help to management in discharging its functions & increasing the managerial efficiency. Hence, it is rightly said that the Management Accounting is a very valuable & indispensable tool of management.
• DISTINCTION BETWEEN FINANCIAL ACCOUNTING & MANAGEMENT ACCOUNTING
The Financial Accounting is designed to supply information in the form of statements either for external or internal use. Profit & loss a/c & Balance Sheet are published for the information of external parties like owners, creditors, investors, banks, government etc.
The additional data is furnished to the management required by it in carrying out its basic functions. The Management Accounting is designed principally for the internal use by the management.
2) SUBJECT MATTER
Financial Accounting deals with whole of the business. Financial statements show the overall trading results for a particular period & reveal the overall performance & position of the enterprise. It gives information regarding costs ,sales , expenses, gain etc, in total & is therefore incapable of showing what part of the management is wrong & why.
Management Accounting is concerned with various divisions, departments of the business & reports on the activities of each of them separately. It provides the detailed information.
Financial Accounting deals with the transactions those have taken place during the year. Financial statements are prepared at the close of the year or at times half the year.
Management accounting furnishes the necessary information to the management frequently i.e. as and when required by the management. It looks forward in estimating the future.
Financial Accounting records actual data of past events to show the results of the business. It shows what has happened.
Management Accounting is subjective in nature & is interested in planning for future. It supplies projected data. It shows what should happen.
Financial Accounting records only monetary transactions or data. But there are number of non-monetary economic events, such as competitive climate, technical innovations, and government policies etc. which affect the management decision to a great extent.
Management Accounting is not restricted to money matters only, but in addition to this it considers qualitative data also. It uses data which is descriptive, statistical, and subjective & relates to future.
Financial Accounting records the transactions relating to income, expenses, revenue, personal accounts & property accounts etc. Information is collected & presented under the set rules & regulations.
Management accounting reports costs & revenue by profit centre or responsibility centre. There are no rules & regulations prescribed for management accounting. It is free to supply the information to the management according to the demand & requirement of the management & serve the purpose for which the information is required.
The outsiders, especially those who have financial stake in the business, make use of financial accounting and as such the information collected & presented must be very accurate .Hence, more emphasis is placed on the precision & reliability as to the exactness of the facts & figures in financial accounts.
This is not in the case of management accounting as even the approximate figures serve the purpose of the management. Approximate figures presented in time are more valuable than the accurate figures presented late.
8) PUBLICATION AND AUDIT
Financial statements are required to be got audited from the qualified auditors before they are published for the general use of the public. Publication of these statements is compulsory.
However, the statements & reports prepared by the management accountant are neither required to be published nor got be audited, as they are meant for internal use of the management.
For every business Financial Accounting has become compulsory for the one reason or the other. In case of Joint stock companies, Corporations, Co-operative Societies etc. It is obligatory to maintain the financial accounting.
There is no such compulsion in respect of Management Accounting. The business is free to install or not to install a system of Management Accounting.
10)TRANSACTIONS RECORDED AT COST
In the financial books the transactions are recorded at cost. The effect of price level changes is not considered or recorded. As a result comparison of various years becomes rather difficult.
Management Accountant not only collects the information from varied sources but he also analyses & interprets the information collected before submitting the same to the management. He takes into consideration present money value; market trends etc, and also gives his view while submitting the reports.
• DISTINCTION DETWEEN MANAGEMENT ACCOUNTING AND COST ACCOUNTING
Management Accounting is designed principally for the internal use by the management i.e. planning & co-coordinating the activities of the business.
The main purpose Cost Accounting is to provide information to the management for the proper planning, control & decision making.
Management Accounting is concerned with various divisions, departments of the business & reports on the activities of each of them separately.
Cost Accounting provides information on the relative efficiencies of various plat & machinery.
Management Accounting provides all accounting information to the management for discharge of its functions effectively.
Cost Accounting deals with cost ascertainment, cost allocation, cost apportionment & cost control.
Management Accounting furnishes the necessary information to the management frequently i.e. as and when required by the management.
Cost reports are prepared frequently & submitted to the management may be daily weekly, monthly etc.
5)TOOLS AND TECHNIQUES
In Management Accounting Fund flow analysis, cash flow analysis, ratio analysis etc. are the important tools used for analysis & interpretation of financial statements.
Standard Costing, budgetary control, break even analysis control are the basic tools & techniques used in Cost Accounting.
The scope of Management Accounting is very wide. It includes Financial accounting, Cost accounting, Budgeting, tax planning, reporting to the management & interpretation of financial data.
Cost Accounting deals primarily with cost ascertainment.
Management Accounting is generally concerned with the projection of figures for future .The policies & plans are prepared for providing future guidance’s.
Cost Accounting uses both past & present figures.
Management Accounting uses both quantitative & qualitative information.
In Cost Accounting only those transactions are taken which can be expressed in figures. Only quantitative aspect is recorded in Cost Accounting.
No specific rules & procedures are followed in reporting Management Accounting. The information is prepared & presented as & when required by the management.
Certain principles & procedures are followed for recording cost of different products. The same rules are applicable at different times too.