MANAGEMENT ACCOUNTING

Dr.P.Anandaraj
Introduction
One of the objectives of any business, whether it is Trading
or Manufacturing, is to earn profit. The businessman will be
interested in knowing how much profit is earned, and also
about the financial position of the business at the end of each
accounting period. Financial Accounting is the language of
business which reports about

a) how much profit is earned during that accounting

period.
b) the financial position of the business as on the date.

These reports are very much essential for each business,

but, they alone may not be enough and meaningful, unless
they are interpreted according to the need. Profit and Loss a/c
shows profit/s by comparing revenues and costs, Balance
Sheet shows the value of assets and liabilities as on the date.
The businessman cannot come to some conclusion based on
the above reports, unless, the profit is compared with the
profit/s of the previous years', or with the investment
Likewise, the figures of the balance sheet should be compared
with the balance sheet of the previous years' or with the
figures of other firms in the industry or with the figures of the
same year. Therefore, comparison and interpretation of
accounting figures becomes essential to the management for
strategic planning and decision making which is the main
purpose of the Management Accounting.

Definition

The Anglo-American Council of Productivity defines

Management Accounting “as the presentation of accounting
information in such a way as to assist the management in
creation of policy and in the day-to-day operation of an
undertaking."

The definition highlights the following points

a. Management accounting is concerned with the
presentation and not with the preparation of accounting
information
b. Management accounting presents the information in arty
convenient form and thus follows no strict orthodox
formats.
c. Management accounting is born only to assist the
management in Policy-framing and decision making.

SCOPE OF MANAGEMENT ACCOUNTING

Management accounting includes all aspects of business

operations. It uses both quantitative and qualitative
information in order to guide the managements. As such the
scope is wide and covers the following:
Financial Accounting
Management accounting uses the facts and figures
supplied by the financial accounting. The data from the
financial records such as profit & loss a/c and balance sheet
are analysed, diagnosed and interpreted. Hence, management
accounting relies on a well-designed system of financial
accounting.
Cost Accounting
Decision making and operational control are the main
managerial functions. Cost accounting system provides the
needed tool like marginal costing, standard costing, budgetary
control etc., for exercising the above managerial functions.
Thus cost accounting comes within the limit of management
accounting.
Statistical Methods
Management accounting presents the data in the form of
graphs, charts, index numbers, pictorial representations etc.
Information presented through these statistical methods will
be effective and permits spot decision.
Operations Research
Operations Research aims at maximizing the profit or
minimising the cost. ie., better utilisation of available
resources using scientific method. It also helps to assess the
overall implications of various alternative course of action, by
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using operations research technique like LPP, Queuing theory
etc., for better managerial decision some of the operations
research technique are also used in management accounting.
Interim Reporting
Management accounting should provide monthly, quarterly
and other periodical statements to guide the management on
the right track. Interim reports include cash flow, fund flow,
scrap reports etc., which helps for better decision making.
Inventory Control
The cost of any product greatly depends on the movements
of inventory and its pricing. Suitable system like ABC
analysis, Bin card system, Perpetual inventory control and
pricing method is framed and followed for better inventory
control which is also used in management accounting.

FUNCTIONS OF MANAGEMENT ACCOUNTING

The basic function of management accounting is to help

the management for effective performance. Management
accounting provides the following functions so that the
management can effectively plan, organise, direct and control
the various activities.
1. Provides Data
The financial accounting gives a lot of factual data
regarding the past performance of the enterprise. These
figures are used by the management accountant as the base
for scientific planning.
2. Modifies Data
Management accounting system picks up the figures from
financial accounting records and goes a step further in
classifying, modifying and compiling the data. For example
the sales figures for different months and different territories
may be classified to improve the territory-wise performance,
assets may be classified as current assets and fixed assets
etc.,
3. Analyses and Interprets the Data
Managerial decisions are based on the figures that are
compiled and modified by the management accountant.
Decisions based on facts and figures are more scientific than

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those based on intuition. For example comparing the total
sales and the credit sales, will throw light on the growth of
debtors and their payment practice. Comparing current assets
and current liabilities shows the short-term liquidity position.
4. Communicates the Results
The management plans and decisions are communicated
throughout the tenet and breadth of the organisation through
several reports, statements etc. Management accounting
system ensures that the information reaches the needy within
a reasonable time.
5. Facilitates Control
Management accounting, through budgetary control,
standard costing, marginal costing closely watches the acts;
performance. The actuals are measured and compared with
standards. Responsibility for the deviations is fixed which
facilitates suitable control measures.
6. Uses Qualitative Information
Management accounting system uses even those
qualitative statements, which could not be monetarily
expressed. Both financial data and qualitative facts are taken
into consideration to aid the managerial decisions. For
example change in the Govt.policy, change in fashion,
seasonal changes, technical innovations are also considered
in management accounting.

TOOLS AND TECHNIQUES OF MANAGEMENT

ACCOUNTING
The various tools used at present in management
accounting may be classified into the following groups.
1. Based on Financial Accounting Information
 Analysis of Financial Statements through Ratio Analysis.
 Analysis of Financial Statements through comparative
statements, trend, graph and diagram.
 Fund flow and cash flow analysis.
 Return on capital employed techniques.
2. Based on Cost Accounting Information
 Marginal costing (including cost volume profit analysis).
 Direct or incremental Costing and differential costing.
 Standard Costing.
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 Analysis of Cost Variances.
3. Based on Mathematics
 Operations Research.
 Linear Programming.
 Network analysis.
 Queing theory and Games Theory.
 Simulation Theory.
4. Based on Future Information
 Budget and Budgeting.
 Budgetary control: Analysis of Budget Variance / Revenue
Variance.
 Business Forecasting.
 Project Appraisal or Evaluation.
5. Miscellaneous Tools
 Managerial Reporting.
 Integrated Auditing.
 Financial Planning.
 Revaluation Accounting.
 Decision making Accounting.
 Management Information System.
IMPORTANT TOOLS AND TECHNIQUES USED IN
MANAGEMENT ACCOUNTING
Some of the important tools and techniques are briefly
explained below.
1. Financial Planning
The main objective of any business organization is
maximization of profits. This objective is achieved by making
proper or sound financial planning. Hence, financial planning
is considered as best tool for achieving business objectives.
2. Financial Statement Analysis
Profit and Loss account and Balance Sheet are important
financial statements. These statements are analyzed for
different period. This type of analysis helps the management
to know the rate of growth of business concern. This analysis
is done through comparative financial statements, common
size statements and ratio analysis.

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3. Cost Accounting
Cost accounting presents cost data in product wise,
process wise, department wise, branch wise and the like.
These cost data are compared with predetermined one. This
comparison of two costs enables the management to decide
the reasons responsible for the difference between these costs.
4. Fund Flow Analysis
This analysis find out the movement of fund from one
period to another. Moreover, this analysis is very useful to
know whether the fund is properly used or not in a year when
compared to the previous year. The working capital
changes and funds from operation are also find out through
this analysis.
5. Cash Flow Analysis
The movement of cash from one period to another can be
find out through this analysis. Besides, the reasons for cash
balance and changes between two periods are also find out. It
studies the cash from operation and the movement of cash in
a period.
6. Standard Costing
Standard costing is predetermined cost. It provides a yard
stick for measuring actual performance. It is used to find the
reasons for the deviations if any.
7. Marginal Costing
Marginal costing technique is used to fix the selling price,
selection of best sales mix, best use of scarce raw materials or
resources, to take make or buy decision, acceptance or
rejection of bulk order and foreign order and the like. This is
based on the fixed cost, variable cost and contribution.
8. Budgetary Control
Under Budgetary control techniques, future financial
needs are estimated and arranged according to an orderly
basis. It is used to control the financial performances of
business concern. Business operations are directed in a
desired direction.
9. Revaluation Accounting
The fixed assets are revalued as per the revaluation
accounting method so that the capital is properly represented
with the assets value. It helps to find out the fair return on
capital employed.
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10. Decision-making Accounting
A business problem can be solved by choosing any one of
the best and most profitable alternative. To select such
alternative, the relevant costs are compared. Thus, accounting
information are used to solve the business problem which are
arising out of increasing complexity of nature of business.
11. Management Information System
The free flow communication within the organization is
essential for effective functioning of business. Hence, the
management can design the system through which every
employee of an organization can assess the information and
used for discharging their duties and taking quality decisions.
12. Statistical Techniques
There are a lot of statistical techniques used in removing
management problems. Methods of least square, regression
and quality control etc. are some examples of statistical
techniques.
13. Management Reporting
The management accountant is preparing the report on the
basis of the contents of profit and loss account and balance
sheet and submit the same before the top management. Thus
prepared reports disclose the strength and weakness
indifferent areas of operating activities and financial activities.
These identification are highly useful to management for
exercising control and decision-making.
14. Historical Cost Accounting
It means that costs are recorded after being incurred. This
is used for comparing with predetermined costs to evaluate
performance.
15. Ratio Analysis
It is used to management in the discharge of its basic
functions of forecasting, planning, coordination,
communication and control. It paves the way for effective
control of business operations by undertaking an appraisal of
both the physical and monetary targets.