Management and cost accounting

7/28/2019 Management and cost accounting

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Management and Cost Accounting

Unit

-

I

Management Accounting

Management & Cost Accounting, Unit 1


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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


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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.


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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 (


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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 themethods 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


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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


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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


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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 ofpossible alternatives

Assisting in the making of a wide range of strategic decisions


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Advantages:

PlanningFormulation 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-ordinationof 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.


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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.


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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.


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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.


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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.


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Management and Cost Accounting

Unit - I

II. MANAGEMENT ACCOUNTING SYSTEM - INSTALLATION



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Structure of Management Accounting Department


Managing

Director

Director

Production

DirectorFinance

ManagementController

BudgetController

InternalAuditor

HeadOrganization &

Methods

CreditController

DirectorMarketing

DirectorPersonnel


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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


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Management Accounting Process


Financial Accounting

Cost Accounting

Other Sources

ManagementAccounting

Data Identification,Measurement, Analysis

and Interpretation

Communication of

Information to

Management and

Others

Planning and Decision

Making

Implementation

Control

Feed Back

DataProcess


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Management Accountant


A person responsible for the supply of accounting information to management isknown 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.


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Functions of the Management Accountant: Planning and Control

Reporting

Evaluating

Administration of Tax

Appraisal of External Effects

Protection of Assets


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Duties of the Management Accountant: Collection of Information

Evaluation of Information

Interpretation of Information

Reporting and Communicating Informations

Documents

Management and cost accounting