NATURE AND SCOPE OF MANAGEMENT ACCOUNTING Tae e Ld HAPTER Introduction; Meaning and definition of management accounting; Nature of management accounting; Scope of management accounting; Ojectives or functions; Tools and techniques used in management accounting; Comparison with financial accounting; Comparison with cost accounting; Limitations; Cost control and Cost reduction; Cost management; Key terms; Examination questions. ment today is found in accounting” Peter F. Drucker “The most exciting and innovative work in manage! Introduction ‘Accounting is broadly divided into three branches: Accounting Financial or General Cost Management Accounting Accounting Accounting FINANCIAL ACCOUNTING Financial accounting is concerned with recording business transactions in the books of account for the purpose of determing the profit or loss and financial position of the business. The information supplied by financial accounting is summarised in the following two statements at the end of the accounting period, generally one yeal- (a) Profit and Loss Account showing the net profit or loss during the period. (b) Balance Sheet showing the financial position of the firm at a point of time. The objective of financial accounting is to provide information to extemal parties such as shareholders, creditors, employees, potential investors, government agencies, etc.Tea ee ee Manageme; 12 MANOBMEN Aecouning COST ACCOUNTING (4) the cost of manufacturing a product; e.g., motor cat, furniture, chemical, steel, Pape, ete. ang (b) the cost of providing a service; e.g., electricity, transport, education, ete, Cost accounting information is mainly for internal use ie. for management. It is Not to be provide {0 extemal parties such as shareholders, creditors, potential investors, etc. Neither de they have i is mn may have to be claim on this information, excepting government agencies, to whom cost informatio MANAGEMENT ACCOUNTING Meaning and Definition for management activities such as planning, controlling and decision-making, etc. In the words of Robert Anthony, “Management accounting is concerned with accounting information that is useful to management.” According to the Institute of Chartered Accountants of England, “any form of accounting which enables a business to be conducted more efficiently” may be regarded as Management accounting. Management accounting information can help managers identify problems, solve problems and evaluate performance. The Institute of Cost Accountants of India has defined management accounting as “a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision making.” The Chartered Institute of Management Accountants (CIMA) of UK has given a very authoritative and comprehensive definition as follows: “Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for — (i) formulating strategy; (ii) planning and controlling activities; (iii) decision-making: (iv) optimising the use of resources; (¥) disclosure to shareholders and others extemal to the entity: (vi) disclosure to employees; and (vii) safeguarding assets.” % dengpaing to National Association of Accountants (USA), management accounting it “the pO of identification, measurement, accumulation, analysis, preparation and communication of een information used by management to plan, evaluate and control within the organisation and to appropriate use and accountability for its resources. as These definitions make it clear that management accounting plays a vital role in providing ty necessary information to managers in performing their functions of planning, controlling, organising sisi‘Nature and Scope of Management Accounting 13 decision-making. Management accounting should serve as a decision support system to all levels of management. Relationship of Financial Accounting, Cost Accounting and Management Accounting The three types of accounting, i-e., financial accounting, cost accounting and management accounting are closely linked. The management accounting uses the principles and practices not only of cost accounting but also of financial accounting. Information provided by financial accounting proves extermely useful for management accounting, For example, Profit and Loss account and Balance Sheet become the basis of ratio analysis and comparative financial statements, etc, which are used by the management accounting as important tools of planning and control. Financial accounting records also become basis of preparing detailed cost computation and reports. Cost accounting is a more detailed application of financial accounting and provides detailed cost information about products, services, departments, etc. This information is used by management accounting for planning, controlling and decision making purposes. Fig. 1.1 shows the evolution of management accounting and its relationship to cost accounting and financial accounting. FINANCIAL ‘ACCOUNTING ‘ASSISTING i ‘MANAGEMENT MANAGEMENT a ‘com ‘MAKING AND CONTROL Fig. 1.1. Relationship of Financial, Cost and Management Accounting. Management Accountant is The Controller In USA, the management accountant is called ‘Contr top management team. : Manager accountant i analyses and interprets plays a very important role in an organisation. He a yunting ment secountans POP “pe informational needs of management at lifer te = information and metntant general perfoms a taf funciona ole But organisation, a ler’ or ‘Financial Controller’ and is a part of the——————— is permitted to participate in planning and decission making, he is a part of the management tean thus becomes a part of the line function. It is very important that status of the managen. accountant in the organisation is clearly defined so that the scope of his work and responsibititiag a accordingly determined. 5 CHARACTERISTICS OR NATURE OF MANAGEMENT ACCOUNTING It is clear from the definitions of management accounting that it is concerned with accoung, data that is useful in decision making. The main characteristics of management accounting aye follows : 1. Useful in decision making. The essential aim of management accounting is to assist managemeyy in decision making and control. It is concerned with all such information which can prove Useful to management in decision making. 2, Financial and cost accounting information. Basic accounting information useful for managemeny accounting s derived from financial and cost accounting records. 3. Imternal use. Information provided by management accounting is exclusively for use by management for intemal 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 desireability. 5. Concerned with future. As management accounting is concerned with decision making, itis related with future because decisions are taken for future course of action and not the past. 6. Flexibility in presentation of information. Unlike financial accounting, in management accounting there are no prescribed formats for presentation of information to management. The form of presentation of information is left to the wisdom of the management accountant who decides which is the most useful format of providing the relevent information, depending upon the utility of each type of form and information. SCOPE OF MANAGEMENT ACCOUNTING Management accounting has a very wide scope. It includes not only financial accounting and cost accounting but also all types of internal financial controls, internal audit, tax accounting, office services, cost control and other methods and control procedures. Thus scope of management accounting, inter alia includes the following: 1, Financial accounting. Financial accounting provides basic historical data which helps management to forecast and plan its financial activities for the future period. Thus for an effective and successtl management accounting, there should be a proper and well designed financial accounting syste™- 2. Cost accounting. Many of the techniques of cost control like standard costing and budget) control and techniques of profit planning and decision-making like marginal costing, CVP analysis differential cost analysis are used by the management accounting. ua Budgeting and forecasting In order to plan business activities forthe future, forecastin 2 uudgeting play a very significant role, Forecasting helps in the preparation of budgets and budget" helps management accountant in exercising budgetary control. at % Tax planning. In order to take advantage of various provisions of tax laws, managem®" m2Nature and Scope of Management Accounting 15 accountant has to depend upon tax accounting and planning to minimise its 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 management. Both routine and special reports are prepared for submission to top management, middle order management and operating level management depending on their requirements, 6. Cost control procedures. Any system of management accounting is incomplete without effective cost control procedures like inventory control, labour control, overhead control, budgetary control, etc. 7. Statistical tools. Various tools of analysing and presenting statistical 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 controls like internal audit and internal check to plug loop holes in the financial system of the concer. 9. Financial analysis and interpretation. Management accountant employs various techniques to analyse and interpret financial data to make it understandable and useable to the management. Such analysis helps management to achieve objectives of management in a more efficient manner. 10. Office services. Management accountant is expected to maintain and control office routines and procedures like filing, copying, communicating, electronic data processing and other allied services. FUNCTIONS (AND OBJECTIVES) OF MANAGEMENT ACCOUNTING Main functions of management accounting are as follows: 1. Planning. Information and data provided by management accounting helps management to forecast and prepare short-term and long-term plans for the future activities of the business and formulate corporate strategy. For this purpose management accounting techniques like budgeting, standard costing, marginal costing, probability, correlation and regression, etc., are used. 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. By proper financial reporting, management accounting helps in achieving coordination in various business activities and accomplishing the set goals. 3. Controlling. Controlling is a very important function of management and management accounting helps in controlling performance by control techniques such as standard costing, budgetary control, control ratios, internal audit, ete. 4. Communication. Management accounting system prepares reports for presentation to various levels of management which show the performance of various sections of the business. Such ‘communication in the form of reports to various levels of management helps to exercise effective control on various business activities and successfully running the business, 5. Financial analysis and interpretation. In order to make accounting data easily understandable, the management accounting offers various techniques of analysing, interpreting and presenting this data in non-accounting language so that every one in the organisation understands it. Ratio analysis, cash flow and funds flow statements, trend analysis, etc., ate some of the management accounting techniques which may be used for financial analysis and interpretation.s Management Aecoung, 1.6 i ion, Apart from monetary and quantitative data, management accouryi, Seoreas genta inch which helps in taking better decisions. Guality of goods, custone Gnd employees, legal judgements, opinion polls, logic, etc., are some of the examples of qualita, information supplied and used by the management accounting system for better management 7. Tax policies. Management accounting system is responsible for tax policies and procedures ang supervises and coordinates the reports prepared by various authorities. 8, Decision-making. Correct decision-making is crucial to the success of a business. Managemen, accounting has certain special techniques which help management in short-term and long-term decison. For example, techniques like marginal costing, differential costing, discounted cash flow, etc, help ix decisions such as pricing of products, make or buy, discontinuance of a product line, capita expenditure, etc. Tools and Techniques used in Management Accounting Management accounting uses a number of tools and techniques to help management in achieving business goals. Some of the important tools and techniques are as follows: 1. Budgeting . Standard costing and variance analysis. Marginal costing and cost volume profit analysis. . Ratio analysis. . Comparative financial statements. Differential cost analysis. Funds flow statement. Cash flow statement. Responsibility accounting. 10. Accounting for price level changes. 11, Statistical and graphical techniques. 12, Discounted cash flow. 13, Risk analysis. 14, Learning curve. 15, Value analysis. 16. Work study, etc. eepnananwy COST ACCOUNTING AND MANAGEMENT ACCOUNTING — DIFFERENCE An examination of the meaning and definitions of cost accounting and management accounting indicates that the distinction between the two is quite vague. Many eminent writers even conside! these two areas as synonymous while others distinguish between the two. Homgren, a renowned autho! on the subject, has gone to the extent of saying, “Modern cost accounting is often called managem"" accounting. Why ? Because cost accountants look at their organisation through manager's eyes.” managerial aspects of cost accounting are inseparable from management accounting. One Poist.°" hich all agree is that these two types of accounting do not have clear cut territorial bounds" distinction between cost accounting and management accounting may be made 0° "Nature and Scope of Management Account Cost Accounting Scope of cost accounting is limited to | providing cost information for | managerial uses. | Scope of management accounting is broader than that of cost accounting as it provides all types of information, i.e.. cost accounting as well as financial accounting information for managerial uses. 2. Emphasis Main emphasis is on cost ascertainment and cost control to ensure maximum profit. Main emphasis is on planning, controlling and decision-making to maximise profit. 3. Techniques employed |Various techniques used by cost accounting include standard costing and variance analysis, marginal costing and cost volume profit analysis, budgetary control, uniform costing and inter-firm comparison, etc. Management accounting also uses all these techniques used in cost accounting but in addition it also uses techniques like ratio analysis, funds flow statement, statistical analysis, operations research and certain techniques from various branches of knowledge like mathematics, economics, etc., whichsoever can help management in its tasks. 4, Evolution Evolution of cost accounting is mainly due to the limitations of financial accounting. Evolution of management accounting is due to the limitations of cost accounting. In fact, management accounting is an extension of the managerial aspects of cost accounting. 5. Statutory requirements Maintenance of cost records has been made compulsory in selected industries as notified by the Govt. from time to time, Management accounting is purely voluntary and its use depends upon its utility to management. 6. Data base It is based on data derived from financial accounts. Tt is based on data derived from cost accounting, financial accoun- ting and other sources. 7. Status in organisation In the organisational set up, cost account-ant is placed at a lower level in hierarchy than the management accountant. Management accountant is generally placed at a higher level of hierarchy than the cost accountant. 8. Installation Cost accounting system can be installed without management accounting. Management accounting cannot be installed without a proper system of cost accounting.