Introduction to Management Accounting | Notes for B.Com, BBA and MBA

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In the post I have given a brief introduction of Management Accounting and Financial Accounting. These notes are useful for the students of B.Com, BBA and MBA of various universities. For more notes visit our website regularly.

Table of Contents

1. Meaning and Limitations of Financial Accounting 2. Meaning and Definitions of Management Accounting 3. Characteristics or Nature of Management Accounting 4. Objectives of Management Accounting 5. Scope of Management Accounting 6. Functions of Management Accounting 7. Advantages and Limitations of Management Accounting 8. Difference between Cost Accounting and Management Accounting 9. Difference between Financial Accounting and Management Accounting 10. Tools and Techniques used in Management Accounting 11. Management Accountant and Its Role – Functions & Duties 12. Steps in Installation of Management Accounting System 13. Essentials for Success of Management Accounting System

 Meaning of Financial Accounting

Financial accounting may be defined as the science and art of recording and classifying business transactions and preparing summaries of the same for determining yearend profit or loss and the financial position of the concern. It is that part of accounting which is employed to communicate the financial information of a business unit. The object of financial accounting is to find out the profitability and to provide information about the financial position of the concern.

The financial accounting is mainly concerned with the preparation of final accounts, i.e. Profit and Loss Account and Balance sheet. The business has become so complex that mere final accounts information is not sufficient in meeting informational needs. The management needs information for planning, controlling and coordinating business activities. It is because of the limitations of financial accounting that cost accounting and management accounting have developed.

Some of the limitations of financial accounting are discussed as follows:

1.          Historical Nature. Financial accounting is historical in nature in the sense that it is a record of all those transactions which have taken place in the business during a particular period of time. The impact of future uncertainties has no place in financial accounting. As management needs information for future planning, financial accounting can only give information about what has happened and not about what will happen.

2.           Provides Information about the Concern as a Whole. In financial accounting, information is recorded for the whole concern. The information is not recorded product – wise, process – wise, department – wise or any other line of activity. It is essential to record information activity – wise so as to be helpful for cost determination and cost control purposes.

3.          Not helpful in Price Fixation. Financial accounting is not helpful in fixing prices of products. The cost of a product can be obtained only when all expenses have been incurred. It is not possible to determine the price in advance. The concern may be required to quote a price for the supply of goods in the near future (for submitting tenders, etc.) Financial accounting cannot supply all these information, so it is not helpful in price determination.

4.          Cost Control Not Possible. Cost control is not possible in financial accounting. The cost figures are known only at the end of a financial period. When the cost has already been incurred then nothing can be done to control it. There is no technique in financial accounting which can help to ascertain whether the cost is more or less.

5.          Appraisal of Policies Not Possible. It is not possible to evaluate various policies and programme in financial accounting. There is no technique for comparing actual performance with budgeted targets. Whether the work is going on as per schedule or not, cannot be determined.

6.          Only Actual Costs Recorded. Financial accounting records only actual cost figures. The amount paid for purchasing materials, property or other assets is recorded in account books. The prices of goods and assets go on varying from time to time. The present prices of assets may be absolutely different from the recorded costs. Financial accounts do not record price level changes.

7.          Not Helpful in Taking Strategic Decisions. Management is to take strategic decisions like replacement of labour by machinery, introduction of a new product, discontinuation of an existing line of production, expansion of capacity, etc. Financial accounts cannot provide necessary information for taking important decisions because information is recorded for the whole concern and it is available only when the event has taken place.

8.          Technical Subject. Financial accounting is a technical subject. The recording of transactions and making their use requires knowledge of accounting principles and conventions. A person who is not aware with accounting subject has little utility of financial accounts.

9.          Quantitative Information. Financial accounting records only that information which can be quantitatively measured. Anything which cannot be quantitatively measured will not form a part of financial accounting even though it is important for the business.

10.      Lack of uniformity in Accounting Principles. Accounts differ on the use of accounting principles. There is lack of uniformity in accounting principles and procedures. The methods of valuing inventory and methods of charging depreciation may be different from firm to firm. The use of different accounting methods reduces the usefulness and reliability of accounts.

Management Accounting: Meaning and Definitions:

The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the 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 the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.

Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.

According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.

From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.

Characteristics or Nature of management accounting

The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organisational goals. The following are the main characteristics of management accounting:

1.          Providing Accounting Information. Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs.

2.          Cause and Effect Analysis. Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result, i.e., profit or loss Management accounting goes a step further. The ‘cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors directly influencing the profitability are also studies. So the study of cause and effect relationship is possible in management accounting.

3.          Use of Special Techniques and Concepts. Management accounting uses special techniques and concepts to make accounting date more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will be determined according to the situation and necessity.

4.          Taking Important Decisions. Management accounting helps in taking various important decisions. It supplies necessary information to the management which may base its decisions on it. The historical date is studies to see its possible impact on future decisions. The implications of various alternative decisions are also taken into account while taking important decisions.

5.          Achieving of Objectives. In management accounting, the accounting information is used in such a way that it helps in achieving organisational objectives. Historical date is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. In case there are deviations between the standards set and actual performance of various departments corrective measures can be take at once. All this is possible with the help of budgetary control and standard costing.

6.          No Fixed Norms Followed. In financial accounting certain rules are followed for preparing different accounting books. On the other hand, no specific rules are followed in management accounting. Though the tools of management accounting are the same but their use differs from concern to concern. The analysis of data depends upon the person using it. The deriving of conclusion also depends upon the intelligence of the management accountant. Every concern uses the figures in its own way. The presentation of figures will be in the way which suits the concern most. So every concern has its own rules and by – rules for analyzing the data.

7.          Increase in Efficiency. The purpose of using accounting information is to increase efficiency of the concern. The efficiency can be achieved by setting up goals for each department or section. The performance appraisal will enable the management to pin point efficient and inefficient spots. An effort is make the staff cost – conscious. Everyone will try to control cost on one’s own part.

8.          Supplies Information and not Decision. The management accountant supplies information to the management. The decisions are to be taken by the top management. The information is classified in the manner in which it is required by the management. Management accountant is only to guide and not to supply decisions. The data is to be used by management for taking various decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management.

9.          Concerned with Forecasting. The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.

From the above discussion we can say that Management Accounting is mainly concerned with presentation of accounting information is such a way that is useful to management in decision making.

Management Accounting
Chapter Wise Notes	Chapter Wise MCQs
1. Introduction to Management Accounting 2. Funds Flow Statement 3. Cash Flow Statement 4. Marginal Costing 5. Budget and Budgetary Control Also Read: 6. Standard Costing and Variance analysis 7. Ratio Analysis	Management Accounting MCQs Marginal and Absorption Costing Budget and Budgetary Control Standard Costing Ratio Analysis Cash Flow Statement Funds Flow Statement Financial Statement and Financial Statements Analysis
Management Accounting Important Questions for Upcoming Exams (Dibrugarh University)
Management Accounting Solved Papers: 2013  2014 2015  2016 2017 2018 2019
Management Accounting Question Papers: 2013 2014 2015 2016 2017 2018 2019

Objectives of Management Accounting

The primary objective is to enable the management to maximize profits or minimize losses. The fundamental objective of management accounting is to assist management in their functions. The other main objectives are:

1)      Planning and policy formulation: Planning is one of the primary functions of management. It involves forecasting on the basis of available information. The main objective of management accounting is to supply the necessary data to the management for formulating plans for the future. the management accountant prepares statements of past results and gives estimations for the future which helps the management in planning and policy formulation.

2)      Controlling: Controlling performance various unit in an organisation is one the main function of management. The actual performance of every unit is compared with pre determined objectives to find the deviations and take corrective steps to improve the performance of various units. The management is able to control performance of each and every individual with the help of management accounting devices such as standard costing, budgetary control etc.

3)      Help in the interpretation process: The main object of management accounting is to present financial information to the management in easily understandable manner. He can use diagrams, graphs and charts to present the data in a precise manner.

4)      Helps in decision making: Management has to take many strategic decisions. Management accounting makes decision making process more modern and scientific by providing significant information relating to various alternatives.

5)      Reporting: One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This facilitates management to take proper and timely decisions. It presents the different alternative plans before the management in a comparative manner.

6)      Motivating: Management accounting helps the management in selecting best alternatives of doing the things. Targets are laid down for the employees and authority is delegated amongst the employees. Delegation increases the job satisfaction of employees and encourages them to look forward. So it serves as a motivational devise.

7)      Helps in organizing: Organisation is related to the establishment of relationship amongst different individuals in the concern. It also includes the delegation of authority and fixing of responsibility. Management accounting is connected with the establishment of cost centres, preparation of budgets, preparation of cost control accounts and fixing of responsibility.

8)      Coordinating operations: It provides tools which are helpful in coordinating the activities of different sections. Co-ordination is done through functional budgeting.

From the above discussion we can say that the main objective of management accounting is to provide data to help the management in planning, decision-making, coordinating and controlling operations.

Scope of Management Accounting

The field of management accounting is very wide. The main purpose of management accounting is to provide information to the management to perform its functions of planning directing and controlling. Management accounting includes various areas of specialization to render effective service to the management.

a)      Financial Accounting: Financial Accounting deals with financial aspects by preparation of Profit and Loss Account and Balance Sheet. Management accounting rearranges and uses the financial statements. Therefore it is closely related and connected with financial accounting.

b)      Cost Accounting: Cost accounting is an essential part of management accounting. Cost accounting, through its various techniques, reveals efficiency of various divisions, departments and products. Management accounting makes use of all this data by focusing it towards managerial decisions.

c)       Budgeting and Forecasting: Budgeting is setting targets by estimating expenditure and revenue for a given period. Forecasting is prediction of what will happen as a result of a given set of circumstances. Targets are fixed for various departments and responsibility is pinpointed for achieving the targets. Actual results are compared with preset targets and performance is evaluated.

d)      Inventory Control: This includes, planning, coordinating and control of inventory from the time of acquisition to the stage of disposal. This is done through various techniques of inventory control like stock levels, ABC and VED analysis physical stock verification, etc.

e)      Statistical Analysis: In order to make the information more useful statistical tools are applied. These tools include charts, graphs, diagrams index numbers, etc. For the purpose of forecasting, other tools such as time series regression analysis and sampling techniques are used.

f)       Analysis of Data: Financial statements are analysed and compared with past statements, compared with those of other firms and with standards set. The analysis and interpretation results in drawing reports and presentation to the management.

g)      Internal Audit: Internal audit helps the management in fixing individual responsibility for internal control.

h)      Tax Accounting: Tax liability is ascertained from income statements. Knowledge of tax provisions helps the management in meeting the tax liabilities and complying with other legislations like Sales tax, Companies Act and MRTP Act.

i)        Methods and Procedures: In includes keeping of efficient system for data processing and effective reporting of required data in time.

Functions of Management Accounting

Main objective of management accounting is to help the management in performing its functions efficiently. The major functions of management are planning, organizing, directing and controlling. Management accounting helps the management in performing these functions effectively. Management accounting helps the management is two ways:

I. Providing necessary accounting information to management

II. Helps in various activities and tasks performed by the management.

I. Providing necessary accounting information to management:

(a) Measuring: For helping the management in measuring the work efficiency in different areas it is done on the past and present incidents with context to the future. In standard costing and budgetary any control, standard and actual performance is compared to find out efficiency.

(b) Recording: In management accounting both the quantitative and qualitative types of data are included and this accounting is done on the basis of assumptions and even those items which cannot be expressed financially are included in management accounting.

(c) Analysis: The work of management accounting is to collect and analyze the fact related to the managerial problems and then present them in clear and simple way.

(d) Reporting: For the use of management various reports are prepared. Generally two types of reports are prepared:-

a. Regular Reports

b. Special Reports.

II. Helping in Managerial works and Activities:

The main functions of management are planning, organizing, staffing, directing and controlling. Management accounting provides information to the various levels of managers to fulfill the above mentioned responsibilities properly and effectively. It is helpful in various management functions as under:-

(a) Planning: Through management accounting forecasts regarding the sales, purchases, production etc. can be obtained, which helps in making justifiable plans. The tools of management accounting like standard costing, cost -volume-profit analysis etc. are of great managerial costing, help in planning.

(b) Organizing: In management accounting whole organization is divided into various departments, on the basis of work or production, and then detailed information is prepared to simplify the thing. The budgetary control and establishing cost centre techniques of management accounting helps which result in efficient management.

(c) Staffing: Merit rating and job evaluation are two important functions to be performed for staffing. Generally only those employs are useful for the organization, whose value of work done by them is more than the value paid to them. Thus by doing cost-benefit analysis management accounting is useful in staffing functions.

(d) Directing: For proper directing, the essentials are co-ordination, leadership, communications and motivation. In all these tasks management accounting is of great help. By analyzing the financial and non financial motivational factors, management accounting can be an asset to find out the best motivational factor.

(e) Co-ordination: The targets of different departments are communicated to them and their performance is reported to the management from time to time. This continual reporting helps the management in coordinating various activities to improve the overall performance.

Advantages and Limitations of Management Accounting

The advantages of management accounting are summarized below:

a)      Helps in Decision Making: Management accounting helps in decision making such as pricing, make or buy, acceptance of additional orders, selection of suitable product mix etc. These important decisions are taken with the help of marginal costing technique.

b)      Helps in Planning: Planning includes profit planning, preparation of budgets, programmes of capital investment and financing. Management accounting assists in planning through budgetary control, capital budgeting and cost-volume-profit analysis.

c)       Helps in Organizing: Management accounting uses various tools and techniques like budgeting, responsibility accounting and standard costing. A sound organizational structure is developed to facilitate the use of these techniques.

d)      Facilitates Communication: Management is provided with up-to-date information through periodical reports. These reports assist the management in the evaluation of performance and control.

e)      Helps in Co-coordinating: The functional budgets (purchase budget, sales budget, and overhead budget etc.) are integrated into one known as master budget. This facilitates clear definition of department goals and coordination of their activities.

f)       Evaluation and Control of Performance: Management accounting is a convenient tool for evaluation of performance. With the help of ratios and variance analysis, the efficiency of departments can be measured which assists management in the location of weak spots and in taking corrective actions.

g)      Interpretation of Financial Information: Management accounting presents information in a simple and purposeful manner. This facilitates quick decision making.

h)      Economic Appraisal: Management accounting includes appraisal of social and economic forces and government policies. This appraisal helps the management in assessing their impact on the business.

Limitations of Management Accounting

Management accounting, being comparatively a new discipline, suffers from certain limitations, which limit its effectiveness. These limitations are as follows:

1. Limitations of basic records: Management accounting derives its information from financial accounting, cost accounting and other records. The strength and weakness of the management accounting, therefore, depends upon the strength and weakness of these basic records. In other words, their limitations are also the limitations of management accounting.

2. Persistent efforts. The conclusions draws by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.

3. Management accounting is only a tool: Management accounting cannot replace the management. Management accountant is only an adviser to the management. The decision regarding implementing his advice is to be taken by the management. There is always a temptation to take an easy course of arriving at decision by intuition rather than going by the advice of the management accountant.

4. Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers both monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the conclusions obtained through it.

5. Top-heavy structure: The installation of management accounting system requires heavy costs on account of an elaborate organization and numerous rules and regulations. It can, therefore, be adopted only by big concerns.

6. Opposition to change: Management accounting demands a break away from traditional accounting practices. It calls for a rearrangement of the personnel and their activities, which is generally not like by the people involved.

7. Evolutionary stage: Management accounting is still in its initial stage. It has, therefore, the same impediments as a new discipline will have, e.g., fluidity of concepts, raw techniques and imperfect analytical tools.

8. Intuitive Decisions: Management accounting helps in scientific decision making. Yet, because of simplicity and personal factors the management has a tendency to arrive at decisions by intuition.

Difference between Cost accounting and Management Accounting

Cost accounting and Management accounting are two modern branches of accounting. Both the systems involve presentation of accounting data for the purpose of decision making and control of day-to-day activities. Cost accounting is concerned not only with cost ascertainment, but also cost control and managerial decision making.

Management accounting makes use of the cost accounting concepts, techniques and data. The functions of cost accounting and management accounting are complimentary. In cost accounting the emphasis is on cost determination while management accounting considers both the cost and revenue. Though it appears that there is overlapping of areas between cost and management accounting, the following are the differences between the two systems.

Basis	Cost accounting	Management accounting
a)   Purpose	The main objective of cost accounting is to ascertain and control the cost of products or services.	The function of management accounting is to provide information to management for efficiently performing the functions of planning, directing, and controlling.
b)   Emphasis	Cost accounting is based on both historical and present data.	Management according deals with future projections on the basis of historical and present cost data.
c)    Principles	Established procedures and practices are followed in cost accounting.	No such prescribed practices are followed in Management accounting.
d)   Data	Cost accounting uses only quantitative information.	Management accounting uses both qualitative and quantitative information.
e)   Scope	Cost accounting is concerned mainly with cost ascertainment and control.	Management accounting includes, financial accounting, cost accounting, budgeting, tax planning and reporting to management.
f)    Status	The Status of cost accountants comes after management accountant.	Management accountant is senior in position to cost accountant.
g)   Tools and techniques	It has standard costing, variable costing, break even analysis etc. as the basic tools and techniques.	Along with these, management accountant has funds and cash flow statements, ratio analysis etc. as his tools and techniques.
h)   Installation	It can be installed without management accounting.	It needs financial and cost accounting as its base for its installation.

 Difference between Financial Accounting and Management Accounting

The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period.

Management accounting makes use of the cost accounting concepts, techniques and data. The functions of cost accounting and management accounting are complimentary. In cost accounting the emphasis is on cost determination while management accounting considers both the cost and revenue. Though it appears that there is overlapping of areas between cost and management accounting, the following are the differences between the two systems.

Basis	Financial accounting	Management accounting
a)      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.	The main objective of management accounting is to provide information for the internal use of management.
b)      Performance	Financial accounting is concerned with the overall performance of the business.	Management accounting is concerned with the departments or divisions. It report about the performance and profitability of each of them.
c)       Data	Financial accounting is mainly concerned with the recording of past events.	Management accounting is concerned with future plans and policies.
d)      Nature	Financial accounting is based on measurement.	Management accounting is based on judgment.
e)      Accuracy	Accuracy is an important factor in financial accounting.	Approximations are widely used in management accounting.
f)       Legal Compulsion	Financial accounting is compulsory for all joint stock companies.	Management accounting is optional.
g)      Monetary transactions	Financial accounting records only those transactions which can be expressed in terms of money.	Management accounting records not only monetary transactions but also non- monetary events.
h)      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.
i)        Stock Valuation	In cost accounts stocks are valued at cost.		In financial accounts, stocks are valued at cost or realisable value, whichever is lesser.
j)        Analysis of Profit and Cost	Cost accounts reveal Profit of Loss of different products, departments separately.		In financial accounts, the Profit or Loss of the entire enterprise is disclosed into.

Tools and Techniques Used in Management Accounting

Management accountant supplies information to the management so that latter may be able to discharge all its functions, i.e., planning organization, staffing, direction and control sincerely and faithfully. For doing this, the management accountant uses the following tools and techniques.

a)      Financial planning: Financial planning is the act of deciding in advance about the financial activities necessary for the concern to achieve its primary objectives. It includes determining both long term and short term financial objectives of the enterprise, formulating financial policies and developing the financial procedure to achieve the objectives. The role of financial policies cannot be emphasized to achieve the maximum return on the capital employed. Financial policies may relate to the determination of the amount of capital required, sources of funds, govern the determination and distribution of income, act as a guide in the use of debt and equity capital and determination of the optimum level of investment in various assets.

b)      Analysis of financial statements: The analysis is an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability of a sound dividend policy. The techniques of such analysis are comparative financial statements, trend analysis, funds flow statement and ratio analysis. This analysis results in the presentation of information which will help the business executive, investors and creditors.

c)       Historical cost accounting: The historical cost accounting provides past data to the management relating to the cost of each job, process and department so that comparison may be make with the standard costs. Such comparison may be helpful to the management for cost control and for future planning.

d)      Standard costing: Standard costing is the establishment of standard costs under most efficient operating conditions, comparison of actual with the standard, calculation and analysis of variance, in order to know the reasons and to pinpoint the responsibility and to take remedial action so that adverse things may not happen again. This aspect is necessary to have cost control.

e)      Budgetary control: The management accountant uses the total of budgetary control for planning and control of the various activities of the business. Budgetary control is an important technique of directing business operations in a desired direction, i.e. achieve a satisfactory return on investment.

f)       Marginal costing: The management accountant uses the technique of marginal costing, differential costing and break even analysis for cost control, decision-making and profit maximization.

g)      Funds flow statement: The management accountant uses the technique of funds flow statement in order to analyze the changes in the financial position of a business enterprise between two dates. It tells wherefrom the funds are coming in the business and how these are being used in the business. It helps a lot in financial analysis and control, future guidance and comparative studies.

h)      Cash flow statement: A funds flow statement based on increase or decrease in working capital is very useful in long-range financial planning. It is quite possible that these may be sufficient working capital as revealed by the funds flow statement and still the company may be unable to meet its current liabilities as and when they fall due. It may be due to an accumulation of investments and an increase in trade debtors. In such a situation, a cash flow statement is more useful because it gives detailed information of cash inflow and outflow. Cash flow statement is an important tool of cash control because it summarizes sources of cash inflow and uses of cash outflows of a firm during a particular period of time, say a month or a year. It is very useful tool for liquidity analysis of the enterprise.

i)        Decision making: Whenever there are different alternatives of doing a particular work, it becomes necessary to select the best out of all alternatives. This requires decision on the part of the management. The management accounting helps the management through the techniques of marginal costing, capital budgeting, differential costing to select the best alternative which will maximize the profits of the business.

j)        Revaluation accounting: The management accountant through this technique assures the maintenance and preservation of the capital of the enterprise. It brings into account the impact of changes in the prices on the preparation of the financial statements.

k)      Statistical and graphical techniques: The management accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such form so that it may help the management in decision-making. The techniques used are Master Chart, Chart of sales and Earnings, Investment chart, Linear Programming, Statistical Quality control, etc.

l)        Communication (or Reporting): The success for failure of the management is dependent on the fact, whether requisite information is provided to the management in right form at the right time so as to enable them to carry out the functions of planning controlling and decision-making effectively. The management accountant will prepare the necessary reports for providing information to the different levels of management by proper selection of data to be presented, organization of data and selecting the appropriate method of reporting.

Management Accountant and Its role

Any person responsible for the supply of accounting information to management is known as management accountant. He feeds informational needs of different managerial levels. He is known by different names in different organisations, i.e., Controller, Comptroller, Chief Accountant, Financial Adviser, Financial Controller, etc. It is essential to determine the status of management accountant in the organisation. It is also necessary to determine his scope of work and responsibility.

If management accountant provides the facts as a accurately as are needed and are presented in a manner which allows proper analysis and interpretation then he cannot be held responsible for any wrong judgement by the management. On the other hand, if the information is biased, inaccurate or it is not presented properly then responsibility will lie on the management accountant.

Functions of Management Accountant

The functions of management accountant depend upon his status in the organisation, needs of the enterprise and personal capabilities of the persons. But still some functions are commonly performed by management accountants. The Financial Executives Institute, America has specified the functions of the controller as follows:

1.          Planning for Control. Management accountant establishes co-ordinates and maintains as integrated plan for the control of operations. Such a plan would provide cost standards, expense budgets, sales forecasts, capital investment programme, profit planning and the system to effectuate the plans.

2.          Reporting. Management accountant measures performance against given plans and standards. The results of operations are interpreted to all levels of management. This function will include installation of accounting and costing systems and recording of actual performance so as to find out deviations, if any.

3.          Evaluating. He should evaluate various policies and programme. The effectiveness of planning and procedures to attain the objectives of the organisation will depend upon the caliber of the management accountant.

4.          Administration of Tax. Management accountant is expected to report to government agencies as required under different laws and to supervise all matters relating to taxes.

5.          Appraisal of External Effects. He is to access the effect of various economic and fiscal policies of the Government and also to evaluate the impact of other external factors on the attainment of organisational objects.

6.          Protection of Assets. The protection of business assets is another function assigned to the management accountant. This function is performed through the maintenance of internal controls, auditing and assuring proper insurance coverage of assets.

Duties of Management Accountant

The primary duty of management accountant is to help management in taking correct policy decisions and improving efficiency of entrepreneurial operations. This duty may require him not only to help management with the necessary information from the business sources but he may have to collect information from outside sources too. The information is made useful by arranging and re-adjusting in such a way that the management is able to understand its significance and utility for managerial purposes. Generally, following duties are performed by the management accountant:

1.          Collection of Information. The information used in management accounting is collected from a number of sources both inside and outside the business. The management accountant will first decide about the type of information required and then the relevant source for it.

2.          Evaluation of Information. The next duty of the management accountant after the collection of information is to evaluate it. The management accountant will distinguish between relevant and irrelevant information. He will also assess the utility of the information. He will leave irrelevant and unnecessary information and management will be supplied only necessary information in a systematic manner.

3.          Interpretation of Information. The interpretation of information is another task assigned to management accountant. If the information is supplied without interpretation then its utility will be much less. Management accountant gives facts and figures about various policies and evaluates them in monetary terms. He is also expected to give his opinion about various alternative courses of action so than it becomes easy for the management to take decisions.

4.          Reporting of Information. Another duty of management accountant is to supply information to the management. He meets informational needs of the management. The information is supplied whenever needed. This information helps management to understand the implications of various decisions and the decisions will be more realistic when they are based on facts and figures.

Steps in Installation of Management Accounting System

Following are the essential steps required for installation of an efficient and effective management accounting system:

a)      Organisation Manual: An appropriate organisation manual should be prepaid and adopted. The manual defines and confine explicitly the scope of authority of each executive in the organisation. This prevents overlapping of function, powers and responsibilities. It also depicts the line of communication.

b)      Preparing Forms and Returns: The second step in installing management accounting system will be the designing and preparing of various forms and returns required for collection and presentation of information for management needs.

c)       Requisite Staffing: The requisite staff should be recruited for making this system effective. The objectives are clear to everyone associated with this system.

d)      Classifying accounts and integrating the system: The accounts are classified to facilitate collection and analysis of data. The financial and cost accounting system should be integrated.

e)      Introducing standard costing techniques: The technique of standard costing are introduced for setting up standards and recording the performance so that reasons for variations are ascertained and corrective measures are taken in time.

f)       Setting up budgetary control system: Budgetary control system should be introduced to plan the activities of various departments.

g)      Setting up operational research techniques: The business is operating under changing economic, political, and social environment. Everyday a new challenge is faced. The operational research techniques will be essential to cope with the need.

Essentials for success of Management Accounting System

Management accounting system must possess the following features:

a)      Simplicity: It must be simple, flexible and adaptable to the changing conditions. And it must be easily understandable to the various levels of management. The information provided must be in the proper order, in right time and to the right persons so as to be utilized fully.

b)      Economy: The management accounting system must suit the finance available. The expenditure must be less than the benefits derived from the system adopted.

c)       Comparability: The management must be able to make comparison of the facts and figures with the past figures, figures of other concerns, or other departments of the same concern.

d)      Minimum Changes to the Existing one: When introducing a management accounting system, it may cause minimum change to the existing set up of the business.

e)      Less Clerical Work: Management accounting system must involve less clerical work.

f)       A Sound Plan: There must be proper and sound plans to collect information and data and present the data in an efficient manner.

g)      Overall Efficiency of management Accountant: The work of the management accountant under a good system of management accounting must be clearly defined as his duties and responsibilities to the firm are very essential.