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Table of Contents for


Management Accounting

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PREV Previous Chapter
Preface

NEX T NextChapter
Chapter 2. Analysis and Interpretation of Financial Statements

1
Introduction to Management Accounting

LEARNING OBJECTIVES

On completion of the study of the chapter, you should be able to understand:

 What is Management Accounting?


 Nature, scope, objectives, functions, utilities and limitations of Management Accounting.
 Tools and techniques of Management Accounting.
 Requisites for installation of Management Accounting System.
 Distinction between Management Accounting and Financial Accounting.
 Distinction between Management Accounting and Cost Accounting.

1.1 DEFINITION OF MANAGEMENT ACCOUNTING

Management Accounting is that branch of accounting which deals with presenting and providing accounting information
to the management in such a systematic way so that it can perform its managerial functions of planning, controlling and
decision-making in an effective and efficient manner. It acts as a ‘decision-making support system’ to the management.

Many distinguished accountants and accounting institutions have defined the term Management Accounting in different
languages. Some of them are enumerated as follows:

According to Robert N. Anthony, ‘Management Accounting is concerned with accounting information which is useful
to the management’.

‘Management Accounting is a term used to describe the accounting methods, system and techniques which, coupled
with special knowledge and ability, assists management in its task of maximizing profits or minimizing losses’, according
to J. Batty.

As per Institute of Cost and Works Accountants of India (ICWAI), ‘Management Accounting is a system of collection
and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-
making’.

According to American Accounting Association (AAA), ‘Management Accounting is the application of appropriate
techniques and concepts in processing historical and projected economic data of an entry to assist management in
establishing plans for reasonable economic objectives in the making of rational decisions with a view towards these
objectives’.

As per Certified Institute of Management Accountants (CIMA), United Kingdom, ‘Management Accounting is an
integral part of management concerned with identifying, presenting and interpreting information used for formulating
strategy, planning and controlling activities, decision-making, optimizing the use of resources, disclosure to shareholders
and other external to the entity, disclosure to employees, and safeguarding assets’.

Analysing the above definitions, it can be concluded that Management Accounting is concerned with collection of data
from both internal as well as external sources and communication of relevant information to the management, after
processing, analysing and interpreting those, to perform its managerial functions of planning, controlling and decision-
making in an effective and efficient manner.

1.2 NATURE OR FEATURES OF MANAGEMENT ACCOUNTING

Management Accounting is basically the most effective tool to the management for the purpose of its planning, controlling
and decision-making. Various distinguished nature or features of Management Accounting are discussed as follows:

1. Management Accounting deals with the collection of accounting and other data, and it analyses, interprets and communicates all
relevant information to the management which are effectively required for planning, controlling and decision-making for the organization.
Hence, in a nutshell, one of the most important nature of Management Accounting is to analyse and interpret accounting and other data to
make them understandable and usable to the management.
2. It interprets the analysed data as obtained from the operational and non-operational activities of the enterprise and makes necessary
comments and conclusions on them.
3. It provides necessary information to the management to judge the effectiveness of its managerial functions.
4. It provides necessary information to the management to perform its managerial functions of decision-making, planning and
controlling.
5. It provides necessary information to the management to review whether the performance of the enterprise has been achieved
towards its goals and objectives.
6. It acts as a yardstick for measuring the level of performance of the operational and non-operational activities of the enterprise.
7. It serves as a yardstick for measuring the effectiveness of managerial performance of the different activities of the enterprise.
8. It is a forward-looking tool to the management. It analyses and interprets historical data for projecting the future trends of the
different activities of the enterprise.
9. It prepares necessary plans to implement various financial decisions of the management. It also develops a system of feedback
reporting and monitoring performance against the plan of the management.

1.3 SCOPE OF MANAGEMENT ACCOUNTING

Management Accounting has a very widespread scope. It covers a very wide area of accounting system, which is discussed
as follows:

1. Financial Accounting: Financial Accounting provides the basic historical data to the Management Accounting which analyses
and interprets those data and provides necessary information to the management for its planning, controlling and decision-making. As
Management Accounting does not maintain the basic financial records, the success of an effective and efficient Management Accounting
System depends on the existence of an effective Financial Accounting System. Therefore, Management Accounting System can be introduced
into an organization where there exists a well-designed Financial Accounting System. Management Accounting applies the principles and
practices of Financial Accounting.
2. Cost Accounting: On the one hand, Cost Accounting provides cost-related basic data to the Management Accounting, which
analyses and interprets those costing data and provides necessary information to the management for the purpose of its controlling
and decision-making. On the other hand, most of the Cost Accounting techniques like Standard Costing, Budgetary Control,
Marginal Costing, Cost–Volume–Profit (CVP) Analysis, Differential Cost Analysis and Inventory Controlling, are used by
Management Accounting in its process of planning, controlling and decision-making. Management Accounting uses the principles
and practices of Cost Accounting.
3. Forecasting and budgeting: Management Accounting exercises the tool of forecasting and budgeting in the process of planning,
controlling and decision-making. Forecasting makes an estimate of the probable event with a set of given or assumed information.
Budgeting prepares a number of plans for any future project by setting definite goals. Forecasting helps to prepare the budget and
budgeting helps to exercise the budgetary control technique on future projects. Both these tools are frequently used in
Management Accounting.
4. Statistical tools: Various statistical tools like graphs, charts, diagrams, time series, sampling, index numbers and Regression
Analysis are used in Management Accounting in the process of planning, controlling and decision-making.
5. Operational research techniques: Various operational research techniques like Linear Programming, Transportation Theory,
Games Theory and Simulation Method are used in Management Accounting to resolve various problems prevailing under the
existing situation in the process of decision-making.
6. Financial analysis and interpretation: Various financial analysis techniques such as Ratio Analysis, Fund Flow Analysis, Cash
Flow Analysis, Comparative Financial Statement, Common-Size Statement and Trend Analysis are widely used in Management
Accounting to analyse and interpret financial data to make them easily understandable and useable to the management. Successful
application of Management Accounting depends a lot on these financial analysis and interpretation works.
7. Tax accounting and tax planning: Determination of taxable income and tax liability of the enterprise fall within the purview of
the Management Accounting. In the process of decision-making, the analysis of implication of tax provisions on future projects
also falls within the purview of Management Accounting. On the other hand, the management accountant must have a vast
knowledge of tax laws and their accounting procedures, and also tax planning, to minimize the tax burden of the enterprise.
8. Management Information System (MIS): Management Information System (MIS) is a modern computerized information
system, by which accurate processing and analysis of a large volume of data can be done within a very short time. This
information system is used in Management Accounting to provide necessary and relevant information to the management in the
process of its planning, controlling and decision-making.
9. Internal control and internal audit: Management Accounting highly depends on internal control system existing in the
organization, like internal check and internal audit, to appraise the targeted performance and to identify the weaker area of the
organization.
10. Office system: Management Accounting System should also be well conversant with the modern office management system like
filing, indexing, copying, electronic data processing, information network system, and email and fax system.
11. Legal provisions: Management Accounting System should also be well informed about relevant and necessary legal provisions
like Companies Act, Foreign Exchange Act, Securities Act, and Direct and Indirect Tax Laws. In the process of decision-making,
management accountants should restrict their plan and action within the periphery of such legal provisions.
12. Other areas: Apart from the aforementioned areas, Management Accounting also includes various newly developed areas of
accounting like Human Resource Accounting, Social Accounting, Environmental Accounting and Inflation Accounting, within the
purview of its scope.

1.4 OBJECTIVES OF MANAGEMENT ACCOUNTING

The prime objective of Management Accounting is to provide necessary information to the management for an effective
and efficient execution of managerial functions. Various objectives of Management Accounting are enumerated as
follows:

1. Analysis and interpretation of financial statements: Management Accounting collects, analyses and interprets the necessary
data from the results shown by the Financial and Cost Accounting System, and also provides necessary and relevant information to the
management in a systematic and useful manner which are to be applied by the management in the process of its planning, controlling and
decision-making. Various tools like Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, Comparative Financial Statement, Common-
Size Statement and Trend Analysis are widely used in Management Accounting for analysing and interpreting those data so as to make them
easily understandable and useable to the management.
2. Planning and policy-making: Management Accounting provides necessary and relevant information to the management in the
process of its planning and policy-making to achieve organizational goals. Various statistical forecasting techniques like Time-
Series Analysis and Regression Analysis are used in Management Accounting to guide proper planning and policy-making.
3. Decision-making: Management Accounting provides necessary and relevant information to the management in the process of its
decision-making. The success of the management highly depends upon a perfect decision-making. Such decision-making broadly
depends on the effectiveness of information network. Management Accounting provides the above information to the management
by applying Marginal Costing Technique, Differential Costing Technique and Absorption Costing Technique, for an effective and
accurate decision-making.
4. Controlling: Management Accounting applies various useful techniques such as Standard Costing, Budgetary Control,
Responsibility Accounting and Management Audit, to ensure an effective managerial control over the use of resources of the
enterprise. Management control is a control system which assures that the resources of the enterprise are effectively and efficiently
used for achieving its goals and objectives. Management Accounting plays a significant role to the management in ensuring the
existence of a proper managerial control system.
5. Communicating: Proper communication of the performance of various sections of an enterprise to different levels of management
is essentially required for planning, controlling and decision-making. Management Accounting does such communication by
preparing reports of performance of various sections of the enterprise with the help of management information system.
6. Coordinating: Management Accounting helps in coordinating various business activities of an enterprise. Its techniques of
planning make a very good coordination between various activities of a concern. A master budget of the concern for a given period
is prepared through coordination between various business activities of the concern. Proper reporting of different business
activities are also made through coordination between various sections of the enterprise.
7. Tax planning: Determination of tax liability of the enterprise after availing various tax rebates and reliefs falls within the purview
of Management Accounting System. Management Accounting helps the management in the process of tax planning by availing
various tax rebates and reliefs and, thus, reduces the burden of tax of the enterprise, on the whole.
8. Advisory Service: Management Accounting renders valuable advice to the management for resolving any financial or other
problems of the enterprise. To overcome any existing financial and other problems, various Management Accounting techniques
are applied according to the nature of the problem. Management Accounting also plays a very important role as an advisor to the
management.

1.5 ROLE OR FUNCTIONS OF MANAGEMENT ACCOUNTING

The function of Management Accounting is to assist the management to perform its functions of planning, organizing,
directing, controlling and decision-making. The major functions of Management Accounting are as follows:

1. Collection of data: Management Accounting does not maintain records of financial and cost data but it collects the basic financial
data mainly from the records as maintained by financial and Cost Accounting for the purpose of preparing plans and actions of the
management.
2. Supply of modified data: It modifies the collected raw data by classifying and compiling them for making them suitable for the
purpose of their analysis and interpretation. It extracts the necessary and effective information from those basic data for the
purpose of their analysis and interpretation.
3. Analysis and interpretation of data: It analyses and interprets those modified data and extracts the necessary and effective
information for making them understandable and useable to the management in the process of its planning, controlling and
decision-making. After analysing and interpreting all those data, it presents the results with necessary comments to the
management.
4. Planning and forecasting: It formulates some definite plans for implementing policies of the management. It helps the
management for formulating different short- and long-term policies by providing necessary and relevant information in relation
thereto. In the process of formulating policies and for their proper execution, it makes the forecasting of some probable future
happenings.
5. Communication: It provides a means of communicating plans and actions of the management over all areas of activities of the
organization. It provides necessary and relevant information to all levels of management.
6. Ensuring control: It ensures a control over the performance of different sections of an enterprise. It uses various techniques like
Budgetary Control, Standard Costing and Responsibility Accounting, and to identify the weaker areas of performance of activity
and suggests appropriate remedial measures to overcome the prevailing problems.
7. Helping in decision-making: It helps the management in the process of its effective decision-making by providing necessary and
relevant information in the relation thereto.
8. Performance evaluation: It evaluates the performance of activities of different divisions as well as the business as a whole of an
enterprise by using its various tools and techniques.
9. Preparation of reports: It prepares reports of performances of different activities of the enterprise and provides to the
management on regular intervals. These managerial reports are prepared as per the requirement of the management.

1.6 UTILITY OF MANAGEMENT ACCOUNTING

Management Accounting provides very valuable services to the management in the course of its functioning. Different
utilities of Management Accounting are discussed as follows:

1. Planning: It formulates policies and programmes by setting definite goals and prepares a systematic plan for achieving these
goals. It makes such plans for achieving organizational goals and targets.
2. Controlling: It plays a most significant role in the process of controlling. Management Accounting, in the process of controlling,
involves framing of budgets, comparison of actual results with budgeted estimates, ascertainment of any deviation of actual results
from budgeted estimates by computation of variances and adoption of necessary remedial measures against such deviation.
3. Coordinating: It plays the most vital role in the process of coordinating of different divisions of an enterprise. Its techniques of
planning make a very good coordination between the various activities of a concern. Proper reporting of different business
activities are also made by Management Accounting through coordination between the various sections of the enterprise.
4. Performance Evaluation: It plays a very important role in the process of evaluation of performance of the different activities of
an enterprise. It evaluates the performances of different divisions and employees of the organization by comparing the target
estimates with the actual performances of the divisions and employees.
5. Organizing: It plays an important role in the process of organizing of the different activities of an enterprise. It divides the whole
organization into suitable cost or profit centres. A sound system of internal control and internal audit is assigned to each cost or
profit centre for ensuring a planned organizing system.
6. Motivating: It helps the management in the process of motivating the employees by setting various targets to achieve the
organizational goals.
7. Communicating: It communicates the performances of the various divisions and employees of the enterprise with the help of the
management information system to the different levels of its management by preparing reports of performance of those sections
and employees of the enterprise. Such communication is essentially required for planning, controlling and decision-making of the
enterprise.
8. Decision-making: It plays the most important role in the process of decision-making of a concern. The success of the management
highly depends upon the perfect decision-making and such decision-making broadly depends on the effectiveness of information
network. It provides necessary and relevant information to the management for effective and accurate decision-making.

1.7 LIMITATIONS OF MANAGEMENT ACCOUNTING


Despite the fact that Management Accounting acts as a very useful tool to the management in the process of performing its
managerial functions, it suffers from the following limitations:

1. Reliance on accounting data: Management Accounting collects the basic data mainly from the records as maintained by financial
and Cost Accounting. Hence, it starts to work on the basis of the data as supplied by the other branches of accounting. If those basic data are
incorrect, then the entire effort of the management accountant becomes useless.
2. Based on historical data: It guides the management in the process of decision-making for the future activities on the basis of the
historical data as supplied by Financial Accounting and Cost Accounting. Therefore, Management Accounting uses historical data
for making future decisions, which may not always result in a correct decision.
3. Wide scope: It covers a very vast area and also includes a number of related fields such as Financial Accounting, Cost
Accounting, Statistics, Operational Research, Law and Economics, to become more effective to the management. It is really very
difficult to develop such a Management Accounting System where all the related people are not well-equipped with full
knowledge of all these related areas.
4. Highly expensive: The installation of a sound Management Accounting System in a concern is highly expensive as it essentially
requires a wide network of management information system. Moreover, the operating expense of the Management Accounting
department is also very high. As a result, small concerns generally cannot afford to install this system.
5. Complicated application: It is such a system where a number of different tools and techniques are applied. It also uses a number
of accounting and non-accounting subjects for analysis and interpretation of data. Accordingly, its proper application is really
complicated when compared to other branches of accounting. A management accountant may try to avoid such a complicated
approach of decision-making.
6. Lack of objectivity: It uses both quantitative as well as qualitative data for analysis and interpretation, and also prepares reports
on the basis of such interpretation. The interpretation of information as provided by Management Accounting in the form of
reports may be influenced by a personal bias of the interpreter, which may reduce the utility of Management Accounting.
7. Not a substitute of management: It merely provides necessary and relevant information to the management to perform their
managerial functions of planning, controlling and decision-making in an effective and efficient manner, but certainly is not a
substitute for the management itself. It acts only as a decision-making tool to assist the management, but cannot take the ultimate
decision on its own.
8. Developing stage: It is still in its developing stage as it is relatively a recent area in the field of accounting. It follows some
concepts and conventions which are not yet generally accepted. Many experiments have been still in progress on this area of
accounting.

1.8 TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING

Management Accounting uses various tools and techniques for providing necessary and effective information to the
management for performing its managerial functions. Various tools and techniques that are commonly used in
Management Accounting are discussed as follows:

1. Financial Statement Analysis: It is a methodical and systematic analysis and interpretation of the data as disclosed in the balance
sheet and income statement with a view to extract necessary and relevant information for proving them to the management for determining
liquidity, solvency, profitability, activity and the managerial performance of the enterprise. Various tools of Financial Statement Analysis
such as Ratio Analysis, Comparative Financial Statement, Common-Size Statement and Trend Analysis are frequently used in Management
Accounting for analysis and interpretation of financial statements.
2. Fund Flow Analysis: It is a detailed analysis of inflows and outflows of fund (i.e., the working capital) of an enterprise during a
particular accounting period. Such analysis is done by preparing a Fund Flow Statement at the end of an accounting period. The
Fund Flow Statement exhibits inflows and outflows of fund from various activities of the enterprise during an accounting period.
As working capital is considered as the life-blood of every business concern, efficient management of working capital is highly
effective for the smooth running of all operating activities of the concern. For an effective and efficient management of the
working capital of a concern, Fund Flow Analysis is frequently used as a tool of the Management Accounting.
3. Cash Flow Analysis: It is a detailed analysis of inflows and outflows of cash and cash equivalents (i.e., cash in hand, cash at bank
and short-term investments) of an enterprise during a particular accounting period. Such analysis is done by preparing a Cash Flow
Statement at the end of an accounting period. The Cash Flow Statement so prepared exhibits the inflows and outflows of cash from
various activities of the enterprise during an accounting period. As the movement of cash is very much significant to every
business concern, an efficient management of cash is highly effective for the liquidity planning of the concern. For an effective
and efficient management of cash of a concern, Cash Flow Analysis is frequently used as a tool of Management Accounting.
4. Costing techniques: Various costing techniques such as Marginal Costing, Standard Costing and Differential Costing are
frequently used as tools of Management Accounting in its process of cost control and decision-making.
5. Budgetary control: Budgetary control involves framing of budgets, comparison of actual results with budgeted estimates,
ascertainment of any deviation of actual results from budgeted estimates by computation of variances and adoption of necessary
remedial measures against such deviation. It is an essential tool widely used in the Management Accounting in the process of its
controlling, planning and performance evaluation of an enterprise.
6. Statistical and operational research techniques: Various statistical and operational research techniques such as charts, graphs,
index number, sampling, time series, Regression Analysis, Linear Programming, Games Theory, and Programme Evaluation and
Review Technique (PERT) are frequently used as tools of Management Accounting in its process of performance evaluation and
decision-making.
7. Responsibility Accounting: It involves preparation of budget for various responsibility centres and assignment of specific
responsibilities to the concerned individual managers for carrying out the budget directions. In the process of cost control,
responsibility accounting is widely used as a tool of Management Accounting.
8. Management Reporting: It involves preparation and submission of reports of performance of various activities of a concern to
the management on regular intervals for its effective planning, controlling, performance evaluation and decision-making.
Management Reporting is widely used as an essential tool in Management Accounting.

1.9 REQUISITES FOR INSTALLATION OF MANAGEMENT ACCOUNTING SYSTEM

Following are the requisites for installation of an effective and efficient Management Accounting System in an
organization:

1. Introduction of appropriate organization manual defining therein power, functions, responsibilities and scope of the employees of
the organization.
2. Recruitment of adequate number of employees and arrangement of time-to-time proper training for those employees.
3. Classification and codification of accounts.
4. Introduction of sound systems of internal control and internal audit in the organization.
5. Setting up of suitable systems of budgetary control and standard costing technique.
6. Setting up of a suitable system for integrating cost and financial data.
7. Setting up of suitable cost centres and profit centres.
8. Setting up of a suitable system of responsibility accounting.
9. Developing of a sound management information system.
10. Developing of an operational research system in the organization.
11. Preparation of an effective proforma for feedback receiving and managerial report.

1.10 HOW DOES MANAGEMENT ACCOUNTING DIFFER FROM THE OTHER BRANCHES OF ACCOUNTING

Management Accounting differs significantly from the other branches of accounting such as Financial Accounting and
Cost Accounting. Factors that distinguish Management Accounting from Financial Accounting and Cost Accounting are
separately discussed as follows:

1.10.1 Management Accounting and Financial Accounting

Financial Accounting records all monetary transactions in the books of accounts and ascertains the results of the financial
activities of the concern for an accounting period by preparation of financial statements at the end of every accounting
period. On the other hand, Management Accounting collects the basic data mainly from the Financial Accounting System
and provides necessary information to the management after analysing and interpreting those data. Points of difference
between the Management Accounting and Financial Accounting are enumerated as follows:

Management Accounting Financial Accounting

1. Management Accounting is primarily based on 1. Financial Accounting is based on the


the data as obtained from Financial Accounting. monetary transactions of the enterprise.

2. Its main function is to assist the management in 2. Its main functions are recording and
the process of its planning, controlling, classifying monetary transactions in the books
performance evaluation and decision-making by of accounts and preparation of financial
proving necessary information to the statements at the end of every accounting
management. period.

3. Reports as prepared in Management 3. Reports as prepared in Financial Accounting


Accounting may contain both objective as well as should always be supported by relevant
subjective figures. figures. It lays emphasis on the objectivity of
the data.

4. Reports as prepared in Management 4. Reports as prepared in Financial Accounting


Accounting are exclusively meant for the are meant for the management as well as for
management of the concern. shareholders and creditors of the concern.

5. Reports are prepared as per the requirement of 5. Reports are prepared at the end of every
the management. accounting period.

6. Reports as prepared in Management 6. Reports as prepared in Financial Accounting


Accounting are not subject to statutory audit. are always subject to statutory audit.

7. It evaluates the sectional as well as the entire 7. It ascertains the results and exhibits the
performance of the business. financial strength of the business as a whole.

8. Its success depends on the existence of a sound 8. Its success does not depend, in any way, on
Financial Accounting System. the existence of a sound Management
Accounting System.

1.10.2 Management Accounting and Cost Accounting

Management Accounting collects the basic data from the Financial Accounting and Cost Accounting systems and provides
necessary information to the management after analysing and interpreting those data. On the other hand, Cost Accounting
records all cost data in the cost book as obtained from the Financial Accounting, ascertains costs and reveals all cost-
related information of the concern at the end of every accounting period. Points of difference between Management
Accounting and Cost Accounting are stated as follows:

Management Accounting Cost Accounting

1. The main objective of Management Accounting 1. The main objective of Cost Accounting is to
is to assist the management in the process of its ascertain, allocate and do accounting for costs
planning, controlling, performance evaluation and and to assist the management in the process of
decision-making by providing necessary its cost control and cost-related decision-
information on time. making.

2. It uses both quantitative as well as qualitative 2. It uses only quantitative cost data
data, measurable and even not measurable in measurable in monetary terms.
monetary terms.

3. Primary emphasis given in Management 3. Primary emphasis given in Cost Accounting


Accounting is on effective and efficient is on cost determination and cost control of the
performance of the business. business.

4. Its success depends on the existence of a sound 4. Its success does not depend, in any way, on
Cost Accounting System. the existence of a Management Accounting
System.

5. It is based on the data as obtained from 5. It is based on the cost-related data as


Financial Accounting and Cost Accounting. obtained from Financial Accounting.

6. Management Accounting provides historical as 6. Cost Accounting provides historical cost


well as predictive information for future decision- information for future cost-related decision-
making. making.

7. Reports as prepared in Management 7. Reports as prepared in Cost Accounting are


Accounting are exclusively meant for the mainly meant for the management, but also
management of the concern. useful to the shareholders and creditors of the
concern.

8. It uses the principles and practices of financial 8. It uses the principles and practices of Cost
as well as Cost Accounting. Accounting alone.

9. Reports as prepared in Management 9. Reports as prepared in Cost Accounting are


Accounting are not subject to statutory audit. subject to statutory audit (i.e., cost audit) in
many countries.

10. It deals with cost- as well as finance-related 10. It deals only with cost-related data of an
data of an enterprise. enterprise.

CHAPTER REVIEW SUMMARY


 Management Accounting is concerned with the collection of data from both internal as well as external sources and communicates
relevant information to the management, after processing, analysing and interpreting those, to perform their managerial functions
of planning, controlling and decision-making in an effective and efficient manner.
 Nature or features of Management Accounting are as follows: (a) It deals with the collection of accounting and other data,
analysing them, interpretting them and communicating all relevant information to the management; (b) It provides necessary
information to the management to perform their managerial functions of decision-making, planning and control; (c) It acts as a
yardstick for measuring the effectiveness of managerial performance of the different activities of the enterprise; and (d) It prepares
necessary plans to implement the various financial decisions of the management.
 Management Accounting has a very wide spread scope. It covers the following areas: (a) Financial Accounting; (b) Cost
Accounting; (c) forecasting and budgeting; (d) statistical tools; (e) operational research techniques; (f) financial analysis and
interpretation; (g) tax accounting and tax planning; (h) management information system; (i) internal control and internal audit; (j)
office system; (k) legal provisions; and (l) other areas like social accounting, human resource accounting, inflation accounting, and
environmental accounting.
 Objectives of Management Accounting are: (a) analysis and interpretation of financial statements; (b) planning and policy-making;
(c) decision-making and controlling; (e) communicating; (f) coordinating; (g) tax planning; and (h) advisory service.
 Role or functions of Management Accounting are: (a) collection of data; (b) supply of modified data; (c) analysis and
interpretation of data; (d) planning and forecasting; (e) communication; (f) ensuring control; (g) helping in decision-making; (h)
performance evaluation; and (i) preparation of managerial reports.
 Utilities of Management Accounting are: (a) planning; (b) controlling; (c) coordinating; (d) performance evaluation; (e)
organizing; (f) motivating; (g) communicating; and (h) decision-making.
 Limitations of Management Accounting are: (a) reliance on accounting data; (b) based on historical data; (c) vast area coverage;
(d) highly expensive; (e) complicated application; (f) lack of objectivity; (g) not a substitute of management; and (h) developing
stage.
 Tools and techniques of Management Accounting are: (a) Financial Statement Analysis; (b) Fund Flow Analysis; (c) Cash Flow
Analysis; (d) costing techniques; (e) budgetary control; (f) statistical and operational research techniques; (g) Responsibility
Accounting; and (h) Management Reporting.
 Requisites for installation of Management Accounting System are: (a) introduction of appropriate organization manual; (b)
recruitment of adequate number of employees; (c) introduction of systems of internal control and internal audit; (d) setting up of
suitable systems of budgetary control and standard costing; (e) development of a management information system; (f) setting up of
a suitable system for integrating cost and financial data; and (g) setting up suitable cost centres and profit centres.
 Distinctions between Management Accounting and Financial Accounting are: (a) Management Accounting is primarily based on
the data from Financial Accounting whereas Financial Accounting is based on the monetary transactions of the enterprise; (b) the
main function of Management Accounting is to assist the management in its planning, controlling, performance evaluation and
decision-making whereas the main function of Financial Accounting is recording of monetary transactions and preparation of
financial statements; (c) Management Accounting evaluates both sectional as well as the whole performance of the business
whereas Financial Accounting ascertains the results and exhibits the financial strength of the business as a whole; and (d) success
of Management Accounting depends on the existence of a sound Financial Accounting System whereas the success of Financial
Accounting does not depend, in any way, on the existence of Management Accounting System.
 Distinctions between Management Accounting and Cost Accounting are as follows: (a) the main objective of Management
Accounting is to assist the management in the process of its planning, controlling, performance evaluation and decision-making
whereas the main objective of Cost Accounting is to ascertain, allocate and do accounting for costs, and to assist the management
in the process of cost control; (b) primary emphasis given in Management Accounting is on the effective and efficient performance
of the business whereas the primary emphasis given in Cost Accounting is on cost determination and cost control of the business;
(c) the success of Management Accounting depends on the existence of a sound Cost Accounting system whereas the success of
Cost Accounting does not depend, in any way, on the existence of Management Accounting System; and (d) Management
Accounting is based on the data as obtained from Financial Accounting and Cost Accounting whereas Cost Accounting is based
on the cost-related data as obtained from Financial Accounting.

CHAPTER REVIEW QUIZ

1. State whether the following statements are true or false:

1. Various statistical and operational research tools are used in Management Accounting in the
process of planning, controlling and decision-making.
2. Management Accounting interprets the analysed data as obtained from the non-operational
activities alone of the enterprise.
3. Management Accounting prepares the necessary plans to implement various financial decisions
of the management.
4. Management Accounting is a backward-looking tool to the management.
5. Management Accounting helps in coordinating various business activities of an enterprise.
6. Management Accounting System should be well conversant with the modern office management
system.
7. Management Accounting is a branch of Financial Accounting.
8. Cost Accounting does not provide cost-related basic information to the Management Accounting.
9. Installation of Management Accounting System is highly expensive to every concern.

Ans.: True: (a), (c), (e), (f), (i); False: (b), (d), (g), (h).

2. Fill in the blanks in the following statements:

0. Success of the management highly depends upon perfect__________.


1. Management Accounting System can be introduced into an organization where there exists a
well-designed__________system.
2. Management Accounting analyses and interprets__________for projecting the future trends of
different activities of the enterprise.
3. Management Accounting acts as a yardstick for measuring of__________of the enterprise.
4. Management Accounting is concerned with the accounting information which is useful to
the__________.
5. Management Accounting communicates relevant information to the management to perform their
managerial functions of__________, __________and__________.

Ans.: (a) decision-making; (b) Financial Accounting; (c) historical data; (d) level of performance; (e)
management; (f) decision-making; planning; controlling.
EXERCISE

I. Theoretical Questions

1. Short Answer Type Questions

1. What is Management Accounting?


2. Write any two features of Management Accounting.
3. Write any two objectives of Management Accounting.
4. Write any three utilities of Management Accounting.
5. Write any three limitations of Management Accounting.
6. Give any two points of differences between Management Accounting and Financial Accounting.
7. Give any two points of differences between Management Accounting and Cost Accounting.

2. Essay Type Questions

1. Define Management Accounting. Discuss its nature.


2. Discuss the scope of Management Accounting.
3. Discuss the objectives of Management Accounting.
4. Discuss the role of Management Accounting.
5. Discuss the advantages of Management Accounting.
6. Discuss the limitations of Management Accounting.
7. Discuss the various tools and techniques used in Management Accounting.
8. Enumerate various requisites for installation of Management Accounting System.
9. Distinguish between

1. Management Accounting and Financial Accounting.


2. Management Accounting and Cost Accounting.

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