Meaning and Definition of Management Accounting

Management Accounting Definition

Management accounting also is known as managerial accounting and can be defined as a
process of providing financial information and resources to the managers in decision
making. Management accounting is only used by the internal team of the organization, and
this is the only thing which makes it different from financial accounting. In this process,
financial information and reports such as invoice, financial balance statement is shared by
finance administration with the management team of the company. Objective of
management accounting is to use this statistical data and take a better and accurate decision,
controlling the enterprise, business activities, and development.

Financial accounting is the recording and presentation of information for the benefit of the
various stakeholders of an organization. Management accounting, on the other hand, is the
presentation of financial data and business activities for the internal management of the
organization. In this article, we will learn what is management accounting and its functions.

Introduction to Management Accounting

One of the definitions of Management accounting says that it is the application of
professional skills and knowledge in the preparation of financial and accounting information
in a manner in which it will assist the internal management in the formulation of policies,
planning, and control of the operations of the firm.

The basic function of management accounting is to help the management make decisions.
There is no fixed structure or format for it.

Financial accounting, costing, business analysis, economics, etc are some tools and
techniques of management accounting.

The only need for management accounting is that the data should serve its purpose, which is
helping the management take important business decisions.

WHAT IS THE SCOPE OF MANAGEMENT ACCOUNTING?

The Scope of Management accounting is very wide and broad based. It Includes all
information, which is provided to the management for financial analysis and
interpretation of the business operation. The following field of activities are
includes included in the scopes of this subject:
1. Financial Accounting: Financial accounting though provides historical
information but is very planning and financial forecasting. It is an essential
perquisite of any discussion of management accounting. Financial statements
contain enough information that is used by management for decision making.
Management accounting contains only tools and techniques and its get the data
for interpretation and analysis mainly firm financial accounting. Thus, without
efficient financial accounting system, management accounting cannot be
operative.

2. Cost accounting: cost accounting provides various techniques for determining

cost of manufacturing products of cost of providing service. It uses financial data
for finding out cost of various job, Product or processes. Business executives
depend heavily on accounting information in general and on cost information in
particular because any activity of an organisation can be described by its cost.
They make use of various cost data in managing organisation effectively. Cost
accounting is Considered as a backbone of management accounting as its
provides the analytical tools such as Budgetary Control, , Standard Costing,
Marginal Costing, Inventory costing, Operating Costing Etc., which are used by
management to discharge its responsibilities effectively.

3. Financial Management: Financial management is concerned with the planning

and controlling of the financial resources of the firm. It deals with the raising
funds and their effective utilization. Its main aim is to use the fund in such a way
that the earning of the firm is maximized. today finance has become the life
blood of any business concerned. although, financial management has emerged
as a separate subject, management accounting includes and extends to the
operation of financial management etc..

4. Financial Statement Analysis: The Various parties concerned with the financial
statements may need information, which can be obtained by financial statement
analysis and developing certain trends and ratios. A person can gain meaningful
insights and conclusions about the firm with the help of analysis and
Interpretation of the information contained in financial statements. Different
techniques have been developed which can be used for the proper interpretation
and analysis of financial statement.
5. Interpretation of data: The Work of Interpretation of financial data is done by
the management accountant. He Interprets various financial statements to the
management. This statements may be studied in comparison to statements of
earlier periods or in comparison with the statements of similar other concerns.
The significance of these reports is explained to the management in a simple
language. If the statement are not properly interpreted then wrong conclusions
may be drawn. So, Interpretation is Important as compiling of financial
statements.

6. Management Reporting: Clear Informative, Timely reports are essential

management tools in reaching decisions that make the best use of firm's
resources. Thus, one of the basic responsibility of management accounting is to
keep the management well informed about the operations of the business. the
reports are presented in the form of graphs, diagrams, index numbers or other
statistical techniques so as to make them easily understandable. The management
accountant send interim reports may be monthly, quarterly, half yearly, these
report are cover profits or order in hand, etc these reports are helpful in giving a
constant review of the working of the business.

7. Quantitative Techniques: Modern managers believe that the financial and

economic data available for managerial decisions can be more useful when
analyzed with more sophisticated analysis and evaluation techniques. This
Techniques such a time series, regression analysis and sampling techniques are
commonly used for this purpose, Further, managers also use techniques such a
linear programming, game theory, Queuing theory etc in their decision making
Process.

8. Inflation Accounting: Inflation accounting attempts to identify certain

characteristics of accounting that tend the reporting of financial results during
the period of rapidly changing prices. It devices and implements appropriate
methods to analysis and interpret the Inflation on the Financial Information.
9. Taxation: This includes computation of income tax as per tax laws and
regulations, filing of returns and making tax payments. In recent times, it
also includes tax planning.

Functions of Management Accounting

The following points highlight the top ten functions of management
accounting. The functions are: 1. Forecasting and
Planning 2. Organising 3. Coordinating 4. Controlling
Performance 5. Financial Analysis and
Interpretation 6. Communication 7. Special Studies 8. Protection of
Business Assets 9. Tax Policies.
Management Accounting: Functions # 1. Forecasting and Planning:
One of the important functions of management accounting is to provide necessary
information and data for making short-term and long-term forecasts and planning the
operations of the business.

For doing this, the management accountant uses techniques of statistics, like
probability, trend study of correlation and regression; budgeting and standard costing;
capital budgeting; marginal costing and cash funds flow statements etc. These are
important tools in the hands of management accountant for the planning of the
business.

Management Accounting: Functions # 2. Organising:

The management accountant helps the management in organising the human and non-
human resources of the business by analysing different functions and assigning specific
responsibilities. He tries to organise the accounting and finance function of the business
on the modern lines.

Management Accounting: Functions # 3. Coordinating:

The management accountant increases the efficiency of organisation and maximise its
profits by providing different tools of coordination as budgeting, financial reporting,
financial analysis and interpretation etc. It helps the management by reconciling the
cost and financial accounts, by preparing budgets and setting the standard costs and in
analysing variances in costs to facilitate management by exception.
Management Accounting: Functions # 4. Controlling Performance:
The management accountant helps in controlling the performance of the organisation
by using standard costing, budgetary control, accounting ratios, cash and funds flow
statements, cost reduction programmes and evaluating the capital expenditure
proposals and return on investment.

Management Accounting: Functions # 5. Financial Analysis and Interpretation:

The management accountant analyses the data and presents it before the management
in non-technical manner along with his comments and suggestions so that the owners
and the top personnel’s in the management may understand it and take decisions
without any difficulty.

Management Accounting: Functions # 6. Communication:

The management accountant prepares various reports to communicate the results to the
superior, to motivate the employees, to exercise effective control on their activities and
to enable the management to take sound decisions. He also communicates with the
outside world about the progress of the business through published accounts and
returns.

Management Accounting: Functions # 7. Special Studies:

The management accountant tries to maximise the profits of the concern by conducting
various cost and economic studies on regular basis. He tries to determine the needs of
long-term and short-term capital, recommend appropriate capitalisation for the
enterprise, evaluation of alternative capital expenditure proposals and their impact on
the return and profits of the concern.

Management Accounting: Functions # 8. Protection of Business Assets:

The management accountant will be responsible for the protection of business assets.
He is to see that sufficient funds are available for repairs, maintenance and replacement
of fixed assets so that production capacity of the enterprise may not be badly affected.
He is also to see that business assets are properly insured.

Management Accounting: Functions # 9. Tax Policies:

The management accountant is responsible for tax policies and procedures. He will
make available the reports required by various authorities. He will make proper
provision for taxation and he is to ensure that quarterly payments of taxes paid in
 advance as required by the Income Tax Act are made in time to avoid penal interest
payment on delayed payment of tax.

Management Accounting: Functions # 9. Miscellaneous Functions:

Besides the above functions, the management accountant supplies useful information to
different functional authorities, provides necessary accounting information and advice
for price determination and pricing decisions and helps to make strategic decisions as
seasonal or temporary suspension of production, make or buy decisions, replacement
decisions and expansion or closure of particular division or department, etc.

IMPORTANCE OF MANAGEMENT ACCOUNTING

The main Advantage of management accounting is given below:

1. Determine of Aim: Management accounting on the basis of the information

available determines its goal and tries to find out the route through which it can
reach the goal.

2. Helps in the Preparation of Plan: Present age is the age of planning. That
producer is considered as most successful producer who produces articles
according to the plan and needs of the consumers. Before taking any plan the
manager must study and analyze the present and future of the business.

3. Better Services to Customers: The cost control device is management

accounting enables the reduction in prices of the Product. All employees in the
concern are made cost Conious. The quality of the Product become good because
quality standards ate pre-determined. The Customers are supplied goods and
goods quality at reasonable price.

4. Easy to take judgment: Before taking any plan or to determine policy. There are
several plans or policies before the management on the basis of the study he
decides which plan and policy was to be adapted so that it may be more useful
and helpful.
5. Measurements of performance: The techniques of budgetary control standard
costing enables the measurement of performance In standard costing, standards
are determined 1st and then actual cost of compared with standard cost. It enables
the management to find out deviations between standard cost and actual cost.
The performance will be good it actual cost does not exceed the standard cost.
Budgetary control system too helps in measuring efficiency of all employees.

6. Its Increase Efficiency of the business: Management accounting increases

efficiency of the business concern. The targets of different departments of the
enterprise are determined in advance and the achievement of these goals is taken
as a tool for measuring their efficiency.

7. Its Provide effective management control : The Tools and techniques of the
management accounting are helpful to the management in planning controlling
and coordinating activities of the business, the getting of standard and assessing
actual performance regularly enables the management to have ‘management by
exception’. Everybody assesses his own work and immediate actions are taken as
a tool for measuring their efficiency.

8. Maximum profits of can be obtained: in this process every possible effort are
made to control unnecessary expenses. The incapability or inefficiency is
removed. New systems or techniques are found out to achieve the goal, so that
there may be maximum profits out if the capital invested in the Business.

9. Safety and security from trade cycle: The Information received form the
management accounting gives more or throws enough light over the past trade
cycle. The management tries to ascertain the Causes of trade cycle and its affect.
Thus, management accounting tries to safeguard the organization from the affect
of trade cycle.
 OR

Advantages and Objectives of Management Accounting

There are many objectives of but the prime objective is to assist the management team of an
organization in improving the quality of their decisions. Purpose of management accounting
is to help the managerial team with financial information so that they can execute business
operations and activities more efficiently. Following is the list of all benefits of management
accounting –

1. Decision Making
2. Planning
3. Controlling business operations
4. Organizing
5. Understanding financial data
6. Identifying business problem areas
7. Strategic Management
Decision Making
This is the most important benefit of the process of management accounting. In fact, it is the
main purpose of it. In this form of accounting, we use techniques from all fields like costing,
economics, statistics, etc.

It provides us with charts, tables, forecasts and various such analysis that makes the process
of decision making easier and more justified.

Read Costing – An Aid to Management here in detail

Planning
Managerial accounting does not have any strict timelines like financial accounting. It is, in
fact, a continuous and ongoing process.

So financial and other information is presented to the management at regular intervals like
weekly, monthly or sometimes even daily.
Hence managers can use this analysis and data to plan the activities of the organization. For
example, if the recent data shows a dip in the sales for a certain region, then the sales
manager can advise his team and plan some action to rectify the situation.

Identifying Business Problem Areas

If some product is not performing well, or some department is running into unexpected
losses, etc. managerial accounting can help us identify the underlying cause.

Actually, if the management is diligent and their data and reports are frequent, they can
identify the problem very early on. This will allow the management to get ahead of the
problem.

Strategic Management
Concept of management accounting is not mandatory by any law. So it can have its own
structure according to the company’s requirements. So if the company feels certain areas
need more in-depth analysis or investigation it can do so freely.

This allows them to focus on some core areas. The information presented to them allows
them to make strategic management decisions.

Like if the company wishes to launch a new product line, or discontinue an existing one,
management accounting will play a huge part in this strategy.

Limitations of Management Accounting

 Data based on Financial accounting – Decisions taken by the management team are
based on the data provided by Financial Accounting
 Less knowledge – Management has insufficient knowledge of economics, finance,
statistics, etc.
 Outdated data – Management team receives historical data, which may change
eventually when management is taking the decisions.
 Expensive – Setting up a management accounting system requires a lot of investment.

OR
LIMITATIONS OR DISADVANTAGES OF MANAGEMENT
ACCOUNTING
1. Based on Financial and Cost Records
Both financial and cost accounting information are used in the management accounting
system. The accuracy and validity of management account is largely based on the
accuracy if financial and cost records maintained. These records determine the Strength
and weakness of management accounting.

2. Personal Bias
The analysis and interpretation of financial statements are fully depending upon the
capability of the analyst and interpreter. Hence, personal prejudices and bias of an
individual can affect the objectivity and effectiveness of the conclusions and
recommendations.

3. Lack of Knowledge and Understanding of the Related Subjects

Financial accounting, cost accounting, statistics, economics, psychology and sociology
are the related subjects of management accounting. The organization can derive more
benefits of management accounting if the management accountant has thorough
knowledge over related subjects. If not so, the success of management accounting
system is questionable.
4. Provides only Data
Under management accounting system, many alternatives are developed to solve a
problem and submitted before the management. Out of the many alternatives available,
the management can select any one of alternatives or even discard all of them. Hence,
management accounting can only provide data and not prescribe any course of action.

5. Preference to Intuitive Decision Making

Scientific decisions can be taken with the help of using management accounting
techniques. But, majority of the management accountant and top level executives prefer
their past experience and intuition in making business decisions. The reason is that an
intuitive decision making is very simple and easy.

6. Management Accounting is only a Tool

The management accountant is using the management accounting system as a tool to
give advice and facilitate the management for decision making. The actual decisions,
their implementation and follow up action are the prerogative of the management.

7. Continuity and Participation

The decisions are taken by the management. Their implementation is vested in the
hands of management accountant. The continuous efforts of management accountant
and full participation of all levels of management are necessary for successful operation
of management accounting system.
8. Broad Based Scope
The scope of management accounting is very wide since it considers both monetary and
non-monetary transactions of the business organization. The limited knowledge and
experience of the management accountant can lead to prepare the data unreliable and
undependable.
9. Costly Installation
The cost of installation of management accounting system is very high. Hence, a small
business organization can not bear the cost of such installation. Moreover, the utility of
this system is restricted only to big and complex organizations.
10. Resistance to Change
The installation of management accounting system brings some changes in the
organizational set up and accounting practice. The personnel concerned may resist such
changes unless they are getting confidence.

11. Evolutionary State

Management accounting is a recent development discipline. The utility of management
accounting is depend upon the intelligent interpretation of the data available for
managerial use. Hence, it is presumed that the management accounting stands in
evolutionary stage.

12. Unquantifiable Variables

Management accounting seeks to interpret and evaluate an objective historical event on
record in terms of money. But, in practice, the business organization is facing many
problems which cannot be exposed.

Meaning of Accounting
Accounting is the language of finance. It conveys the financial position of the firm or
business to anyone who wants to know. It helps to translate the workings of a firm into
tangible reports that can be compared. So it is essential that we know the meaning of
accounting.

Meaning of Accounting
Accounting is all about the process that helps to record, summarize, analyze, and report data
that concerns financial transactions. Let’s understand the components a little better to
understand the true meaning of accounting.
Recording
The first and foremost function that accounting looks forward to achieving is the recording
of the different transactions that are made within the firm. This can also be referred to
as book-keeping which is a process of recognizing the transactions and setting them up as
records.

Book-keeping is only concerned with the recording segment and nothing else. Accounting
maintains a few books for the cause of recording. The maintenance of the procedure
happens in a systematic manner.

The three different ways of recording are:

 Putting up a system that will help in maintaining the records.

 Tracking financial transactions.
 Aggregating the reports to present a final set of financial reports.
Summarizing
Raw data is generally the result of recording transactions. However, these raw data are not
of much significance to the organization. They have no part to play in the decision-
making process. As a result of this, the accountants divide these raw data into several
categories. So the recording of the transactions is then followed up by summarizing.

Reporting
The affairs in any company are the responsibility of the management. The owners must
know about the various operations happening within the firm using their money. Therefore,
to take care of this, owners receive reports. They receive these reports quarterly and at the
end, they receive an annual report that summarizes all their performances.

Analyzing
Finally, there is an analysis of all the results so far. After recording and summary, it is very
important to draw conclusions. It is the responsibility of the management to check for the
positive and negative points.

Therefore, to analyze all of this, accounting introduces the concept of comparison.

Comparing profits, sales, equity, and so on with one another to determine and analyze the
performance and growth of an organization.
Basic Fundamentals of Accounting
Accounting is all about the term ALOE. Do not confuse it with the plant! ALOE is a term
that has an important role to play in the accounting world and the understanding of the
meaning of accounting. Here is what the acronym, “A-L-O-E” means.

 A – Assets
 L – Liabilities
 O E- Owner’s Equity
This is one of the basic concepts of accounting. The equation for the same goes like this:

Assets = Liabilities + Owner’s Equity

Here is the meaning of every term that ALOE stands for.

 Assets: Assets are the items that belong to you and you are the owner of it. These items
correspond to a “value” and can serve you cash in exchange for it. Examples of Assets
are Car, House, etc.
 Liabilities: Whatever you own is a liability. Even a loan that you take from a bank to buy
any sort of asset is a liability.
 Owner’s Equity: The total amount of cash someone (anyone) invests in an organization is
Owner’s Equity. The investment done is not necessarily money always. It can be in the
form of stocks too.

Objectives of Accounting
Maintaining Records
As we mentioned, accounting is the spoken language of transactions. The human brain
cannot store endless information. And so accounting takes the charge of keeping the records
of all the transactions made within a firm.

Profit and Loss

Business is directly proportional to profits. It is all about earning profits. The accounting
chart of profit and loss determines whether there is a profit or loss made in the business. The
income and expenditure decide profit and loss.
Utility of Resources
Resources are a very crucial part of any organization and for a firm to function smoothly,
they play a significant role. The records hold the responsibility to report to the firm about
the different activities along with its timing. Hence, it becomes easy for the management to
take note of the details before putting in the money.

Estimation of Financial Position

A business person is not only interested in knowing the Profit and Losses of his business but
he also wants to know how much he owes to his creditors and how much he has to pay to
his debtors. For this purpose, he prepares a statement in which all such details are recorded.
This statement is known as Balance sheet. With the help of Balance sheet Financial position
of the business can be Understood.

Helps in Decision Making

With the help of all the records that have been maintained by following Accounting
Procedures, Decisions can be made with all those information which eventually helps in the
smooth functioning of the organisation.

Key Differences Between Financial Accounting and Management Accounting

The following points explain the major differences between financial accounting and
managerial accounting:

1. Financial Accounting is the branch of accounting which keeps track of all the
financial information of the entity. Management Accounting is that branch of
accounting which records and reports both the financial and nonfinancial
information of an entity.
2. Users of financial accounting are both the internal management of the company
and the external parties while the users of the management accounting are only
the internal management.
3. Financial accounting is to be publicly reported whereas the Management
Accounting is for the use of the organisation and hence it is very confidential.
4. Only monetary information is contained in financial accounting. As against this,
management accounting contains both monetary and non-monetary information
such as the number of workers, the quantity of raw material used and sold, etc.
5. Financial Accounting is done in the prescribed format, whereas there is no
prescribed format for the Management Accounting.
6. Financial Accounting focuses on providing information about the functioning of
the entity’s business to its users, whereas Management Accounting focuses on
 providing information to help them in evaluating the performance and devising
plans for the future.
7. The Financial Accounting is mainly done for a specific period, which is usually
one year. On the other hand, the management accounting is done as per the
needs of the management say quarterly, half yearly, etc.
8. Financial accounting is a must for any company for auditing purposes. On the
contrary, management accounting is voluntary, as no editing is done.
9. Financial accounting information is required to be published and audited by
statutory auditors. Unlike, management accounting, which does not require
information to be published and audited, as they are for internal use only.

Cost Accounting vs Management Accounting – Key differences

cost accounting vs management accounting. Let’s have a look –

 The scope of cost accounting is much narrower. The scope of management

accounting is much broader and vaster. Since both of these help make
management effective decisions, management accounting has many more tools
than cost accounting.
 Cost accounting is the sub-set of management accounting. Management
accounting itself is a stand-alone subject on helping management in strategizing
well.
 Cost accounting is used for management, shareholders, and stakeholders also.
Management accounting, on the other hand, is just for management.
 Statutory audit is mandatory for cost accounting in giant businesses since there
can be chances of huge discrepancies. But there’s no requirement of the statutory
audit of management accounting.
 Cost accounting is solely based on quantitative data points. Management
accounting, on the other hand, is based on both qualitative and quantitative data
points.
 Cost accounting has its own norms and its own rules and is not dependent on
management accounting. On the other hand, to create effective reports,
management accounting is dependent on both cost accounting and financial
accounting.
Key Differences Between Cost Accounting and Financial
Accounting
The following are the major differences between cost accounting and financial
accounting:

1. Cost Accounting aims at maintaining cost records of an organisation. Financial

Accounting aims at maintaining all the financial data of an organisation.
2. Cost Accounting Records both historical and per-determined costs. Conversely,
Financial Accounting records only historical costs.
3. Users of Cost Accounting is limited to internal management of the entity,
whereas users of Financial Accounting are internal as well as external parties.
4. In cost, accounting stock is valued at cost while in financial accounting, the stock
is valued at the lower of the two i.e. cost or net realisable value.
5. Cost Accounting is mandatory only for the organisation which is engaged in
manufacturing and production activities. On the other hand, Financial
Accounting is mandatory for all the organisations, as well as compliance with the
provisions of Companies Act and Income Tax Act is also a must.
6. Cost Accounting information is reported periodically at frequent intervals, but
financial accounting information is reported after the completion of the financial
year i.e. generally one year.
7. Cost Accounting information determines profit related to a particular product,
job or process. As opposed to Financial Accounting, which determines the profit
for the whole organisation made during a particular period.
8. The purpose of Cost Accounting is to control costs, but the purpose of financial
accounting is to keep complete records of the financial information, on the basis
of which reporting can be done at the end of the accounting period.