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Introduction, Nature, Scope & Limitations

Unit I
 FinancialAccounting, Cost Accounting and
Management Accounting

 Management Accounting:
 Nature & Scope
 Advantages and Limitations
 Role of Management Accountant
A process of collecting, recording, interpreting and
communicating financial information to the stakeholders

Classification:

 FinancialAccounting
 Cost Accounting
 Management Accounting
 Historical Nature  Does not help in
 Aggregate Approach strategic decisions
 Price Fixation not  Quantitative information
possible only
 Cost Control not  Window dressing
possible  Records actual cost only
 Evaluation cannot be
done
Information needs of:
 Management

 Shareholders and Investors


 Employees

 Creditors

 Government

 Line Managers
Specialised branch of accounting concerned
with collection, determining and controlling
costs of products
 Analysis & Ascertainment  Not independent
of Costs
 Cost Reduction & Cost  Based on estimates –
Control absorption
 Planning & Decision
Making – pricing, launch,
 Does not consider –

market determination, abnormal losses, financial

make or buy, shut down charges, interest, etc.

Functions Limitations
- Management-oriented accounting
- Study of managerial aspect of financial accounting

It is an activity that provides financial and non financial


information to the managers and other internal decision
makers
“Management accounting is the presentation of accounting
information in such a ways as to assist management in the
creation of policy and the day-to-day operation of an
undertaking”
- Anglo American Council on Productivity
“ A system of collection and presentation of the relevant
economic information relating to an enterprise for
planning, controlling and decision making”

- The Institute of Cost and Works Accountants of India


 Providing Accounting  Financial Accounting
Information  Cost Accounting
 Cause and Effect Analysis  Financial Management
 Use of special Techniques  Budgeting and Forecasting
and Concepts  Inventory Control
 Taking Important Decision  Reporting to Management
 Achieving of Objectives  Interpretation of Data
 No fixed Forms to follow  Controlling Policies
 Increase in Efficiency  Internal Audit
 Helps in Forecasting  Tax Accounting

Nature Limitations
 Planning & Policy Formulation
 Helpful in Controlling Performance
 Helpful in Interpreting Financial Information
 Motivating Employees
 Helps in Making Decision
 Reporting to Management
 Helpful in Coordination
 Helpful in Tax Administration
 Planning & Forecasting
 Modification of Data
 Financial Analysis & Interpretation
 Facilitates Managerial Control
 Communication
 Use of Qualitative Information
 Coordinating
 Helpful in Taking Strategic Decisions
 Furnishing Information to Multi Level of Management
In Short – Management Accounting provides:

 Provides Data
 Modifies Data
 Analyses and Interprets Data
 Controlling Measures
 Multi level Communication
 Based on accounting Information
 Lack of Knowledge
 Absence of Standardisation
 Intuitive Decisions
 Provides only information and not decision
 Evolutionary stage
 Resistance from Human Resource
 Top Heavy Structure
 Only a tool and not a replacement of Management
Meaning
 The top managerial and financial accountant.

 Supervises the accounting department and assists management in interpreting and

utilizing managerial accounting information.

Functions of the controller

1. Financial accounting - the preparation of financial statements

2. Cost accounting - the preparation of the firm's operating budgets

3. Taxes - the preparation of reports that the firm must file with various local, state
and federal agencies

4. Data processing - of corporate accounting and payroll activities 


 He interprets financial information to make business decisions
 He combines accounting, finance and management with the leading

edge techniques needed to drive successful businesses


 He provides business data and analysis to managers within

organisations to assist in business decision-making and control


 He provides monthly management accounts, budgets & forecasts

 He performs cost analysis and cost-reduction projects, competitor

analysis, variance analysis, tender preparation and review, strategic


planning, long and medium term planning, as well as investor
appraisal
 Analysing information and using it to make business decisions
 Formulating business strategy to create wealth and shareholder value
 Determining what information is needed by management and
explaining numbers to non-financial managers
 Advising managers about the financial implications of projects
 Explaining the financial consequences of business decisions applying
accounting techniques to plan and budget
 Monitoring spending and financial control
 Identifying and managing risk
 Conducting internal business audits.
 Accept or reject an order when there is excess capacity

 Accepting or reject an other when there is no excess capacity

 Outsource a product or service

 Add, drop a product, service or department

 Sell or process further

 Optimization of limited resources or working under constraint


Marketing Production Financial

Pricing Units of equipment Issue of bonds

Sales forecast Factory workers’ wages Issue of stock

Number of sales people Overtime, second shift Bank loan

Sales people Replacement of Retirement of bonds


compensation equipment

Number of products Inventory levels Dividends

Advertising Order size Investment in securities

Credit Suppliers
Balance Sheet Items Decisions
Cash Minimum level
Accounts receivable Credit terms
Inventory Order size
Fixed asset Capacity size
Bonds payable Amount and interest rate

Income Statement Items


Sales Price, number of
products, number of sales people
Salesmen compensation Salaries and commission rate
Advertising Media, advertising budget
Decision items Strategic Decisions Tactical Decisions

Cash Maintain minimum Specific level of cash


level without excessive
risk
Accounts receivable Sell on credit Specific credit terms

Inventory Maintain safety stock Specific level of


inventory

Price Be volume dealer by Specific price


setting price lower
than competition
Financial Statement Items Management Accounting Tools
Balance Sheet:
 Cash Cash budget
Capital budgeting models
 Accounts receivable Incremental analysis
 Inventory EOQ models, Safety stock model

 Fixed assets Incremental Analysis, Capital budgeting


Income Statement:
 Sales C‑V‑P analysis, Segmental reporting, Incremental
analysis
 Expenses C‑V‑P analysis, Incremental analysis
 Net income Direct costing
 Keep or replace

 Additional volume of business

 Credit analysis

 Demand analysis

 Sales people compensation analysis

 Capacity analysis