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MANAGEMENT ACCOUNTING
a TOOL to help managers

Session plan as per DESCRIPTOR (Class 1; Session 1) Overview of Management Accounting

1. Planning and control functions 2. Functions of Management Accounting 3. Financial Accounting and Management Accounting

Session Plan
1. 2. 3. 4. Accounting Management Accounting Functions of Management Accounting Management Accounting vs Financial Accounting. 5. Some similarities between MA & FA 6. Cost Accounting 7. Uses of Cost Accounting

Accounting
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

Business Accounting System

Financial Accounting

Management Accounting

Cost Accounting

Management Accounting
1. Conventional Accounting reveals periodically how well (or badly) the firm is being run. 2. But this information is more useful to external parties namelyManagement Accounting shareholders, creditors, Govt. etc. 3. There is no denying the fact that internal parties i.e., managers also require this information. But to improve their future performance, it is of little use. 4. Thats why this new system of accounting has been developed, specially for managers, for improving their performance.

Continued
5. Management Accounting is thus concerned with further improvement of the overall efficiency. 6. It is forward-looking. It provides the basis to make informed business decisions. 7. The Institute of Cost and Management Accountants, London, has defined Management Accounting as:

the application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertakings.

FUNCTIONS OF MANAGEMENT ACCOUNTING

1. PLANNING & FORECASTING provides necessary information and data for long and short-term planning and forecasting. 2. MOTIVATION motivates employees by setting targets, measuring actual performance, comparing the same with the targets and then rewarding them suitably for their efficiency. 3. EVALUATION OF PLANS AND POLICIES evaluates various policies & their impact on the profitability.

Continued
4. STRATEGIC DECISION MAKING supplies analytical information of various alternatives, thus enabling proper strategic decisions (to close down a unit or not / to make or buy a product etc.)

5. CO-ORDINATION through budgeting, different activities of a business concern can be coordinated.

6. CONTROL sets standard for various activities and operation of a firm. Thereafter measures actual performance vs the standard & highlights weak areas enabling corrective actions in those areas.

In short
Accounting information specifically prepared to aid managers is Management Accounting. Used in three basic managerial functions:1. Planning : process of deciding what action should be taken in the future 2. Implementation : specific actions (planned in advance) to fulfill the budgets 3. Control : managerial action to correct conditions that cause deviation between the actual and planned performance

MANAGEMENT ACCOUNTING VS. FINANCIAL ACCOUNTING

DIMENSION
Structure Sources of principles Need Timeorientation

MANAGEMENT ACCOUNTING
Varies according to use of the information Whatever is useful to Management Optional Historical and future estimates

FINANCIAL ACCOUNTING
Unified structure Generally accepted accounting principles Statutory Obligation Historical

Continued
DIMENSION Reporting entity Purpose MANAGEMENT ACCOUNTING Responsibility centres FINANCIAL ACCOUNTING Overall organisation External reporting/ for outside users Relatively larger groups/ unknown Primarily monetary

Assisting management Small groups/ known identity

Monetary & nonmonetary

Users
Information content

Continued
DIMENSION Information precision MANAGEMENT ACCOUNTING Many approximations FINANCIAL ACCOUNTING Few approximations Quarterly and annual Delay of weeks or months common Few lawsuits, but threat always present

Report frequency Report timeliness

Liability potential

Varies (weekly or monthly common) Prompt at the end of the period

Virtually none

SIMILARITIES BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTING

Most elements of financial accounting are also found in management accounting.

Basic data collected for both are in accordance with GAAP to avoid duplication. Both are used in decision making.

USES OF COST ACCOUNTING

1. Cost Accounting provides data for Appraisal Information (measurement) 2. Cost Accounting helps in Profit Planning 3. Cost Accounting is useful for the purpose of control.

MEASUREMENT PURPOSES

For measurement purpose the management accounting system focuses on the measurement of full costs.
Full Cost Accounting measures the resources used in performing some activity. It is the sum of direct and indirect costs. Full costs are used in (i) Financial reporting, (ii)Analysing economic performance and (iii)Cost-plus contracts.

CONTROL PURPOSES

For control purposes, management accounting measures costs by responsibility centres.

Responsibility Centre is an organisation unit headed by a manager who is responsible for its operations and performances.

RECAP
1. 2. 3. 4. Accounting Management Accounting Functions of Management Accounting Management Accounting vs Financial Accounting. 5. Some similarities between MA & FA 6. Cost Accounting 7. Uses of Cost Accounting

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