Description
Cost accounting has been created because of limits of financial accounting. It has conquer a percentage of the restrictions of financial accounting and serves the inner management by drawing its consideration on deficient operations and assisting in control of exercises of the conglomeration.
MANAGEMENT ACCOUNTING
Cost accounting has been developed due to limitations of financial accounting. It has overcome some of the limitations of financial accounting and serves the internal management by drawing its attention on insufficient operations and helping in control of activities of the organization. But cost accounting is not able to meet the informational needs of the management function, because management needs not only costing information but also information relating to the other activities. The tremendous industrial growth marked by increased production, product improvement, product diversification, increased market area, cut-throat competition has posed new challenges to the management. In view of the above factors, the management always looks at the ways and means to minimize costs and maximize profits. This demands modern techniques of control and supervision which is impossible only with the help of information not only relating to costs but also relating to other activities. Management accounting provides such information. It provides relevant information to management, so that planning, organizing, controlling, and co-ordination of business operations can be done in an ordinarily manner efficiently and effectively. Further it also provides necessary information to the management in decision making, regarding the economic activity of business unit.
Development of management accounting:
The term ‘Management Accounting’ is of recent origin. This was first used in 1950 by the British team of Accountants that visited the United State under the auspices of Analog American Productivity Council. Since then the term has become quite familiar in USA and in other countries. In the last five decades, a change was witnessed in the development of accounting from a more device of recording and compiling of income and expenditure relating to the past business events to an instrument of forecasting planning and regulating business activity.
Definition:
“Such of its techniques and procedures which accounting mainly seeks to aid the management actively have come to be known as management accounting.” --- ICAI. “Management accounting is concerned with accounting information that is useful to management.” --- Robert N. Anthony. “Management accounting includes the methods and concept necessary for effective planning for choosing among alternative business actions and for control through the evaluations and interpretation of performance.” --- American Accounting Association. From the above definitions it is clear that financial data is recorded, analyzed and presented to the management in such a way that it becomes useful to management in planning, organizing.
Scope of management accounting:
Management accounting is mainly concerned with the presentation of accounting information in the most useful was for the management. It includes all information which is provided to the management for the purpose of analysis and interpretation of the business activities. The nature and scope of management accounting includes the following. 1. Financial Accounting: Even though the financial accounting provides historical data, it is very useful for forecasting and planning. Hence, management cannot obtain full control and co-ordination of operations without a properly designed financial accounting system. 2. Cost Accounting: Cost accounting provides various techniques of costing viz., marginal costing, standard costing, differential costing, opportunity costing etc., which play a useful role in the operation and control of the business undertakings by providing the cost of manufacturing products or services. 3. Budgeting & Forecasting: Budgets include future plans, policies and goals of the organization for a fixed period. Hence for budgeting, the forecasting on the various aspects of the business is necessary. Through the budget control is exercised by comparing the actual with budgeted figures and variance, reasons for variance is ascertained and by fixing the responsibility remedial action will be taken. Forecasting is a prediction of what will happen in the given set of circumstances. But budgeting and forecasting are important for management accounting in planning various activities.
4. Inventory control: Proper and effective control of inventory is required, as it involves large sums. The control of inventory will help in controlling costs. Management accountant guides the management as regards when, where and how to purchase the raw material. 5. Reporting: One of the main functions of the management accountant is reporting. He is required to submit reports to the management on various activities of the concern so as to assist it in controlling the organization. The reports are submitted in the form of graphs, diagrams, index numbers, pictograms and other stastical techniques to make them easily understandable with the help of these reports the management can have a constant review of the working of the enterprise.
6. Internal audit: The performance of each department and the individual is judged by the internal audit system. It helps the management in fixing the responsibility on various individuals. 7. Control procedures and methods: The management accounting process includes the procedure and methods of inventory control, cost control, time control, budgetary control and variance analysis etc. 8. Tax accounting: Management accounting also includes tax accounting, income statements are prepared, taxable income is determined and income tax returns are filled as per the provisions of income tax Act. 9. Office services: Management Accountant is expected to deal with the data processing reporting on the best use of mechanical and electronic devises, communications. 10. Interpretation of data: Normally, the management accountant interprets the data available in the form of various financial statements. The current financial statements are compared not only with the past years but also with the financial statements of other firms. The management draws conclusions basing in the interpretation of data. If the data is not properly interpreted then there is the danger of drawing wrong conclusions. The management accounting is concerned with the interpretation of financial data to the management and advises them on decision making.
Objectives of management accounting:
1. Formulating the plans and policies: Planning is one of the important functions of management. Planning is essential related to future. It includes forecasting, setting goals and deciding on the programmers of activities to be undertaken. Management accounting by providing past information based on results, helps in planning and forecasting of production, sales, cash inflows and outflows. 2. Helps in organizing: Organizing is a tool for achieving the objectives in a planning two sub-functions viz., division of responsibility and lining of authority among the various personal for getting plans duty implemented. Management accounting is concerned with the establishment of cost centers budget centers, profit centers with a view to control costs and responsibilities. All these aspects help in setting up efficient organization. 3. Reporting : One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the business. It helps the management in taking timely decision the management accountant informs the financial position to the management from time to time through reports. The performance of various units/departments is also regularly communicated to the top management. 4. Motivating the employees: By fixing the targets to be achieved and providing incentives, management accounting motivates the employees to put in their best. 5. Helps in decision making: Decision making is an important and primary function of top management. During the course of business, management has to take certain important decisions like replace of labour with technology, expansion or diversification of production etc. Management accountant prepares a report on the feasibility of various alternatives and make assessment of their financial implications. This information helps the management in taking correct decisions in correct time. 6. Helps in controlling: Management accounting devices like standard costing and budgetary control are helpful in controlling performance. When actual performance is compared with predetermined objectives, the management is able to find out the deviations and take necessary corrective measures. Management accounting provides special assistance in controlling the business activities and costs.
7. Helps in co-ordination: Management accounting helps the management by providing various tools to coordinate various departments/sections. This can be done through functional budgeting. 8. Helps in tax administration: Management accounting helps the management in assessing various tax liabilities and depositing correct amount of tax with authorities concern. 9. Helps in interpretation of financial information: Interpretation of financial data is another important objective. Management accounting presents the financial information to the management in such a way that it is easily understood. If the financial data is of technical nature, the management personnel may not be able to understand the importance and utility of various statements. The management accountant explains these statements in simple language. If necessary he uses statistical devices like charts, diagrams, index numbers etc., and interpretation of financial information.
Functions of Management Accounting:
1. Modification of data: Accounting data in its original form is not suitable for managerial decision making and control purposes. Management accounting modifies the accounting data presents in financial statements in such a way which is more suitable and highly useful to management. This modification data is highly useful to management in planning various activities. Ex. Information on the sales can be presented product wise, territory wise, season wise, dealer wise, etc., 2. Financial analysis and interpretation: Management accounting helps in interpreting the financial data presented in the financial statements in simplified way and presents in non-technical manner with comments and suggestions. Interpretation of financial data is a very important function of management. Normally, top management lacks the technical knowledge and may not understand the financial data which is often presented in the technical manner. The management accountant analyse the financial data, and presents to the management with his suggestions, and comments on various alternatives. Then it is easy for the management to take decisions. 3. Planning and forecasting: Another important function of management accounting is to help the management in planning and forecasting. Planning and forecasting are essential for achieving the desired business activities. Management accounting by providing necessary information assist the management in forecasting. Management accountant with the help of various statistical techniques such as probability, correlation and regression, marginal costing, funds flow statements etc., prepare plans and forecasting. 4. Communication: Management accounting is an important medium of communication. In business concern different levels of management needs different types of information. The top management needs concise information at relatively long intervals. Middle level management needs information regularly on various activities. The lower level management is interested in detailed information of short intervals. The management accountants by preparing various reports establish communication within the organization and also with the outside world. 5. Managerial control: Controlling is one of the important functions of management accounting. The standards are fixed for various departments and individuals. Actual performance is recorded and variations are calculated. In such a way, management accounting helps the management to assess the performance of every one in organization. All this is done with the help of standard costing and budgetary control which are a part and parcel of management accounting. 6. Use of non- monetary information:
Management accounting does not restrict itself merely to financial data for helping the management in decision making process, but also considers non-monetary information. Such information may be collected from case studies, minutes of meeting, engineering records, surveys etc., 7. Strategic decision making: Very frequently, the management has to take strategic decision such as make or buy decision, replacing the old machinery with latest one, temporary shutdown of the business , decision to enter in new market etc,. Management accounting come to the rescue of management by providing financial, technical and statistical data in detail to enable it to take decisions. 8. Co-ordination: For smooth running of business, co-ordination among various departments and the staff working in them are highly essential. Management accountant by acting as a coordinator among various departments through budgeting and financial reports and work to achieve coordination. 9. Staff education: Management accounting educates the staff working in the organization in respect of techniques used, their purpose and their benefits.
Importance of Management Accounting:
In present highly competitive and complex industrial world, management accounting has become an integral part of the management. It guides the management at every step and meet the information needs of various levels of management. Management improves the efficiency of management in all aspects. It may be summarized under the following heads. 1. Proper planning: Management accounting helps the management to plan various business operations by providing accounting information. The management formulates policies, programmes and strategies with the help of accounting information. It helps to develop effective internal control and audit system. Efficient planning and effective organization brings systematic regularity in business activities. 2. Increase efficiency: Management accounting encourages efficiency in business operations. The largest of different departments are fixed in advance and achievement of targets forms a yardstick for measuring their efficiency. 3. Measurement of performance: The system of budgetary control and standard costing enables the measurement of performance. In standard costing standards are determined in advance and then the actual cost is compared with the standard cost. It helps the management to know the deviations if any between standard cost and actual cost. The performance will be good if the actual cost does not exceed the standard cost. 4. Maximum profitability: The use of the management accounting may control or even eliminate various types of wastage, production defectives etc,. The various management techniques are used to control cost of production. The reduction in cost of production increases the sales volume, thereby maximum profits to the concern. 5. Maximum return on capital employed: Management accounting through the process of planning, control and coordination helps the management in getting maximum return on capital employed. 6. Good industrial relations: Unacceptable standards or sub-standards which are often responsible for unhealthy and bad relations between management and labour can be removed by the use of management accounting. Industrial relations can thus be improved. It creates a good climate for further investments in the business concerns.
7. Services to customers: The cost control devices employed in management accounting enable the reduction of prices. All employees in the concern are made cost conscious. Since quality of goods is determined in advance the quality of goods is determined in advance the quality of the products becomes good and hence the customers are provided quality goods at reasonable prices. 8. Effective management control: The tools and techniques of management accounting are helpful to management planning, controlling and coordination of the activities of the concern. The techniques of budgetary control, standard costing and departmental operating statements greatly help in performing the controlling function.
9. Helps in communication: Management accounting helps in communicating up-to-date information to various parties interested in the successful working of a business organization.
Limitations:
1. Based on accounting records: Management accounting derives information from financial accounting, cost accounting and other records. The accuracy of data and conclusions drawn from them depend to a large extent on the accuracy of basic records such as financial and cost records. In other words the merits and demerits of management accounting depends upon the merits and demerits of the basic records. 2. Persistent efforts: The conclusions and decisions drawn by the management accountant are not extending automatically. He has to convince the authorities at all levels. Thus there is need for continuous and coordinated efforts at each management level to execute these decisions. 3. Wide scope: The scope of management accounting is very wide and broad based and this creates many difficulties in the implementation process. It considers both monetary as well as nonmonetary factors. This bridge a degree of inexactness and subjectivity I the conclusions obtained through it. 4. Costly installation: The installation of management accounting system is costly affair. It needs an elaborate organization system and number of rules and regulations. Its use is limited to the large concerns which can offer it. In other words it is not within the reach of small concerns because of the heavy cost involved. 5. Evolutionary stage: Compartively management accounting is new discipline and is still very much in a state of evolution. The techniques and tools used by this system give varying and differing results. The conclusions drawn from analysis and interpretations are not same. 6. Personal bias: The interpretation and analysis of financial information depends upon the capacity or ability of interpreter (Management Accountant). The data must be carefully analyzed and interpreted without involving personal bias. But there is every likelihood that the analysis and interpretations are influenced by personal bias. Personal prejudices and bias affect the objectivity of decisions. 7. Psychological resistance from staff: The installation of management accounting involves basic change in organizational setup. It calls for a rearrangement of personnel as well as their activities. New rules and
regulations are also required to be framed which affect a number of people. Hence, there is a possibility of resistance from one quarter or other. 8. Not a substitute to management: Management accounting is a tool for management. It is not a substitute for management or administration. Ultimate decisions and corrective steps or measures are being taken by management and not by management accountant. So, management accounting has a supplementary service function and has no final, say neither in in taking decisions nor in their implementation. 9. Lack of knowledge: The use of management accountancy requires the knowledge of a number of related subjects such as accountancy, statistics, management science, econometrics and engineering etc. Management should be conversant with all the subjects. Deficiency in knowledge of any of these subjects limits the use of management accounting. 10. Lack of well established conventions: Management accounting is of recent origin. It is still developing stage. It does not have well established conventions as other branches of accounting.
Management Accountant:
The person who entrusted with management accounting functions is an organization is known as management accountant. He provides financial data to the management. He plays a significant role in the decision making process of an organization. He feeds informational needs of different managerial levels by furnishing alternative plans and their profitability. The organizational status or position of management accountant varies from concern to concern depending upon the pattern of management system in that concern. He is known by different names by different organizations. He may be considered as an executive in some concerns, while he may be a member of the board of directors in some other concerns. He usually occupies a key position in the organization heading the accounting department. Definition: “The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel and the hub receiving the information. He processes that information and then returns the processed information back to where it has come from.” -- Sri P.L Tandon.
Functions of management accountant:
The functions of management accountant depend upon his status in the organization, needs of the enterprise and personal capabilities of the person. The financial executive institute, America has specified the functions of management accountant as follows. 1. Planning for control: Management accountant establishes, coordinates and maintains as an integral part of management an adequate plan for the control of operations. Such a plan would provide for profit planning. Cost standards, expense budgets, sales forecasts, capital investment programs together with the necessary procedures to effectuate the plan. 2. Reporting and interpreting: Management accountant measures performance against given plans and standards. He interprets the results of operations to all levels of management and to the owners of the business. This function includes formulation and administration of accounting policy and the compilation of statistical records or special reports. 3. Evaluation and consultation: Management accountant should evaluate various policies and programs. He should consult with all segments of management responsible for policy making. The effectiveness of planning and procedures to attain the objectives of the organization will depend upon the caliber of the management accountant. 4. Tax administration: Management accountant is expected to report to the govt. departments as required under different laws and to supervise all matters relating to all types of taxes. 5. Appraisal of external effects: Management accountant is to assess various economic and fiscal policies of government. He should also evaluate the impact of other external factors on the attainment of organizational objectives. 6. Protection of assets: He should ensure physical protection for the assets of the business concern through adequate internal control and proper insurance coverage. 7. Economic appraisal: He should continuously appraise economic and Special Forces and government influences and interpret their effect upon the business.
Duties of Management Accountant
The primary duty of management accountant is to help management in taking correct policy decisions and improving the efficiency of entrepreneurial operation. It is the duty of the management accountant to keep management at all levels duly informed of their actual attainments and positions. The Controller’s Institutes of America has defined the following duties of management accountant or controller. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. The installation and supervision of all accounting records. The preparation and interpretation of the financial statements/records. The continues audit of all accounts and records of the concern wherever located. The compilation of production costs and distribution costs. The taking and costing of all physical inventories. The preparation and filing of tax returns and the supervision of all matters relating to taxes. The preparation and interpretation of all statistical records. The budgets of annual budgets covering all activities for submission to the Board of Directors prior to the beginning of the fiscal year. The ascertainment of that all properties are properly and adequately insured. The initiation, preparation and insurance of standard practices relating to all accounting matters and procedures and coordination of the system. The maintenance of adequate records of authorized appropriations and determination that all sums expended pursuant thereto are properly accounted. The ascertainment that financial transactions covered by the minutes of the Board of Directors and / or Executive Committee are properly executed and recorded. The maintenance of adequate records of all contracts and leases. The approval for payment of all cheques, promissory notes and other negotiable instruments. The examination of all warrants for withdraws of securities and determination that such withdrawals are made in conformity with the bye-laws and regulations established.
From the above it can easily be observed that the functions of management are peripheral. In order to be a successful management accountant he should have direct contract with the top management.
doc_377870998.docx
Cost accounting has been created because of limits of financial accounting. It has conquer a percentage of the restrictions of financial accounting and serves the inner management by drawing its consideration on deficient operations and assisting in control of exercises of the conglomeration.
MANAGEMENT ACCOUNTING
Cost accounting has been developed due to limitations of financial accounting. It has overcome some of the limitations of financial accounting and serves the internal management by drawing its attention on insufficient operations and helping in control of activities of the organization. But cost accounting is not able to meet the informational needs of the management function, because management needs not only costing information but also information relating to the other activities. The tremendous industrial growth marked by increased production, product improvement, product diversification, increased market area, cut-throat competition has posed new challenges to the management. In view of the above factors, the management always looks at the ways and means to minimize costs and maximize profits. This demands modern techniques of control and supervision which is impossible only with the help of information not only relating to costs but also relating to other activities. Management accounting provides such information. It provides relevant information to management, so that planning, organizing, controlling, and co-ordination of business operations can be done in an ordinarily manner efficiently and effectively. Further it also provides necessary information to the management in decision making, regarding the economic activity of business unit.
Development of management accounting:
The term ‘Management Accounting’ is of recent origin. This was first used in 1950 by the British team of Accountants that visited the United State under the auspices of Analog American Productivity Council. Since then the term has become quite familiar in USA and in other countries. In the last five decades, a change was witnessed in the development of accounting from a more device of recording and compiling of income and expenditure relating to the past business events to an instrument of forecasting planning and regulating business activity.
Definition:
“Such of its techniques and procedures which accounting mainly seeks to aid the management actively have come to be known as management accounting.” --- ICAI. “Management accounting is concerned with accounting information that is useful to management.” --- Robert N. Anthony. “Management accounting includes the methods and concept necessary for effective planning for choosing among alternative business actions and for control through the evaluations and interpretation of performance.” --- American Accounting Association. From the above definitions it is clear that financial data is recorded, analyzed and presented to the management in such a way that it becomes useful to management in planning, organizing.
Scope of management accounting:
Management accounting is mainly concerned with the presentation of accounting information in the most useful was for the management. It includes all information which is provided to the management for the purpose of analysis and interpretation of the business activities. The nature and scope of management accounting includes the following. 1. Financial Accounting: Even though the financial accounting provides historical data, it is very useful for forecasting and planning. Hence, management cannot obtain full control and co-ordination of operations without a properly designed financial accounting system. 2. Cost Accounting: Cost accounting provides various techniques of costing viz., marginal costing, standard costing, differential costing, opportunity costing etc., which play a useful role in the operation and control of the business undertakings by providing the cost of manufacturing products or services. 3. Budgeting & Forecasting: Budgets include future plans, policies and goals of the organization for a fixed period. Hence for budgeting, the forecasting on the various aspects of the business is necessary. Through the budget control is exercised by comparing the actual with budgeted figures and variance, reasons for variance is ascertained and by fixing the responsibility remedial action will be taken. Forecasting is a prediction of what will happen in the given set of circumstances. But budgeting and forecasting are important for management accounting in planning various activities.
4. Inventory control: Proper and effective control of inventory is required, as it involves large sums. The control of inventory will help in controlling costs. Management accountant guides the management as regards when, where and how to purchase the raw material. 5. Reporting: One of the main functions of the management accountant is reporting. He is required to submit reports to the management on various activities of the concern so as to assist it in controlling the organization. The reports are submitted in the form of graphs, diagrams, index numbers, pictograms and other stastical techniques to make them easily understandable with the help of these reports the management can have a constant review of the working of the enterprise.
6. Internal audit: The performance of each department and the individual is judged by the internal audit system. It helps the management in fixing the responsibility on various individuals. 7. Control procedures and methods: The management accounting process includes the procedure and methods of inventory control, cost control, time control, budgetary control and variance analysis etc. 8. Tax accounting: Management accounting also includes tax accounting, income statements are prepared, taxable income is determined and income tax returns are filled as per the provisions of income tax Act. 9. Office services: Management Accountant is expected to deal with the data processing reporting on the best use of mechanical and electronic devises, communications. 10. Interpretation of data: Normally, the management accountant interprets the data available in the form of various financial statements. The current financial statements are compared not only with the past years but also with the financial statements of other firms. The management draws conclusions basing in the interpretation of data. If the data is not properly interpreted then there is the danger of drawing wrong conclusions. The management accounting is concerned with the interpretation of financial data to the management and advises them on decision making.
Objectives of management accounting:
1. Formulating the plans and policies: Planning is one of the important functions of management. Planning is essential related to future. It includes forecasting, setting goals and deciding on the programmers of activities to be undertaken. Management accounting by providing past information based on results, helps in planning and forecasting of production, sales, cash inflows and outflows. 2. Helps in organizing: Organizing is a tool for achieving the objectives in a planning two sub-functions viz., division of responsibility and lining of authority among the various personal for getting plans duty implemented. Management accounting is concerned with the establishment of cost centers budget centers, profit centers with a view to control costs and responsibilities. All these aspects help in setting up efficient organization. 3. Reporting : One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the business. It helps the management in taking timely decision the management accountant informs the financial position to the management from time to time through reports. The performance of various units/departments is also regularly communicated to the top management. 4. Motivating the employees: By fixing the targets to be achieved and providing incentives, management accounting motivates the employees to put in their best. 5. Helps in decision making: Decision making is an important and primary function of top management. During the course of business, management has to take certain important decisions like replace of labour with technology, expansion or diversification of production etc. Management accountant prepares a report on the feasibility of various alternatives and make assessment of their financial implications. This information helps the management in taking correct decisions in correct time. 6. Helps in controlling: Management accounting devices like standard costing and budgetary control are helpful in controlling performance. When actual performance is compared with predetermined objectives, the management is able to find out the deviations and take necessary corrective measures. Management accounting provides special assistance in controlling the business activities and costs.
7. Helps in co-ordination: Management accounting helps the management by providing various tools to coordinate various departments/sections. This can be done through functional budgeting. 8. Helps in tax administration: Management accounting helps the management in assessing various tax liabilities and depositing correct amount of tax with authorities concern. 9. Helps in interpretation of financial information: Interpretation of financial data is another important objective. Management accounting presents the financial information to the management in such a way that it is easily understood. If the financial data is of technical nature, the management personnel may not be able to understand the importance and utility of various statements. The management accountant explains these statements in simple language. If necessary he uses statistical devices like charts, diagrams, index numbers etc., and interpretation of financial information.
Functions of Management Accounting:
1. Modification of data: Accounting data in its original form is not suitable for managerial decision making and control purposes. Management accounting modifies the accounting data presents in financial statements in such a way which is more suitable and highly useful to management. This modification data is highly useful to management in planning various activities. Ex. Information on the sales can be presented product wise, territory wise, season wise, dealer wise, etc., 2. Financial analysis and interpretation: Management accounting helps in interpreting the financial data presented in the financial statements in simplified way and presents in non-technical manner with comments and suggestions. Interpretation of financial data is a very important function of management. Normally, top management lacks the technical knowledge and may not understand the financial data which is often presented in the technical manner. The management accountant analyse the financial data, and presents to the management with his suggestions, and comments on various alternatives. Then it is easy for the management to take decisions. 3. Planning and forecasting: Another important function of management accounting is to help the management in planning and forecasting. Planning and forecasting are essential for achieving the desired business activities. Management accounting by providing necessary information assist the management in forecasting. Management accountant with the help of various statistical techniques such as probability, correlation and regression, marginal costing, funds flow statements etc., prepare plans and forecasting. 4. Communication: Management accounting is an important medium of communication. In business concern different levels of management needs different types of information. The top management needs concise information at relatively long intervals. Middle level management needs information regularly on various activities. The lower level management is interested in detailed information of short intervals. The management accountants by preparing various reports establish communication within the organization and also with the outside world. 5. Managerial control: Controlling is one of the important functions of management accounting. The standards are fixed for various departments and individuals. Actual performance is recorded and variations are calculated. In such a way, management accounting helps the management to assess the performance of every one in organization. All this is done with the help of standard costing and budgetary control which are a part and parcel of management accounting. 6. Use of non- monetary information:
Management accounting does not restrict itself merely to financial data for helping the management in decision making process, but also considers non-monetary information. Such information may be collected from case studies, minutes of meeting, engineering records, surveys etc., 7. Strategic decision making: Very frequently, the management has to take strategic decision such as make or buy decision, replacing the old machinery with latest one, temporary shutdown of the business , decision to enter in new market etc,. Management accounting come to the rescue of management by providing financial, technical and statistical data in detail to enable it to take decisions. 8. Co-ordination: For smooth running of business, co-ordination among various departments and the staff working in them are highly essential. Management accountant by acting as a coordinator among various departments through budgeting and financial reports and work to achieve coordination. 9. Staff education: Management accounting educates the staff working in the organization in respect of techniques used, their purpose and their benefits.
Importance of Management Accounting:
In present highly competitive and complex industrial world, management accounting has become an integral part of the management. It guides the management at every step and meet the information needs of various levels of management. Management improves the efficiency of management in all aspects. It may be summarized under the following heads. 1. Proper planning: Management accounting helps the management to plan various business operations by providing accounting information. The management formulates policies, programmes and strategies with the help of accounting information. It helps to develop effective internal control and audit system. Efficient planning and effective organization brings systematic regularity in business activities. 2. Increase efficiency: Management accounting encourages efficiency in business operations. The largest of different departments are fixed in advance and achievement of targets forms a yardstick for measuring their efficiency. 3. Measurement of performance: The system of budgetary control and standard costing enables the measurement of performance. In standard costing standards are determined in advance and then the actual cost is compared with the standard cost. It helps the management to know the deviations if any between standard cost and actual cost. The performance will be good if the actual cost does not exceed the standard cost. 4. Maximum profitability: The use of the management accounting may control or even eliminate various types of wastage, production defectives etc,. The various management techniques are used to control cost of production. The reduction in cost of production increases the sales volume, thereby maximum profits to the concern. 5. Maximum return on capital employed: Management accounting through the process of planning, control and coordination helps the management in getting maximum return on capital employed. 6. Good industrial relations: Unacceptable standards or sub-standards which are often responsible for unhealthy and bad relations between management and labour can be removed by the use of management accounting. Industrial relations can thus be improved. It creates a good climate for further investments in the business concerns.
7. Services to customers: The cost control devices employed in management accounting enable the reduction of prices. All employees in the concern are made cost conscious. Since quality of goods is determined in advance the quality of goods is determined in advance the quality of the products becomes good and hence the customers are provided quality goods at reasonable prices. 8. Effective management control: The tools and techniques of management accounting are helpful to management planning, controlling and coordination of the activities of the concern. The techniques of budgetary control, standard costing and departmental operating statements greatly help in performing the controlling function.
9. Helps in communication: Management accounting helps in communicating up-to-date information to various parties interested in the successful working of a business organization.
Limitations:
1. Based on accounting records: Management accounting derives information from financial accounting, cost accounting and other records. The accuracy of data and conclusions drawn from them depend to a large extent on the accuracy of basic records such as financial and cost records. In other words the merits and demerits of management accounting depends upon the merits and demerits of the basic records. 2. Persistent efforts: The conclusions and decisions drawn by the management accountant are not extending automatically. He has to convince the authorities at all levels. Thus there is need for continuous and coordinated efforts at each management level to execute these decisions. 3. Wide scope: The scope of management accounting is very wide and broad based and this creates many difficulties in the implementation process. It considers both monetary as well as nonmonetary factors. This bridge a degree of inexactness and subjectivity I the conclusions obtained through it. 4. Costly installation: The installation of management accounting system is costly affair. It needs an elaborate organization system and number of rules and regulations. Its use is limited to the large concerns which can offer it. In other words it is not within the reach of small concerns because of the heavy cost involved. 5. Evolutionary stage: Compartively management accounting is new discipline and is still very much in a state of evolution. The techniques and tools used by this system give varying and differing results. The conclusions drawn from analysis and interpretations are not same. 6. Personal bias: The interpretation and analysis of financial information depends upon the capacity or ability of interpreter (Management Accountant). The data must be carefully analyzed and interpreted without involving personal bias. But there is every likelihood that the analysis and interpretations are influenced by personal bias. Personal prejudices and bias affect the objectivity of decisions. 7. Psychological resistance from staff: The installation of management accounting involves basic change in organizational setup. It calls for a rearrangement of personnel as well as their activities. New rules and
regulations are also required to be framed which affect a number of people. Hence, there is a possibility of resistance from one quarter or other. 8. Not a substitute to management: Management accounting is a tool for management. It is not a substitute for management or administration. Ultimate decisions and corrective steps or measures are being taken by management and not by management accountant. So, management accounting has a supplementary service function and has no final, say neither in in taking decisions nor in their implementation. 9. Lack of knowledge: The use of management accountancy requires the knowledge of a number of related subjects such as accountancy, statistics, management science, econometrics and engineering etc. Management should be conversant with all the subjects. Deficiency in knowledge of any of these subjects limits the use of management accounting. 10. Lack of well established conventions: Management accounting is of recent origin. It is still developing stage. It does not have well established conventions as other branches of accounting.
Management Accountant:
The person who entrusted with management accounting functions is an organization is known as management accountant. He provides financial data to the management. He plays a significant role in the decision making process of an organization. He feeds informational needs of different managerial levels by furnishing alternative plans and their profitability. The organizational status or position of management accountant varies from concern to concern depending upon the pattern of management system in that concern. He is known by different names by different organizations. He may be considered as an executive in some concerns, while he may be a member of the board of directors in some other concerns. He usually occupies a key position in the organization heading the accounting department. Definition: “The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel and the hub receiving the information. He processes that information and then returns the processed information back to where it has come from.” -- Sri P.L Tandon.
Functions of management accountant:
The functions of management accountant depend upon his status in the organization, needs of the enterprise and personal capabilities of the person. The financial executive institute, America has specified the functions of management accountant as follows. 1. Planning for control: Management accountant establishes, coordinates and maintains as an integral part of management an adequate plan for the control of operations. Such a plan would provide for profit planning. Cost standards, expense budgets, sales forecasts, capital investment programs together with the necessary procedures to effectuate the plan. 2. Reporting and interpreting: Management accountant measures performance against given plans and standards. He interprets the results of operations to all levels of management and to the owners of the business. This function includes formulation and administration of accounting policy and the compilation of statistical records or special reports. 3. Evaluation and consultation: Management accountant should evaluate various policies and programs. He should consult with all segments of management responsible for policy making. The effectiveness of planning and procedures to attain the objectives of the organization will depend upon the caliber of the management accountant. 4. Tax administration: Management accountant is expected to report to the govt. departments as required under different laws and to supervise all matters relating to all types of taxes. 5. Appraisal of external effects: Management accountant is to assess various economic and fiscal policies of government. He should also evaluate the impact of other external factors on the attainment of organizational objectives. 6. Protection of assets: He should ensure physical protection for the assets of the business concern through adequate internal control and proper insurance coverage. 7. Economic appraisal: He should continuously appraise economic and Special Forces and government influences and interpret their effect upon the business.
Duties of Management Accountant
The primary duty of management accountant is to help management in taking correct policy decisions and improving the efficiency of entrepreneurial operation. It is the duty of the management accountant to keep management at all levels duly informed of their actual attainments and positions. The Controller’s Institutes of America has defined the following duties of management accountant or controller. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. The installation and supervision of all accounting records. The preparation and interpretation of the financial statements/records. The continues audit of all accounts and records of the concern wherever located. The compilation of production costs and distribution costs. The taking and costing of all physical inventories. The preparation and filing of tax returns and the supervision of all matters relating to taxes. The preparation and interpretation of all statistical records. The budgets of annual budgets covering all activities for submission to the Board of Directors prior to the beginning of the fiscal year. The ascertainment of that all properties are properly and adequately insured. The initiation, preparation and insurance of standard practices relating to all accounting matters and procedures and coordination of the system. The maintenance of adequate records of authorized appropriations and determination that all sums expended pursuant thereto are properly accounted. The ascertainment that financial transactions covered by the minutes of the Board of Directors and / or Executive Committee are properly executed and recorded. The maintenance of adequate records of all contracts and leases. The approval for payment of all cheques, promissory notes and other negotiable instruments. The examination of all warrants for withdraws of securities and determination that such withdrawals are made in conformity with the bye-laws and regulations established.
From the above it can easily be observed that the functions of management are peripheral. In order to be a successful management accountant he should have direct contract with the top management.
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