6. Interpretation of data: Analysis and interpretation of financial statements are important parts of management accounting.

Financial statements may be studied in comparison to statements of earlier periods or in comparison with the statements of similar other firms. After analyzing, the interpretation is made and the reports drawn from the analysis are presented to the management in a simple language. 7. Reporting: The interpreted information in the form of quantitative expression must be communicated to those who are interested in it or to whom it carries vital importance. At the same time these data should be communicated in a reasonable time. Delay in passing on the data makes the data useless and obsolete. The reports may cover profit and loss account, cash and fund flow statement, stock reports, etc. Reports may be sent monthly, quarterly, half yearly, etc. 8. Internal audit: It needs devising a system of internal control by establishing internal audit coverage for all operating units. Internal audit helps the management in fixing responsibility of different individuals. 9. Tax accounting: Income statements are prepared and tax liabilities are calculated. The management is informed about tax burden from Central Government, state government and local authorities. This include the computation of taxable income as per tax law, filing of return etc. apart from this, some of the acts which have their influence on management decisions are the companies act, the controller of capital issues act, MRTP act, etc. 10. Methods and Procedures: This includes maintenance of proper data processing and other office management services, reporting on best use of mechanical and electronic devices. It provides statistical data to the various departments of the organization. It undertakes special cost studies and estimations, reports on costvolume-profit relationships, under changing conditions. OBJECTIVES (PURPOSES) OF MANAGEMENT ACCOUNTING The primary objective of management accounting is to enable the management to maximize profits or minimize losses. The fundamental object of management accounting is to assist management in their functions of formulating policies, making decisions, planning activities and controlling business operations. The evolution of management accounting has given a new approach to the function of accounting. The main objectives or purposes of management accounting can be summarized as follows: 1. Planning and policy formulation: Planning is one of the primary functions of management. It involves forecasting on the basis of available information, setting goals, framing policies, determining the alternative courses of action and deciding on the programme of activities to be undertaken. Management accounting can help greatly in these processes. Management accounting facilitates for the preparation of statements in the light of pats results and gives estimation for the future. 2. Help in the interpretation process: The main object of management accounting is to present financial information to the management. Financial information is to technical nature. Therefore, the financial information must be presented in such a

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way that it is easily understood, apart from the simple language. The management accounting presents accounting information in an intelligible manner and explains with the help of statistical devices like charts, diagrams, graphs, index numbers, etc. Helps in decision making: Management accounting makes decision making process more modern and scientific by providing significant information relating to various alternatives in terms of cost and revenue. With the help of techniques provided by management accounting, data relating to cost, price and savings for each of the available alternatives are collected and analyzed and provides a base for taking sound decisions. Controlling: Management accounting is a useful device of managerial control. Accounting devices like standard costing and budgetary control are helpful in controlling performance. The actual results are compared with pre-determined objectives. Cost control is affected through the use of standard costing and departmental control is made possible through the use of budgets. The management is able to control performance of each and every individual with the help of management accounting devices. Reporting: One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This facilitates management to take proper and timely decisions. The object of management accounting is to provide data. It presents the different alternatives plans before the management in a comparative manner. The performance of various departments is also communicated to the top management. Motivating: Delegation increases the job satisfaction of employees and encourages them to look forward. So it serves as a motivational device. Targets are laid down for employees. The settings of goals, planning the best and economical course of action, measuring the results, etc. increases the effectiveness of the organization and motive the workers. Helps in organizing: Return on Capital employed is one of the tools of management accounting. Since management accounting stresses more on budget centres, investment centres, cost centres and profit centres, with a view to control and responsibilities, it also contributes to principles of decentralization to a greater extent. All these aspects are helpful in setting up effective and efficient organization framework. Coordinating operations: Management accounting helps in overall control and coordination of business operations. It provides tools which are helpful in coordinating the activities of different sections or departments. Budgets are important means of coordination.

FUNCTIONS OF MANAGEMENT ACCOUNTING Management accounting is closely associated with the process called management control. Management control is the process of assuring that resources are obtained and used effectively and efficiently in the accomplishment of an organizations objectives. The basic function of management accounting is a part of accounting. It has developed out of the need for making more and more use accounting for taking

managerial decisions. Management accounting functions may be said to include all activities with collecting, processing, interpreting and presenting data to management. The manner in which management accounting satisfies the requirements of the management for arriving at appropriate business decisions may be described as follows: 1. Modifications of data: Accounting data as such are not suitable for managerial decision-making and control purposes. Management accounting modifies the available accounting data by rearranging in such a way that it becomes useful for management. The modification of data in similar groups makes the data more useful and understandable. For example, sales figures for different months may be classified, to know the total sales made during the period, product-wise, salesmenwise and territory-wise. 2. Planning and forecasting: Under the process of planning, management formulates policies and executes plans to achieve the desired objectives. Management accounting can help greatly in this process. Planning and forecasting are essential for achieving business objectives. The most important function of management accounting is to make short-term and long-term forecasts and planning the future operations of the business. Management accounting provides necessary information and data for forecasting. It uses various techniques such as budgeting, standard costing, marginal costing, fund flow statement, trend ratio, correlation etc. These are important tools of management accounting in planning. 3. Financial analysis and interpretation: The accounting data is analyzed and interpreted meaningfully for effective planning and decision-making. The interpretation is most important function of management accounting. The top management people are not always well-versed in accounting techniques. They may not understand the financial data in its raw form. Management accounting selects useful data, analyses it and presents the interpretation before management in a non-technical manner along with comments and suggestions. Thus, analysis and interpretation of data are considered as backbone of management accounting. 4. Communication: Management accounting is an important medium of communication. Different levels of management (top, middle and lower) need different types of information. The top management needs concise information at relatively long intervals, middle management needs information regularly and the lower management is interested in detailed information at short intervals. Management accounting establishes communication within the organization and with outside world. 5. Facilitate Managerial control: Management accounting is very useful in controlling performance. Management accounting enables all accounting efforts to be directed towards the attainment of goals efficiently by controlling the operations of the company more effectively. The standards of various departments and individuals are set up. The actual performance is recorded and variations are calculated. This process enables the management to assess the performance of everyone in the organization. 6. Use of qualitative information: Mere financial data and its analysis and interpretation are not sufficient for decision-making purposes. Management accounting does not confine itself merely to financial data to assist the

management in decision-making process but frequently draws upon various sources other than accounting for qualitative information which cannot be converted into monetary terms. For this purpose, engineering records, case studies, special surveys, productivity reports etc. are greatly relied upon. 7. Decision making: Management accounting furnishes accounting data and statistical information required for the decision making process which vitally affects the survival and the success of the business. Management accounting supplies analytical information regarding various alternatives and the choice of management is made easy. 8. Coordinating: Coordination is the essence of managerial activity. The targets and performances of different departments are communicated to the management from time to time. Different tools such as budgeting, financial analysis and interpretation etc. are provided. It helps to increase the efficiency of various sections thereby increasing profitability of the concern. The supply of adequate information at the proper time will increase the efficiency of the management. DISTINCTION OF FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING Financial accounting and management accounting are closely interrelated since management accounting draws out a major part of the information from financial accounting and modifies the same for managerial use. Financial accounting is concerned with the recording of day to day transaction of the business. Finally the concern finds out profit or loss for a period through the profit and loss account and judge the financial position by preparing balance sheet. The main concern of management accounting is to provide necessary information- quantitative as well as qualitative- to the management for planning and control. Despite the close interrelationship that exists, there are certain points of difference between the two and they are discussed below: 1. Objective: The primary objective of financial accounting is to make periodical reports to owners, creditors and government but in management accounting the objective is to assist internal management. Thus, the former involves external reporting and the latter involves internal reporting. The financial accounting is primarily an external reporting system while management accounting is primarily an internal reporting system. 2. Nature of data used: Financial accounting is concerned with historical records relating to past whereas management accounting is mainly concerned with the future plans and politics. That is, financial accounting makes use of data which is historical, quantitative, monetary and objective, while management accounting uses data which is descriptive, statistical, and subjective and relates to the future. 3. Subject matter: Financial accounting deals with the position of the business as a whole i.e., the financial statements report mostly the overall performance or position of the business. But management accounting deals with assessing the activities of different units, departments or divisions. Management accounting is limited in its coverage- deals with vital and significant activities.

4. Flexibility: In financial accounting, attempts are being made to prepare accounts in accordance with the standards fixed by and/or suitable for external parties. On the other hand, management accounting considers the standards fixed by management itself. Thus management accounting is free in its approach and flexible as compared to the rigidities of the financial accounting principles and rules. 5. Legal compulsion: Financial accounting has more or less become compulsory or statuary for every business. But a business is free to install or not to install a system of management accounting. Thus management accounting is adopted on voluntary basis to increase the managerial efficiency. 6. Periodicity of reporting: Under management accounting, immediate and prompt communication of data is very much required. In fact, if data are received too late or they are not upto date, they would not be considered as valuable for the use of management. Prompt and quick communication of information and keeping them upto date are not required under financial accounting. The period of reporting is much longer in financial accounting as compared to management accounting. 7. Precision: Under financial accounting, it is necessary to record the transactions with perfect accuracy and precision. All transactions are therefore, recorded at actual amount involved. As the information is meant for internal use, there is less emphasis on precision in the case of management accounting. Sometimes, approximated figures are much more significant and valuable than actual figures, because the objective of these figures is to find out the trend in business and not to disclose accurate financial position. 8. Unit of account: Financial accounting recognizes the whole business concern as one unit of account. Financial statements prepared at the end of a year highlight upon the operating results and position of the business as whole. While, management accounting is concerned, in addition to overall position, with assessing the results of the activities of those divisions which are set up in the process of organization. 9. Coverage: Financial accounting covers entire range of business activity while management accounting considers only parts of activity which are relevant to management for decision making. In financial accounting only those events and transactions are recorded which can be expressed in money. On the other hand, management accounting touches and deals with non- monetary events such as competition, technical changes, and change in the value of money. Financial accounting is static in nature whereas management accounting is dynamic in nature. 10. Publication and audit: Financial statement like profit and loss account and balance sheet are published for the use of general public. They are audited by practicing chartered accountants while there is no such provision in management accounting. All the reports, statements and forecast made by management accounting are for the internal use of management only. 11. Accounting principles: Financial accountings are governed by the generally accepted principles and conventions. No such set of principles are followed in management accounting. Management accounting is used for taking policy

decisions. The form and method of presenting figures differs from concern to concern. 12. Methodology: Management accounting and financial accounting both differ on the methodology also. In financial records are maintained in the form of revenue, income and expenditure, personal accounts and property accounts etc. In management accounting, costs and revenue are mostly reported by responsibility centres or profit centres. DISTINCTION BETWEEN MANAGEMENT ACCOUNTING AND COST ACCOUNTING 1. Object: The primary objective of cost accounting is to determine and to record the cost of producing a product or providing a service. The purpose of management accounting is to provide information to the management for planning and coordinating the activities of the business. 2. Nature: Cost accounting is based on past and present facts and figures while management accounting deals with future projections and plans, on the basis of past and present cost data. 3. Principles: Certain principles and procedures are followed in the system of costing. But no such principles and procedures are being followed in management accounting. The information is prepared and presented as is required by the management. 4. Data used: Only quantitative aspect is recorded in cost accounting while management accounting uses both quantitative and qualitative information. 5. Parties: The facts and data, provided by cost accounting, are preferred by both internal as well as external parties whereas the information furnished by management accounting is useful only to the management. TOOLS OF MANAGEMENT ACCONTING 1. Financial planning: Financial planning involves determining both long term and short term financial objectives of the firm, formulating financial policies and developing the financial procedures to achieve the objective. Every firm has to take a decision about the sources of raising funds. The funds can be raised either through issue of share capital or through raising loans. Again a decision is to be taken about the type of capital, i.e., equity share capital or preference share capital. When it decides to raise fund through loans, it is to be decided whether the loan is of short-term or long-term nature. The proportion between share capital and loan capital should also be decided. 2. Analysis of financial statements: The analysis and interpretation of financial statements are an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earning, ability to pay debt and probability of a sound dividend policy. The technique of financial analysis includes comparative financial statements, ratios, fund flow statements, trend analysis etc. These are important tools.

3. Historical cost accounting: The statement of actual costs after they have been incurred is called historical cost accounting. Although these are of limited value, they are essential in order to operate a standard costing system. 4. Standard costing: Standard costing is an important tool of cost control which is one of the main objectives of management accounting. This involves the technique of preparation of standard costs, their comparison with actual costs and analysis of the differences i.e., variances to their causes and point of incidence. It is the most effective method available for controlling performances and costs. 5. Budgetary control: One of the essential features of modern management is planning and control. There are a number of devices which help in controlling. The most widely used device for managerial control is budget. It is a quantitative expression of plan of action. The actual performance is recorded and compared with the pre-determined targets. Finding out deviation is an important tool for planning. 6. Marginal costing: This is a method of costing which is concerned with changes in costs resulting from changes in the volume of production. Marginal costing is helpful for measuarement of profitability of different line of production. 7. Decision accounting: Decision making is the primary function of top management. Decision taking involves a choice from various alternatives. Decisions are taken after studying the alternative data in terms of costs, prices and profits furnished by management accounting and exercising the best choice after considering other non-financial factors. 8. Revaluation accounting: Revaluation accounting is also an important tool of management accounting. This term is used to denote the methods employed for overcoming the problems connected with fixed asset replacement in a period of rising prices. It ensures the maintenance and preservation of the capital of the enterprise. 9. Ratio accounting: Ratio accounting signifies the technique and methodology of analysis and interpretation of financial statements by means of accounting ratios derived from such statements. Ratio accounting includes trend analysis, comparative financial statements, inter-period comparisons, ratio analysis, fund flow statements, etc. The analysis and interpretations of financial statements result in the presentation of information that will aid to business executives, investors, creditors, etc. 10. Control accounting: It consists of techniques of standard coating, budgetary control, control reports and statements, internal check, internal audit and reports, it is in this field that the management has scope to display ingenuity in the analysis, interpretation and presentation of information at all levels of management. 11. Internal auditing: Internal auditing is an independent appraisal activity within an organization for the review of accounting, financial and other operations as a basis for protective and constructive service to management. It is a type of control tool which functions by measuring and evaluating the effectiveness of other types of control. It deals primarily with accounting and financial matters but it may also properly deal with matters of an operating nature.

12. Management information system: One of the primary functions of the management accounting of an enterprise is to provide management at all levels with necessary factual data and information so as to enable them to carry out the functions of planning, controlling and decision-making effectively. With the development of electronic devices for recording and classifying data, reporting to management has considerably improved. Feedback of information and responsive actions can be used as control techniques. 13. Statistical techniques: There are a large number of statistical and graphical techniques which are used in management accounting. Some common examples are master chart, chart of sales and earning, investments chart, etc. NEED AND IMPORTANCE OF MANAGEMENT ACCOUNTING Management accounting is the application of appropriate accounting techniques and concepts in processing historical and projected economic data of a business entity to assist its management in implementing plans for realizing its objectives. In the present complex industrial world, management accounting has become an integral part of the management. It guides and advises management at every step. The following are the advantages of management accounting: 1. It increases the efficiency of various business functions. The targets of different departments are fixed in advance. The achievement of these goals is a tool for measuring their efficiency. 2. The activities of the concern are planned in a systematic manner. Various operations can be planned with the help of accounting information budgeting and forecasting. 3. The different tools of management accounting have provided validity, objectivity and reliability in business management. 4. Different techniques of management accounting help in effective control of business operations. The maximum utilization of capital and maximum return on capital invested in business becomes feasible through application of accounting techniques. 5. It creates harmony in the relationship between the management and employees. It enables the management to improve its service to its customers. 6. The management aims to control the cost of production and at the same time increase the efficiency of employees. When cost of production is reduced, it will increase the profit. 7. The business gets rid of seasonal and cyclical fluctuations on account of the use of management accounting. 8. Unacceptable standards or sub-standards, which are often responsible for unhealthy and bad relations between management and employees, can be removed by t he use of management accounting. There arise improved and healthier relations. 9. The use of management accounting may control or even eliminate various types of wastages, production defectives, etc. 10. Management accounting helps in communicating upto date information to various parties interested in successful working of the business organization.

LIMITATIONS OF MANAGEMENT ACCOUNTING 1. Limitations of basic records: Management accounting is mainly concerned with the rearrangement or modification of data. It derives its information from financial accounting, cost accounting and other records. The correctness of the management accounting depends upon the correctness of these basic records: that is, their limitations are also the limitations of management accounting. 2. Persistent efforts: The conclusions and decisions drawn by the management accountant are not executed automatically. Thus, there is need for continuous and coordinated efforts of each management level to execute these decisions. 3. Management accounting is only a tool: Management accounting should never be considered as an alternate or substitute for management. This is a mere tool for management. Ultimate decisions and corrective steps or measures are being taken by management and not by management accountant. 4. Costly installation: It is very costly. The installation of management accounting system needs a very elaborate organization and numerous rules and regulations. This results in heavy investments which only big concerns can afford. 5. Personal bias: The interpretations of financial information depend upon the capacity of interpreter as one has to make a personal judgment. Personal prejudices and bias affect the objectivity of decisions. 6. Resistance: The installation of management accounting involves basic change in organizational set up. New rules and regulations are also required to be framed which affect a number of personnel and hence there is a possibility of resistance from some quarters or the other. 7. Evolutionary stage: Management accounting is only in a development stage. It has not reached the final stage. Its conventions are not as exact and established as of other branches of accounting. Being an inexact science, its results depend to a very great extent upon the intelligent interpretation of the data for managerial use. 8. Provides only data: The main function of management accounting is to provide data and not decisions. It can only inform, not prescribe. This limitation should also keep in mind while using the techniques of management accounting. 9. Broad based scope: The scope of management accounting is wide and broad based and this creates many difficulties in the implementation process. Management requires information from both accounting as well as nonaccounting sources. These create many problems and bring a degree of inexactness and subjectivity in the conclusion obtained through it. 10. Not an alternation to administration: Management accounting is a tool of management, to an alternative of management. It cannot replace the management or administration. MANAGEMENT ACCOUNTING The officer who is entrusted with management accounting function in an organization is known as management accountant. He plays a significant role in the decisionmaking process of an organization. The organizational status or position of

management accountant varies from concern to concern depending upon the pattern of management system in that concern. 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 the information and then returns the processed information back to where it came from. A controller or management accountant can exercise better influence and control more by his personality, mental equipment, industrial background, competence and integrity than by virtue of his holding the office. FUNCTIONS OF MANAGEMENT 1. To establish, coordinate and administer, as an integral part of management, an adequate plan for the control of operations. Such a plan would provide, to the extent required in the business cost standards, expense budget, sales forecasts, profit planning, and programme for capital investment and financing, together with necessary procedures to effectuate the plan. 2. To compare performance with operating plan and standards and to report and interpret the results of operation to all levels of management, and to the owners of the business. This function includes the formulation and administration of accounting policy and the compilation of statistical records and special reports as required. 3. To consult with all segments of v responsible for policy or action concerning any phase of the operations of business as it relates to the attainment of objectives, and the effectiveness of policies, organization structures, procedures. 4. To administer tax policies and procedures. 5. To supervise and coordinate preparation of reports to government agencies. 6. To assure fiscal protection for the assets of the business through adequate internal control and proper insurance coverage. 7. To continuously appraise economic and social forces and government influences, and interpret their effect upon business. DUTIES OF MANAGEMENT ACCOUNTANT Controllers Institute of America has defined the following duties of Management Accountant or Controller: 1. The installation and interpretation of all accounting records of the corporation. 2. The preparation and interpretation of the financial statements and reports of the corporation. 3. Continuous audit of all accounts and records of the corporation wherever located. 4. The compilation of costs of distribution. 5. The compilation of production costs. 6. The taking and costing of all physical inventories. 7. The preparation and filing of tax returns and to the supervision of all matters relating to taxes.

8. The preparation and interpretation of all statistical records and reports of the corporation. 9. The preparation as budget, in conjunction with other officers and department heads, of an annual budget covering all activities of the corporation for submission to the Board of Directors prior to the beginning of the fiscal year. The authority of the Controller, with respect to the veto of commitments of expenditures not authorized by the budget shall, from time to time, be fixed by the Board of Directors. 10. The ascertainment currently that the properties of the corporation are properly and adequately insured. 11. The initiation, preparation and issuance of standard practices relating to all accounting matters and procedures and the coordination of system throughout the corporation including clerical and office methods, records, reports and procedures. 12. The maintenance of adequate records of authorized appropriations and the determination that all sums expended pursuant thereto are properly accounted for. 13. The ascertainment currently that financial transactions covered by minutes of the board of Directors and/or the Executive committee are properly executed and recorded. 14. The maintenance of adequate records of all contracts and leases. 15. The approval for payment(and/or countersigning) of all cheques, promissory notes and other negotiable instruments of the corporation which have been signed by the treasurer or such other officers as shall have been authorized by the by-laws of the corporation or from time to time designated by the Board of Directors.