Overview of Financial accounting

Three phases pre-industrialization, post-industrialization & Competitive

environment
Development of FA in post-ind
o Major factors, volume production, separation of investors/users from
management
o It was not possible to operate old system of accounts for catering to
the needs of the volume & location challenges.
Objective of the development of new system of accounting
o Purpose of above steps safeguarding investors & other users as they
were separate from management
Overview of FA, definition
o Systematic recording, classifying and summarizing business and
financial transactions.
o Accounting is just a logical way of converting data into information for
making decision.
Example of election,
o Difficult to know their opinion at once in a gathering
o Capture all eligible voters through voters lists
o Various points are established for casting of votes (
o Casted votes are counted according to candidates (Classifying in
ledger)
o Results are summarized (Summarizing)
o Results are presented for decision of govt making (
o
Is just preparation of FS sufficient
o How do we guarantee correctness & fairness of the FS
o Various Features of internal control, audit, internal audit, disclosure
requirements, regulatory framework are put in place

Management Accounting
Definition
Objectives
Difference between FA & MA
Difference between CA & MA
Limitations of MA
Overview of MA Broad areas

Case Studies
http://www.cimaglobal.com/Professional-ethics/Ethics/Responsible-business/Ethicaldilemma/Case-studies/

http://highered.mheducation.com/sites/0077098595/student_view0/case_studies.ht
ml
Difference between cost accounting and management accounting
Usually though to be one and the same as users (internal management) of
both are same.
If we talk about cost accounting, it has a quantitative approach but the
management accounting gives emphasis on both quantitative and qualitative
data.

Difference of FA & MA

Difference of CA & MA

BASIS OF
COMPARISO
N

COST ACCOUNTING

MANAGEMENT ACCOUNTING

Meaning

The recording, classifying

and summarising of cost
data of an organisation is
known as cost accounting.

The accounting in which the both

financial and non-financial
information are provided to
managers is known as Management
Accounting.

Information
Type

Quantitative.

Quantitative and Qualitative.

Objective

Ascertainment of cost of
production.

Providing information to managers

to set goals and forecast strategies.

Scope

Narrow, as it is limited only

up to the cost information.

Its area of operation is wide.

Specific
Procedure

Yes

No

Recording

Records past and present

data

It gives more stress on the analysis

of future projections.

Definition of Cost Accounting

Cost Accounting is a method of collecting, recording, classifying and

analyzing the information related to cost.
The information provided by it, is helpful in the decision making process of
managers. There are three major elements of cost which are material (direct
& indirect), labor (direct & indirect) and overhead (Production, Office &
administration, Selling & Distribution, etc).
As compared to MA its scope is narrow & limited. It has specific procedures
and records past & present data.
The main aim of the cost accounting is to track the cost of production and
fixed costs of the company. This information is useful in reducing and
controlling various costs. It is very similar to financial accounting, but it is not
reported at the end of the financial year.

Definition of Management Accounting

Management Accounting refers to the preparation of financial and non-financial
information for the use of management of the company. It is also termed as
managerial accounting. The information provided by it is helpful in making policies
and strategies, budgeting,, forecasting future plans, making comparisons and
evaluating performance of the management.
The reports produced by management accounting are used by the internal
management (managers and employees) of the organization and so they are not
reported at the end of the financial year.
Key Differences Between Cost Accounting and Management Accounting
The accounting related to the recording and analyzing of cost data is cost
accounting. The accounting related to the producing information which is used by
the management of the company is management accounting.
Cost Accounting provides quantitative information only. On the contrary,
Management Accounting provides both quantitative and qualitative information.
Cost Accounting is a part of Management Accounting as the information is used by
the managers for making decisions.
The main objective of the Cost Accounting is the ascertainment of cost of producing
a product, but the main objective of the management accounting is to provide
information to managers for setting goals and future activity.
There are specific rules and procedure for preparing cost accounting information
while there is no specific rules and procedures in case of management accounting
information.
The scope of Cost Accounting is limited to cost data however the Management
Accounting has a wider area of operation like tax, budgeting, planning and
forecasting, analysis etc.
Similarities
Branch of Accounting
Helpful in decision making

Prepared for a particular period.

Not reported at the end of the financial year.
Conclusion
Both the cost accounting and management accounting are a part of accounting.
They are helpful in for ensuring smooth and efficient running of the business. On the
basis of the information provided by the two entities various analysis are conducted.
Cost accounting aims at reducing extra expenditure, eliminating unnecessary costs
and controlling various costs. On the other hand management accounting aims at
planning of policies, strategy formulation setting goals etc.
Financial accounting has its focus on the financial statements which are distributed
to stockholders, lenders, financial analysts, and others outside of the company.
Courses in financial accounting cover the generally accepted accounting principles
which must be followed when reporting the results of a corporation's past
transactions on its balance sheet, income statement, statement of cash flows, and
statement of changes in stockholders' equity.
Managerial accounting has its focus on providing information within the company so
that its management can operate the company more effectively. Managerial
accounting and cost accounting also provide instructions on computing the cost of
products at a manufacturing enterprise. These costs will then be used in the
external financial statements. In addition to cost systems for manufacturers,
courses in managerial accounting will include topics such as cost behavior, breakeven point, profit planning, operational budgeting, capital budgeting, relevant costs
for decision making, activity based costing, and standard costing.

Point of
Differences

Financial Accounting

Cost Accounting

Meaning

Recoding of transactions is part

of financial accounting. We make
financial statements through
these transactions. With the
help of financial statements, we
analyze the profitability and
financial position of a company.

Cost accounting is used to

calculate cost of the product
and also helpful in controlling
cost. In cost accounting, we
study about variable costs,
fixed costs, semi-fixed costs,
overheads and capital cost.

Purpose

Purpose of the financial

statement is to show correct
financial position of the
organization.

To calculate cost of each unit of

product on the basis of which
we can take accurate decisions.

Recording

Estimation in recording of
financial transactions is not
used. It is based on actual
transactions only.

In cost accounting, we book

actual transactions and
compare it with the estimation.
Hence costing is based on the
estimation of cost as well as on
the recording of actual
transactions.

Controlling

Correctness of transaction is
important without taking care of
cost control.

Cost accounting done with the

purpose of control over cost
with the help of costing tools
like standard costing and
budgetary control.

Period of reporting of financial

accounting is at the end of
financial year.

Reporting under cost

accounting is done as per the
requirement of management or
as-and-when-required basis.

In financial accounting, costs are

recorded broadly.

In cost accounting, minute

reporting of cost is done perunit wise.

Fixation of selling price is not an

objective of financial accounting.

Cost accounting provides

sufficient information, which is
helpful in determining selling
price.

Period

Reporting

Fixation of
Selling Price

Relative
Efficiency

Valuation of
Inventory

Process

Relative efficiency of workers,

plant, and machinery cannot be
determined under it.

Valuable information about

efficiency is provided by cost
accountant.

Valuation basis is cost or

market price whichever is less

Cost accounting always

considers the cost price of
inventories.

Journal entries, ledger accounts,

trial balance, and financial
statements

Cost of sale of product(s),

addition of margin and
determination of selling price of
the product.

S.No
.

Cost Accounting

Management Accounting

The main objective of cost

accounting is to assist the
management in cost control
and decision-making.

The primary objective of management

accounting is to provide necessary
information to the management in the
process of its planning, controlling, and
performance evaluation, and decisionmaking.

Cost accounting system uses

quantitative cost data that
can be measured in monitory
terms.

Management accounting uses both

quantitative and qualitative data. It also
uses those data that cannot be measured
in terms of money.

Determination of cost and

cost control are the primary
roles of cost accounting.

Efficient and effective performance of a

concern is the primary role of management
accounting.

Success of cost accounting

does not depend upon
management accounting
system.

Success of management accounting

depends on sound financial accounting
system and cost accounting systems of a
concern.

Cost-related data as
obtained from financial

Management accounting is based on the

data as received from financial accounting

accounting is the base of

cost accounting.

and cost accounting.

Provides future cost-related

decisions based on the
historical cost information.

Provides historical and predictive

information for future decision-making.

Cost accounting reports are

useful to the management as
well as the shareholders and
creditors of a concern.

Management accounting prepares reports

exclusively meant for the management.

Only cost accounting

principles are used in it.

Principals of cost accounting and financial

accounting are used in management
accounting.

Statutory audit of cost

accounting reports are
necessary in some cases,
especially big business
houses.

No statutory requirement of audit for

reports.

10

Cost accounting is restricted

to cost-related data.

Management accounting uses financial

accounting data as well as cost accounting
data.

http://www.tutorialspoint.com/accounting_basics/management_accounting_introduct
ion.htm
Very Imp link
Useful Link
http://denniscaplan.fatcow.com/TOC.htm (All chapters description)
Academic literature traces the origin of management
accounting from two different perspectives. One
perspective takes the economic approach and is
supported by authors such as Chandler (1977), Kaplan
(1984) and Johnson and Kaplan (1987). The

other approach is supported by authors such as

Miller and OLeary (1987), Hoskin and Macve
(1988) and Ezzamel et al. (1990) and is referred to
as the non-economic approach (Luft, 1997).
1.1. Economic approach. Proponents of the economic
approach argue that management accounting
practices originated from the private sector to support
business operations. For example, Johnson and
Kaplan (1987) state that the origins of modern management
accounting can be traced to the emergence
of managed, hierarchical enterprises in the early 19 th
century. During this period the need to gain more
efficiency in production was realized. Factory owners
started hiring workers on a long-term basis in a centralized
workplace and hence, the development of
hierarchical organizations. Factories were frequently
located in a considerable distance from the head office
of the owners, and an information system was required to increase and judge the efficiency of the
managers and workers at the factory. Before this time
(the industrial revolution period) workers were hired
on a short-term basis and paid on work done, while
factories were owner managed. The role of accounting
was, thus, limited to record keeping.
Boer (2000). He asserts that
management accounting began under the label cost
accounting in the distant past and split from cost
accounting in the 1950s

Johnson and Kaplan (1987) conclude that management

accounting systems evolved to motivate and
evaluate the efficiency of internal processes and not
to measure the overall profits of the organization.
Hence, a separate financial accounting system had
to be operated to record transactions and process
data for preparing annual financial statements for
the owners and creditors of the firm

(IFAC, 1998) identified four stages in which management

accounting has evolved:
Stage 1 Prior to 1950, the focus was on cost
determination and financial control, through the
use of budgeting and cost accounting technologies.
Stage 2 By 1965, the focus had shifted to the

provision of information for management planning

and control, through the use of technologies such
as decision analysis and responsibility accounting.
Stage 3 By 1985, attention was focused on the
reduction of waste in resources used in business
processes, through the use of process analysis
and cost management technologies.
Stage 4 By 1995, attention had shifted to the
generation or creation of value through the effective
use of resources, through the use of
technologies, which examine the drivers of customer
value, shareholder value and organizational
innovation
1.2. Non-economic approach. Proponents of the noneconomic
approach argue that in the nineteenth century
and early twentieth century, control through
measuring individual performance and analyzing it by
comparison with norms or standards was developed in
governmental institutions such as the military (Hoskin
and Macve, 1988). Offices that collected national
health statistics (Hacking, 1990) also introduced these
measures before they were common in firms. They
argue that management accounting practices were
developed for disciplinary and academic evaluation
purposes and were not meant to support business as
argued by the proponents of the economic approach

Objectives of MA
The phrase Management Accounting includes two words, Management and Accounting. It refers to
Accounting for the Management. Management accounting is the procedure to develop management
reports and accounts that present precise and timely financial and statistical information required by
managers to make day-to-day and short-term decisions.
It demonstrates how the accounting function can be re-oriented so as to fit it within the structure of
management activity
Management accounting creates monthly or weekly reports for an organization's internal audiences
such as department managers and the chief executive officer. These reports characteristically
demonstrate the amount of available cash, sales revenue generated, amount of orders in hand, state
of accounts payable and accounts receivable, outstanding debts, raw material and inventory, and
also comprises of trend charts, variance analysis, and other statistics
The information in the management accounting system is used for Measurement, Control and
Decision-making
Objectives of Management Accounting

Decisions

The main objective of an internal managerial accounting system is to provide information to

managers so they can make sound decisions. The goal is not to comply with outside
demands, such as those of bankers, but rather to capture valuable data that can be used to
manage and control a business better. Since the internal needs of firms vary, so do their
accounting systems -- what is good for one business may not work for another. Usually such
systems are complex, gathering lots of details, depending on management requirements.
For example, a manager may want to know the amount of materials a certain manufacturing
process utilizes, and a good managerial accounting system should give him this information.

Planning
Managers use the accounting system for budgeting and other planning functions. Budget
numbers are saved and reports can be created and compared with figures that reflect actual
revenues and expenses. Many budget-specific accounting software programs allow for
creating "what-if" scenarios that can be very complex. Quite a few business owners make
plans based on gut feelings, and using a managerial accounting system can help them in
focusing on specific costs and possibilities. For example, a business needs to acquire an
expensive machine, and a management financial system may help the business in timing
the purchase when cash flows are planned to be the highest, avoiding debt.
Related Reading: About Ethics in Managerial Accounting

Efficiencies
Another goal of a managerial accounting system is to make work flows and processes more
efficient and effective. Since most managerial systems are industry specific or customized
for the business, they help in speeding up common daily processes, including paying the
bills. The name of a vendor can be saved along with its address and other information, so
that when you pay a bill, you can reuse this information, saving lots of time. This is the same
situation if you have a system that caters to your receivable needs, where you can create
invoices fast because most of the data has already been captured.

Other Objectives
Internal managerial accounting systems centralize lots of data, organizing and creating a
structure where information is easy to find. For example, if you're interested in learning more
details about inventory, you go to that area, not to fixed assets or budget modules.
Management systems should be fast and flexible enough to cater to the needs of a business,
including the ability to generate useful reports, such as trend analysis or other special
reports. To be effective, management systems should be easy to use, requiring minimal
training time. The more complicated an internal managerial accounting system is, the less
effective it will be.

Objectives of Management Accounting

Let us go through the objectives of management accounting:

Planning and Formulating Policies

In the process of planning and formulating policies, a management
accountant provides necessary and relevant information to achieve the
targets of the company. Management accounting uses regression analysis
and time series analysis as forecasting techniques.

Controlling Performance
In order to assure effective control, various techniques are used by a
management accountant such as budgetary control, standard costing,
management audit, etc. Management accounting provides a proper
managerial control system to the management. Reports are provided to the
management regarding the effective and efficient use of resources.

Interpreting Financial Statement

Collecting accounting data and analyzing the same is a key role of
management accounting. Management accounting provides relevant
information in a systematic way that can be used by the management in
planning and decision-making. Cash flow, fund flow, ratio analysis, trend
analysis, and comparative financial statements are the tools normally used
in management accounting to interpret and analyze accounting data.

Motivating Employees
Management accounting provides a selection of best alternative methods of
doing things. It motivates employees to improve their performance by
setting targets and starting incentive schemes.

Making Decisions
Success of any organization depends upon accurate decision-making and
effective decision-making is based on informational network as provided by
management accounting. Applying techniques of differential costing,
absorption costing, marginal costing, and management accounting provides
useful data to the management to aid in their decision-making.

Reporting to Management
It is the primary role of management accounting to inform and advice the
management about the latest position of the company. It covers information
about the performance of various departments on regular basis to the
management which is helpful in taking timely decisions.
A management accountant also works in the capacity of an advisory to
overcome any existing financial or other problems of an organization.

Coordinating among Departments

Management accounting is helpful in coordinating the departments of an
organization by applying thorough functional budgeting and providing
reports for the same to the management on a regular basis.

Administrating Tax
Any organization must comply with the tax systems prevailing in the
country they are operating from. It is a challenge due to the ever-increasing
complexity of the tax structure. Organization need to file various kinds of
returns with different tax authorities. They need to calculate the correct
amount of tax and assure timely deposit of tax. Therefore, the management

takes guidance from management accountants to comply with the law of

the land.

http://scc.losrios.edu/~burbagg/notes-c1.pdf Notes
1. MANAGERIAL ACCOUNTING AND THE BUSINESS ENVIRONMENT Chap 1
2. COST TERMS, CONCEPTS & CLASSIFICATIONS Chap 2
3. JOB ORDER COSTING Chap 3
4. PROCESS COSTING Chap 4
5. COST BEHAVIOR, ANALYSIS AND USE Chap 5
6. ACRONYMS Chap 6
7. VARIABLE COSTING, A TOOL FOR MANAGEMENT Chap 7
8. ACTIVITY BASED COSTING A TOOL TO AID DECISION MAKING Chap 8
9. PROFIT PLANNING Chap 9
10.STANDARD COSTS AND BALANCED SCORECARD Chap 10
11.FLEXIBLE BUDGETS AND OVERHEAD ANALYSIS Chap 11
12.SEGMENT REPORTING AND DECENTRALIZATION Chap 12
13.RELEVANT COSTS FOR DECISION MAKING Chap 13
14.BUDGETING DECISIONS Chap 14

Ray Garrison & Noreen

1. Managerial Accounting: An Overview 1
2. Managerial Accounting and Cost Concepts 24
3. Job-Order Costing 83
4. Process Costing 141

5. Cost-Volume-Profit Relationships 183

6. Variable Costing and Segment Reporting: Tools for Management 229
7. Activity-Based Costing: A Tool to Aid Decision Making 272
8. Profit Planning 335
9. Flexible Budgets and Performance Analysis 383
10. Standard Costs and Variances 418
11. Performance Measurement in Decentralized Organizations 472
12. Differential Analysis: The Key to Decision Making 527
13. Capital Budgeting Decisions 579
14. Statement of Cash Flows 639
15. Financial Statement Analysis 679
Appendix A Pricing Products and Services 715
Appendix B Profitability Analysis 731

ANALYSIS OF MANAGEMENT INFORMATION

UNDERSTANDING FINANCIAL STATEMENTS FROM A MANAGERIAL
POINT OF VIEW
FINANCIAL ANALYSIS AS DIAGNOSTIC, EVALUATIVE, & PREDICTIVE
TOOL
UNDERSTANDING CASH FLOWS
UNDERSTANDING COSTS CONSTRUCTS & BEHAVIORS
TYPES OF COST ACCUMULATIONS
Job order Costing
Process Costing
Activity-Based Costing
Standard Costing
DECISION FRAMEWORKS USING COSTS
Cost-Volume Profit Analysis
Differential Analysis
Variable Costing and Absorption Costing
BUDGETING FRAMEWORK & RESPONSIBILITY CENTERS
SEGMENT REPORTING & DECENTRALIZATION
CAPITAL BUDGETING

Colin Drury 6th Edition

Part 1 Introduction to Management & Cost Accounting
1. Introduction to Management Accounting
2. An Introduction to Cost terms & concepts
Part 2 Cost Accumulation for Inventory Valuation & Profit Measurement
3. Accounting for direct costs
4. Cost assignment for indirect costs
5. Accounting entries for job costing system
6. Process costing
7. Joint & by Product costing
8. Income effect of alternative cost accumulation systems
Part 3 Information for Decision making
1. Cost volume profit analysis
2. Cost estimation & cost behavior
3. Measuring relevant cost & revenues for decision making
4. The application of linear programming for management accounting
5. Activity based costing
6. Decision making under conditions of risk & uncertainty
7. Capital investment decisions
Part 4 Information for Planning, Control & Performance Measurement
1. The budgeting process
2. Management control system
3. Standard Costing & Variance analysis

Introduction to Management Accounting (Chapter 1)

The users of Accounting information

Major Differences between Financial and Managerial Accounting
The Decision Making Process
Basic Cost Terminology
Classification of cost

An Introduction to Cost terms and Concepts(Chapter 2 & 9)

Basic Cost Terminology

Direct and Indirect Costs


Factors Affecting Direct/Indirect Cost Classification

Cost Behavior

Cost Objects

Cost Behavior Summarized

Other Cost Concepts

Avoidable and Unavoidable cost

Sunk Cost

Relevant and Irrelevant cost

Period and Product cost

Opportunity cost

Introduction to decision making

Single limiting factor decision making

Discussion Questions, Problems

Decision Making , Measuring Relevant costs and revenues for Decision Making
(Chapter 9)

Limiting factor decision Making

Product mix decisions when capacity constraints exist

Outsourcing and make or buy decisions

Relevant cost decision Making

Relevant cost of Material, Labor, Overheads, Machinery and cost of tender

and feasibility studies.

Minimum Pricing of the projects

Discussion Questions, Problems
Cost-Volume-Profit Analysis (Chapter 8)

The accountants cost volume Profit Model

Contribution Margin
Breakeven Point in terms of units
Breakeven Point in terms of Rupees
Contribution Margin ratio
Units required to achieve a Desired Profit
Sales required to achieve a Desired Profit
Margin of Safety
CVP, Graphically
Multi-product cost volume profit analysis

Discussion Questions & Problems

Master Budget and Responsibility Accounting (Chapter 15)

Definition of Budget


a.
b.
c.

a.
b.
c.
d.
e.
f.
g.
h.
i.

Different Types of Budgets

Incremental budgeting
Zero based budgeting
Rolling Budget
The Ongoing Budget Process
Advantages of Budgets
Why we prepare Budgets
Operational Budgets
Sales Budget
Production budget
Material Consumption budget
Material purchase budget
Direct Labor budget
Factory overhead budget
Selling and Admiration budget
Master Budgets
Components of Master Budgets
Behavioral Aspects of Budgeting

Discussion Questions & Problems

Flexible Budgets and Cash budgeting (Chapter 15)

Why we prepare flexible budgets

How to prepare flexible budgets
Preparation of cash budget
Preparation of Cash ladders

Discussion Questions & Problems

Mid Semester Exam

Standard Costing and Variance Analysis (Chapter 17 & 18)

Basic Concepts

Establishing cost standards

Purpose of Standard Costing

Variance analysis

Material Variances

Material Price Variance

Material Usage Variance

Total material variance

Labor Rate variance

Labor efficiency variance

Total labor variance

Variable Overhead variance

Fixed Overhead variances

Sales variances
Reconciliation of Standard cost with actual cost
Reconciliation of Budgeted Profit with actual profit

Discussion Questions & Problems

Quantitative models for the Planning and Control of Stocks (Chapter 23)

Why do firms hold stock

Holding cost

Ordering cost

Buffer stock

Lead time

Re order level

Economic Order quantity

Maximum level

Minimum level

EOQ and Discounts

Discussion Questions & Problems
Accounting Entries for a Job Costing System (Chapter 4)

Material recording procedures

Recording the purchase of Raw Materials

Recording the issue of materials

Accounting procedure for labor costs

Accounting procedure for manufacturing overheads

Preparing WIP Accounts

Cost flow from WIP to FG and to P&L

Interlocking accounts
Discussion Questions & Problems

Cost Assignment and Activity Based Costing (Chapter 3)

How to allocate cost to products

How to allocate Production overheads

What is predetermined absorption rate

What is over and under absorbed overheads

How to calculate over and under absorbed overheads

Marginal and Absorption costing

The emergence of ABC systems

Traditional vs ABC costing Systems

Volume Based and Non Volume based cost drivers

Discussion Questions & Problems

Notes MA India
Definition
The term Management Accounting, covers all those services by which the
accounting department can assist the top management and other
departments in the formation of policy, control of execution and appreciation
of effectiveness.

It constantly needs accounting information on which to base its decision. A

decision based on data is usually correct and the risk of erring is minimized.
Accounting information should be recorded and presented in the form of
reports at such frequent intervals, as the management may want.

It is to be understood here that the accounting information has no end in

itself; it is a means to an end.

Management accounting has no set principles such as the double entry

system of bookkeeping. In place of generally accepted accounting principles,
the philosophy of cost benefit analysis is the core guide of this discipline. It
says that no accounting system is good or bad but is can be considered
desirable so long as it brings incremental benefits in excess of its incremental
costs.

FUNCTIONS OF MANAGEMENT ACCOUNTING

The basic function of management accounting is to assist the management in
performing its functions effectively. The functions of the management are
planning, organizing, directing and controlling. Management accounting helps
in the performance of each of these functions in the following ways:
(i) Provides data: Management accounting serves as a vital source of
data for management planning. The accounts and documents are a
repository of a vast quantity of data about the past progress of the
enterprise, which are a must for making forecasts for the future.
(ii) Modifies data: The accounting data required for managerial decisions
is properly compiled and classified. For example, purchase figures for
different months may be classified to know total purchases made
during each period product-wise, supplier-wise and territory-wise.
(iii) Analyses and interprets data: The accounting data is analyzed
meaningfully for effective planning and decision-making. For this
purpose the data is presented in a comparative form. Ratios are
calculated and likely trends are projected.
(iv) Serves as a means of communicating: Management accounting
provides a means of communicating management plans upward,
downward and outward through the organization. Initially, it means
identifying the feasibility and consistency of the various segments of
the plan. At later stages it keeps all parties informed about the plans
that have been agreed upon and their roles in these plans.
(v) Facilitates control: Management accounting helps in translating
given objectives and strategy into specified goals for attainment by a
specified time and secures effective accomplishment of these goals in

an efficient manner. All this is made possible through budgetary

control and standard costing which is an integral part of management
accounting.
(vi) Uses also qualitative information: Management accounting does
not restrict itself to financial data for helping the management in
decision making but also uses such information which may not be
capable of being measured in monetary terms. Such information may
be collected form special surveys, statistical compilations, engineering
records, etc.
Functions of MA
Planning: He has to establish, coordinate and administer as an
integral part of management, an adequate plan for the control of the
operations. Such a plan would include profit planning, programmes of
capital investment and financing, sales forecasts, expenses budgets
and cost standards.
(ii) Controlling: He has to compare actual performance with operating
plans and standards and to report and interpret the results of
operations to all levels of management and the owners of the business.
This id done through the compilation of appropriate accounting and
statistical records and reports.
(iii) Coordinating: He consults all segments of management responsible
for policy or action. Such consultation might concern any phase of the
operation of the business having to do with attainment of objectives
and the effectiveness of the organizational structures and policies.

Box 1.1
Features of data
Provided by Financial Provided by
Accounting Management accounting
1. Period
After a stated period
At frequent intervals
2. Time
Historical data
Current and future data
3. Unit of expression
Money only
Any statistical unit
4. Nature
Actual data
Projected data
5. Specificity
Aggregates
Detailed analysis
6. Description
Money consequences
Events
7. Reality
Objective
Subjective
8. Precision
Pie to Pie accuracy
May be guess-work
9. Principles
Double entry system
Cost benefit analysis
10. Legality
Obligatory
Optional
11. Purpose
Overview of entire
Analytical details of such Business
activity activities as call for decisions

LIMITATIONS OF MANAGEMENT ACCOUNTING

Management accounting, being comparatively a new discipline, suffers from certain
limitations, which limit its effectiveness. These limitations are as
follows:

1. Limitations of basic records: Management accounting derives its information from

financial accounting, cost accounting and other records. The strength and weakness
of the management accounting, therefore, depends upon the strength and
weakness of these basic records. In other words, their limitations are also the
limitations of management accounting.
2. Persistent efforts. The conclusions draws by the management accountant are not
executed automatically. He has to convince people at all levels. In other words, he
must be an efficient salesman in selling his ideas.
3. Management accounting is only a tool: Management accounting cannot replace
the management. Management accountant is only an adviser to the management.
The decision regarding implementing his advice is to be taken by the management.
There is always a temptation to take an easy course of arriving at decision by
intuition rather than going by the advice of the management accountant.
4. Wide scope: Management accounting has a very wide scope incorporating many
disciplines. It considers both monetary as well as non-monetary factors. This all
brings inexactness and subjectivity in the conclusions obtained through it.
5. Top-heavy structure: The installation of management accounting system requires
heavy costs on account of an elaborate organization and numerous rules and
regulations. It can, therefore, be adopted only by big concerns.
6. Opposition to change: Management accounting demands a break away from
traditional accounting practices. It calls for a rearrangement of the personnel and
their activities, which is generally not like by the people involved.
7. Evolutionary stage: Management accounting is still in its initial stage. It has,
therefore, the same impediments as a new discipline will have, e.g., fluidity of
concepts, raw techniques and imperfect analytical tools. This all creates doubt
about the very utility of management accounting

Lecture 2 Feb 10, 2016

Oral Assignment:
Which series of steps (logically) do we need to take so as to learn
the management accounting academically & make application
thereof in an office. (Hint: Recall steps that we learnt in process for
Financial Accounting)
Which part of accounting information system initiates the
Introduction
In the initial stages cost accounting was merely considered to be a technique for
ascertainment of cost
of products or services on the basis of historical data. In course of time due to
competitive nature of the market, it was realized that ascertainment of cost is not
as important as controlling costs. Hence, cost accounting started to be considered
more as a technique for cost control a s compared to cost ascertainment.

Due to technological development in all fields, now cost reduction has also come
within the ambit of cost accounting. Cost accounting is thus concerned with
recording, classifying and summarizing costs for
determination of costs of products or services, planning, controlling and reducing
such costs and furnishing of information to management for decision making.
CIMA Management Accounting

1.2 Why organisations need costing systems

An organisations costing system is the foundation of the internal financial
information system
for managers. It provides the information that management needs to plan and
control the
organisations activities and to make decisions about the future. Examples of the
type of information provided by a costing system and the uses to which it might be
put include
the following.
Actual unit costs for the latest period; could be used for cost control by comparing
with
a predetermined unit standard cost, which would also be provided by the costing
system.
Could also be used as the basis for planning future unit costs and for decisions
about
pricing and production levels. For example, a manager cannot make a decision
about
the price to be charged to a customer without information which tells the manager
how
much it costs to produce and distribute the product to the customer.
Actual costs of operating a department for the latest period; could be used for
cost control
by comparing with a predetermined budget for the department. Could also be used
as the basis for planning future budgeted costs and for decisions such as
outsourcing.
For example, a manager might be considering the closure of the packing
department and
instead outsourcing the packing operations to another organisation. In order to
make
this decision the manager needs to know, among other things, the actual cost of
operating
the packing department.
The forecast costs to be incurred at different levels of activity. Could be used for
planning,
for decision making and as a part of cost control by comparing the actual costs
with the forecasts. For example, a manager cannot make a well-informed decision
about
the appropriate production level for the forthcoming period unless information is
available
about the costs that will be incurred at various possible output levels.

This is by no means an exhaustive list of the information that is provided by a

costing
system. However, it should serve to demonstrate that organisations need costing
systems
that will provide the basic information that management requires for planning,
control
and decision-making.