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www.unitedworld.in

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MANAGEMENTACCOUNTINGa TOOL to help managers

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1. Planning and control functions2. Functions of Management Accounting3. Financial Accounting and Management

Accounting

Session plan as per DESCRIPTOR

(Class 1; Session 1)

Overview of Management Accounting

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Session Plan1. Accounting2. Management Accounting3. Functions of Management Accounting4. Management Accounting

vs Financial Accounting.5. Some similarities between MA & FA6. Cost Accounting7. Uses of Cost Accounting

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Financial

Accounting

Accounting

The process of identifying, measuring andcommunicating economic information

to permit informed judgements and

decisions by users of the information.

Financial

Accounting

Management

Accounting

Cost Accounting

Business Accounting System

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Management Accountinganagement Accounting

Management Accounting1. Conventional Accounting reveals periodically how

well (or badly) the firm is being run.

2. But this information is more useful to externalparties namely shareholders, creditors, Govt. etc.

3. There is no denying the fact that internal parties i.e.,managers also require this information. But toimprove their future performance, it is of little use.

4. Thats why this new system of accounting has beendeveloped, specially for managers, for improving

their performance.

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5. Management Accounting is thus concerned withfurther improvement of the overall efficiency.

6. It is forward-looking. It provides the basis to makeinformed business decisions.

7. The Institute of Cost and Management Accountants,London, has defined Management Accounting as:

the application of professional knowledge and skill in

the preparation of accounting information in such away as to assist management in the formulation of

policies and in the planning and control of theoperation of the undertakings.

Continued

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1. PLANNING & FORECASTING provides necessaryinformation and data for long and short-term

planning and forecasting.

2. MOTIVATION motivates employees by settingtargets, measuring actual performance, comparingthe same with the targets and then rewarding them

suitably for their efficiency.

3. EVALUATION OF PLANS AND POLICIES evaluatesvarious policies & their impact on the profitability.

FUNCTIONS OF MANAGEMENTACCOUNTING

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4. STRATEGIC DECISION MAKING supplies analytical

information of various alternatives, thus enabling

proper strategic decisions (to close down a unit or not/ to make or buy a product etc.)

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

6. CONTROL sets standard for various activities andoperation of a firm. Thereafter measures actualperformance vs the standard & highlights weak areas

enabling corrective actions in those areas.

Continued

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Accounting information

specifically prepared toaid managers is Management Accounting.

In short

Used in three basic managerial functions:-

1.Planning : process of deciding what actionshould be taken in the future

2. Implementation : specific actions (planned in

advance) to fulfill the budgets

3. Control : managerial action to correct conditionsthat cause deviation between the

actual and planned performance

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MANAGEMENT ACCOUNTINGVS. FINANCIAL ACCOUNTING

Structure

Varies according to

use of the information Unified structure

DIMENSIONMANAGEMENT

ACCOUNTING

FINANCIAL

ACCOUNTING

Sources ofprinciples

Whatever is useful

to Management

Generally accepted

accounting principles

Need Optional Statutory Obligation

Time-orientation

Historical and

future estimatesHistorical

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Reportingentity

Responsibilitycentres

Overall organisation

DIMENSIONMANAGEMENTACCOUNTING

FINANCIALACCOUNTING

PurposeAssisting

management

External reporting/

for outside users

UsersSmall groups/known identity

Relatively largergroups/ unknown

Continued

Information

content

Monetary & non-

monetary

Primarily monetary

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Informationprecision

Manyapproximations

Few approximations

DIMENSIONMANAGEMENTACCOUNTING

FINANCIALACCOUNTING

Reportfrequency

Varies (weekly ormonthly common)

Quarterly and annual

Reporttimeliness

Prompt at the endof the period

Delay of weeks ormonths common

Continued

Liability

potential

Virtually noneFew lawsuits, but

threat always present

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SIMILARITIES BETWEEN FINANCIALAND MANAGEMENT ACCOUNTING

Basic data collected for both are in

accordance with GAAP to avoid

duplication.

Most elements of financial accounting are

also found in management accounting.

Both are used in decision making.

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USES OF COST ACCOUNTING

1. Cost Accounting provides data forAppraisal Information (measurement)

2. Cost Accounting helps in ProfitPlanning

3. Cost Accounting is useful for thepurpose of control.

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For measurement purpose the managementaccounting system focuses on the measurement offull costs.

Full costs are used in(i) Financial reporting,(ii)Analysing economic performance and

(iii)Cost-plus contracts.

Full Cost Accounting measures the resources used inperforming some activity. It is the sum of direct andindirect costs.

MEASUREMENT PURPOSES

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For control purposes, management accounting

measures costs by responsibility centres.

Responsibility Centre is an organisation unit

headed by a manager who is responsiblefor its operations and performances.

CONTROL PURPOSES

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RECAP1. Accounting

2. Management Accounting3. Functions of Management Accounting4. Management Accounting

vs Financial Accounting.5. Some similarities between MA & FA6. Cost Accounting7. Uses of Cost Accounting

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NEXT SESSION

FUNDS FLOW STATEMENTS

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