MANAGEMENT ACCOUNTING: NATURE AND SCOPE
COURSE: MANAGEMENT ACCOUNTINGCOURSE CODE: MC-105AUTHOR: Dr. N. S. MALIKLESSON: 01VETTER: Prof. M S TuranMANAGEMENT ACCOUNTING: NATURE AND SCOPEObjective: The present lesson explains the meaning, nature, scope and limitationsof accounting. Further, it discusses the activities covered undermanagement accounting and its difference with financial accounting.LESSON STRUCTURE1.1Introduction1.2Definitions of Management Accounting1.3Nature of Management Accounting1.4Functions of Management Accounting1.5Scope of Management Accounting1.6The Management Accountant1.7Management Accounting and Financial Accounting1.8Cost Accounting and Management Accounting1.9Limitations of Management Accounting1.10Self-Test Questions1.11Suggested Readings1.1INTRODUCTIONManagement accounting can be viewed as Management-oriented Accounting.Basically it is the study of managerial aspect of financial accounting,"accounting in relation to management function". It shows how the accountingfunction can be re-oriented so as to fit it within the framework of managementactivity.The primary task of management accounting is, therefore, toredesign the entire accounting system so that it may serve the operational1
needs of the firm. If furnishes definite accounting information, past, present orfuture, which may be used as a basis for management action. The financialdata are so devised and systematically development that they become aunique tool for management decision.1.2DEFINITIONS OF MANAGEMENT ACCOUNTINGThe term “Management Accounting”, observe, Broad and Carmichael, coversall those services by which the accounting department can assist the topmanagement and other departments in the formation of policy, control ofexecution and appreciation of effectiveness. This definition points out thatmanagement is entrusted with the primary task of planning, execution andcontrol of the operating activities of an enterprise.It constantly needsaccounting information on which to base its decision. A decision based ondata is usually correct and the risk of erring is minimized. The position of themanagement in respect of its functions can be compared to that of an armygeneral who wants to wage a successful battle. A general can hardly fightsuccessfully unless he gets full information about the surrounding situationand the extent of effectiveness of each of his battalions and, to the extendpossible, even the enemy's intentions.Like a general a successfulmanagement too strives to outstrip other competitors in the field bystreamlining its operating efficiency. It needs a thorough knowledge of thesituation and the circumstances in which the firm operates. Such knowledgecan only be gained through the processed financial data rendered by theaccounting department on the basis of which it can take policy decisionregarding execution, control, etc.It is here that the role of managementaccounting comes in. It supplies all sorts of accounting information in the2
form of such statements as may be needed by the management. Therefore,management accounting is concerned with the accumulation, classificationand interpretation of information that assists individual executives to fulfillorganizational objectives.The Report of the Anglo-American Council of Productivity (1950) has alsogiven a definition of management accounting, which has been widelyaccepted. According to it, "Management accounting is the presentation ofaccounting information in such a way as to assist the management in creationof policy and the day to day operation of an undertaking". The reasoningadded to this statement was, "the technique of accounting is of extremeimportance because it works in the most nearly universal medium availablefor the expression of facts, so that facts of great diversity can be representedin the same picture. It is not the production of these pictures that is a functionof management but the use of them." An analysis of the above definitionshows that management needs information for better decision-making andeffectiveness.The collection and presentation of such information comewithin the area of management accounting.Thus, accounting informationshould be recorded and presented in the form of reports at such frequentintervals, as the management may want. These reports present a systematicreview of past events as well as an analytical survey of current economictrends.Such reports are mainly suggestive in approach and the datacontained in them are quite up to date. The accounting data so supplied thusprovide the informational basis of action.The quality of information sosupplied depends upon its usefulness to management in decision-making.The usual approach is that, first of all, a thorough analysis of the whole3
managerial process is made, then the information required for each area isexplored, and finally, all the information, after analysis in terms of alternatives,is taken into consideration before arriving at a management decision. It is tobe understood here that the accounting information has no end in itself; it is ameans to an end. As its basic idea is to serve the management, its form andfrequency are all decided by managerial needs. Therefore, accounting aidsthe management by providing quantitative information on the economic wellbeing of the enterprise. It would be appropriate if we called managementaccounting an Enterprise Economics. Its scope extends to the use of certainmodern sophisticated managerial techniques in analyzing and interpretingoperative data and to the establishment of a communication network forfinancial reporting at all managerial levels of an organization.1.3NATURE OF MANAGEMENT ACCOUNTINGThe term management accounting is composed of 'management' and'accounting'.The word 'management' here does not signify only the topmanagement but the entire personnel charged with the authority andresponsibility of operating an enterprise. The task of management accountinginvolves furnishing accounting information to the management, which maybase its decisions on it.It is through management accounting that themanagement gets the tools for an analysis of its administrative action and canlay suitable stress on the possible alternatives in terms of costs, prices andprofits, etc. but it should be understood that the accounting informationsupplied to management is not the sole basis for managerial decisions. Alongwith the accounting information, management takes into consideration orweighs other factors concerning actual execution.4For reaching a final
decision, management has to apply its common sense, foresight, knowledgeand experience of operating an enterprise, in addition to the information that isalready has.The word 'accounting' used in this phrase should not lead us to believe that itis restricted to a mere record of business transactions i.e., book keeping only.It has indeed a 'macro-economic approach'. As it draws its raw material fromseveral other disciplines like costing, statistics, mathematics, financialaccounting, etc., it can be called an interdisciplinary subject, the scope ofwhich is not clearly demarcated. Other fields of study, which can be coveredby management accounting, are political science, sociology, psychology,management, economics, statistics, law, etc. A knowledge of political sciencehelps to understand authority relationship and responsibility identification in anorganization. A study of sociology helps to understand the behaviour of manin groups. Psychology enables us to know the mental make-up of employersand employees. A knowledge of these subjects helps to increase motivation,and to control the actions of the people who are ultimately responsible forcosts.This builds a better employer-employee relationship and a soundmorale. The subject of management reveals the processes involved in the artof managing, a knowledge of economics assists in the determination ofoptimum output in the forecasting of sales and production, etc., and alsomakes it possible to analyze management action in terms of cost revenues,profits, growth, etc. It is with the help of statistics that this information ispresented to the management in a form that can be assimilated. The subjectof management accounting also encompasses the subject of law, knowledge5
of which is necessary to find out if the management action is ultra-vires or not.It is, therefore, a wide and diverse subject.Management accounting has no set principles such as the double entrysystem of bookkeeping. In place of generally accepted accounting principles,the philosophy of cost benefit analysis is the core guide of this discipline. Itsays that no accounting system is good or bad but is can be considereddesirable so long as it brings incremental benefits in excess of its incrementalcosts. Applying management accounting principles to financial matters canarrive at no single perfect solution. It is, therefore, an inexact science, whichuses its own conventions rather than standardized principles. The facts to bestudied here can be interpreted in different ways and the precision of theinferences depends upon the skill, judgement and common sense of differentmanagement accountants.It occupies a middle position between a fullymatured and an infant subject.Since management accounting is managerially oriented, its data is selective innature. It focuses on potential opportunities rather than opportunities lost.The data is operative in nature catering to the operational needs of a firm. Itdetails events, monetary and non-monetary. The nature of data, the form ofpresentation and its duration are mainly determined by managerial needs. Itis quite frequently reported as it is meant for internal uses and managerialcontrol. An accountant should look at his enterprise from the management'spoint of view. Whenever he fails to do that he ceases to be a managementaccountant.Management accounting is highly sensitive to management needs. However,it assists the management and does not replace it. It represents a service6
phase of management rather than a service to management frommanagement accountant. It is rather highly personalized service. Finally, itcan be said that the management accounting serves as a managementinformation system and so enables the management to manage better.1.4FUNCTIONS OF MANAGEMENT ACCOUNTINGThe basic function of management accounting is to assist the management inperforming its functions effectively. The functions of the management areplanning, organizing, directing and controlling. Management accounting helpsin the performance of each of these functions in the following ways:(i)Provides data: Management accounting serves as a vital source ofdata for management planning. The accounts and documents are arepository of a vast quantity of data about the past progress of theenterprise, which are a must for making forecasts for the future.(ii)Modifies data: The accounting data required for managerial decisionsis properly compiled and classified. For example, purchase figures fordifferent months may be classified to know total purchases madeduring each period product-wise, supplier-wise and territory-wise.(iii)Analyses and interprets data:The accounting data is analyzedmeaningfully for effective planning and decision-making.purpose the data is presented in a comparative form.For thisRatios arecalculated and likely trends are projected.(iv)Serves as a means of communicating:Management accountingprovides a means of communicating management plans upward,downward and outward through the organization.Initially, it meansidentifying the feasibility and consistency of the various segments of7
the plan. At later stages it keeps all parties informed about the plansthat have been agreed upon and their roles in these plans.(v)Facilitates control:Management accounting helps in translatinggiven objectives and strategy into specified goals for attainment by aspecified time and secures effective accomplishment of these goals inan efficient manner.All this is made possible through budgetarycontrol and standard costing which is an integral part of managementaccounting.(vi)Uses also qualitative information:Management accounting doesnot restrict itself to financial data for helping the management indecision making but also uses such information which may not becapable of being measured in monetary terms. Such information maybe collected form special surveys, statistical compilations, engineeringrecords, etc.1.5SCOPE OF MANAGEMENT ACCOUNTINGManagement accounting is concerned with presentation of accountinginformation in the most useful way for the management.Its scope is,therefore, quite vast and includes within its fold almost all aspects of businessoperations. However, the following areas can rightly be identified as fallingwithin the ambit of management accounting:(i)Financial Accounting: Management accounting is mainly concernedwith the rearrangement of the information provided by financialaccounting.Hence, management cannot obtain full control andcoordination of operations without a properly designed financialaccounting system.8
(ii)Cost Accounting:Standard costing, marginal costing, opportunitycost analysis, differential costing and other cost techniques play auseful role in operation and control of the business undertaking.(iii)Revaluation Accounting: This is concerned with ensuring that capitalis maintained intact in real terms and profit is calculated with this fact inmind.(iv)Budgetary Control: This includes framing of budgets, comparison ofactual performance with the budgeted performance, computation ofvariances, finding of their causes, etc.(v)Inventory Control: It includes control over inventory from the time it isacquired till its final disposal.(vi)Statistical Methods:Graphs, charts, pictorial presentation, indexnumbers and other statistical methods make the information moreimpressive and intelligible.(vii)Interim Reporting: This includes preparation of monthly, quarterly,half-yearly income statements and the re
The term management accounting is composed of 'management' and 'accounting'. The word 'management' here does not signify only the top management but the entire personnel charged with the authority and responsibility of operating an enterprise. The task of management accounting involves furnishing accounting information to the management, which may
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