UNIT I

Introduction

1.1 Management Accounting- Introduction, objectives nature, function, difference between Management Accounting and Financial Management

Introduction

The term management accounting consists of two phrases, "management" and "accounting". It is a study of the management aspects of accounting. This is a tool in the hands of management to make decisions. The focus of management accounting is to redesign accounting in a way that helps managers formulate policies and control their execution.

Management accounting has a recent origin. The term was first used in 1950 by a team of accountants who visited the United States under the auspices of the British-American Council on Productivity. The costing term did not mention the term "management accounting" before this research group visited. Fierce competition, large-scale production, dynamic development of technology, and the complexity of modern business have led to the development of management accounting-to solve many problems. Management accounting provides management with information to use as a basis for decision making.

J. Bati is used to describe management accounting as "accounting methods, systems, and techniques that, combined with special knowledge and capabilities, support management's mission to maximize profits or minimize losses. It is defined as "term".

Nature of Management Accounting:

Management accounting is the latest division of accounting, but it may be considered partly science and partly art. It is the science of "quantification and summarization" of accounting data and the art of "interpretation".

Management accounting draws conclusions through the collection, processing, and objective analysis of data. Therefore, it relies on "progress and problem objectification and quantification". From this point of view, management accounting can be regarded as science.

However, management accounting also includes human judgment, impulses, whims, and prejudices, as evidenced by the inferences and conclusions drawn from the interpretation and analysis of data. The deduction must not be exactly scientific. The management accountant's personal judgment can have a significant impact on interpretation and deductions. From this point of view, management accounting can be regarded as an art.

As with all other social sciences, we can conclude that management accounting is partly science and partly art.

The main purpose of management accounting is to enable managers to perform their functions efficiently. The main functions of management are planning, organization, direction, and control. Management accounting helps managers perform these functions effectively.

(1) Presentation of data: Traditional income statements and balance sheets are not decision-making analyses. Controlling modifies and rearranges data according to the decision-making requirements of various methods.

(2) Support for planning and forecasting: Controlling helps you manage your planning process through budgetary and standard costing techniques. Forecasting is widely used in budgeting and setting standards.

(3) Help with organizing: Organization is related to the establishment of relationships between various individuals within a company. This includes delegating authority and modifying responsibilities. Management accounting aims to help managers organize through the establishment of cost centers, profit centers, responsibility centers, budget reserves and more. AH These activities help set up an effective organizational framework.

(4) Decision making: Management accounting provides comparative data for analysis and interpretation for effective decision making and policy making.

(5) Report to managers at various levels: One of the main objectives of management accounting is to keep management informed about the performance, plan compliance, and progress of different sections of the organization.Top management needs feedback on its planning policies and program implementation. Even mid-career executives and junior executives need data for day-to-day operational decisions. Management accountants create regular and frequent reports and send them in time to meet the needs of managers at all levels.

(6) Communication of management policy: Management accounting effectively communicates management policies to individuals for proper implementation.

(7) Effective management: Standard costing and budgeting are an integral part of management accounting. These techniques set goals, compare budgets with real-world will criteria, evaluate performance, and control deviations.

(8) Incorporation of non-financial information: Management accounting considers both financial and non-financial information to develop alternative behavioral policies that lead to effective and accurate decision making.

(9) Adjustment: The goals of the various departments are communicated to them, and their performance is sometimes reported to management. This ongoing report helps management coordinate various activities to improve overall performance.

(10) Motivate employees: Budgets, standards, and other programmers are actually implemented by employees. The main purpose of management accounting is to set goals in the form of budgets, standards, and programmers in a way that encourages employees to reach them. This is usually achieved by making goals feasible and providing appropriate financial and non-monetary incentives to achieve them.

Importance of Management Accounting:

Management accounting has immeasurable value and usefulness for the management of any company, and has been considered essential, especially for large organizations with complex management tasks.The importance of management accounting can be listed below.

(1) Improvement of efficiency: Management accounting greatly contributes to improving the operational efficiency of a company. Budgets, standards, reports, etc. usually increase the level of performance.

(2) Effective planning: Through the "decision-making data" provided by management accounting, policy development and operational planning become more effective.

(3) Performance evaluation: Performance evaluation of employees, departments, etc. is facilitated by management accounting based on difference analysis and management ratio.

(4) Maximizing profits: Management accounting helps in profit planning to pursue profit-optimizing decisions.

(5) Reliability: Tools used in management accounting typically make the data provided for management accurate and reliable.

(6) Elimination of waste: Standard costs, budgets, cost control methods, etc. contribute to the elimination of waste and the production of defective products.

(7) Effective communication: Regular and systematic reporting ensures a continuous flow of operational information to different levels of administrators.

(8) Employee morale: Employee morale can be created and maintained through achievable standards, practical budgets, and incentive schemes.

9) Management and coordination: Managing costs and adjustments in efforts in different segments of your organization can be achieved through performance reports, variance analysis, follow-up actions, and more.

The greatest advantage of management accounting is its advisory role in helping managers makes the best possible decisions on a daily basis on everyday issues and important policy issues.

Key takeaways:

Difference between Management Accounting and Financial Management

What is financial accounting?

Financial accounting is the accounting department involved in summarizing, recording, and reporting financial transactions that arise from business concerns over a period of time. Financial accounting is used to create various financial statements that companies can use to show financial performance to different users of financial information such as creditors, investors, customers, and suppliers.

What is Management accounting?

Management accounting is the latest division of accounting, but it may be considered partly science and partly art. It is the science of "quantification and summarization" of accounting data and the art of "interpretation".

Management accounting draws conclusions through the collection, processing, and objective analysis of data. Therefore, it relies on "progress and problem objectification and quantification". From this point of view, management accounting can be regarded as science.

However, management accounting also includes human judgment, impulses, whims, and prejudices, as evidenced by the inferences and conclusions drawn from the interpretation and analysis of data. The deduction must not be exactly scientific. The management accountant's personal judgment can have a significant impact on interpretation and deductions. From this point of view, management accounting can be regarded as an art.

Key takeaways:

1.2 Role of Management Accountant.

The importance/role of management accounting can be stated as follows:

1.     Efficient Planning

Management accounting plays a vital role in taking an efficient plan providing necessary information.

Through the capital budget, sales budget, Cost-volume-profit analysis, management accountants provide information for making plans.

2.     Increasing Efficiency to Business Operations

Management accounting also plays an important role in increasing efficiency in business operations through budgeting, ratio analysis, variance analysis, standard costing, etc.

3.     Efficient Control

Management accounting takes pan inefficient control through JIT philosophy and total quality control system.

4.     Increase Labor Efficiency

Management accounting helps to increase labor efficiency through standard labor costing, linking bonus with productivity and budgeting.

5.     Achieve Management Efficiency

Management accounting contributes a lot to increase the management efficiency of the organization providing managers with the correct information.

6.     Help Management Function

We know that the main functions of management are planning, organizing, leading, and controlling management accounting helps management personnel to perform the functions properly, providing necessary accounting information.

7.     Communicating

For performing the functions efficiently and effectively, managers need to communicate with the various parties and parts of the organization.

Management accounting helps in this respect preparing various reports.

Last of all, we can say that the activities of management accounting are occurred only to perform a vital role in the decision-making process in an organization.

Key takeaways –

1.3 Managerial Reporting, Responsibility Accounting.

Management reporting

Managerial accounting reports can provide you with the information needed to trim costs, reward high-performing employees, cut languishing product lines and invest in the goods that offer the best financial return for your business. Depending on the type of projects your business undertakes and the time-sensitivity of your financial information, you may request or generate reports quarterly, monthly, weekly or even daily.

Types

Budget Reports to Analyze Performance

Budget reports help small business owners analyze business performance and managers analyze their department's performance and control costs. The estimated budget for the period is usually based on the actual expenses from prior years. If the small business was substantially over budget in a previous year and cannot find methods to trim costs, future budgets may need to be increased to a more accurate level.

Accounts Receivable Aging

The accounts receivable aging report is a critical tool for managing cash flow if you extend credit to customers of your business. This report breaks down the customer balances by how long they have been owed. Most aging reports include separate columns for invoices that are 30 days late, 60 days late and 90 days late or more. A manager can use the aging report to find problems with the company's collections process.

Job Cost Reports

Job cost reports show expenses for a specific project financed by your small business. They are usually matched with an estimate of revenue so you can evaluate the job's profitability. This helps identify higher-earning areas of the business so you can focus additional efforts there instead of wasting time and money on jobs with low profit margins. Job cost reports are also used to analyze expenses while the project is in progress so you can correct areas of waste before costs spiral out of control.

Inventory and Manufacturing

If your small business maintains a physical inventory or produces products, you can use managerial accounting reports to make the manufacturing processes more efficient. These reports generally include items such as inventory waste, hourly labor costs or per-unit overhead costs.

Responsibility accounting

Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.

Definition

“Responsibility Accounting is a system of management accounting under which accountability is established according to the responsibility delegated to various levels of management and a management information and reporting system instituted to give adequate feedback in terms of the delegated responsibility. Under this system division or units of an organisation under a specified authority in a person are developing responsibility centres and evaluated individually for their performance.”

-Institute of Cost and works Accountant of India.

Responsibility Accounting recognises various decision centres throughout organisation and traces costs to the individual managers who are primarily responsible for making decision about the costs in question.” -Charls, T. Hatgren

“Responsibility Accounting is that type of Management Accounting that collects and reports both planned and actual accounting information in terms of responsibility centres.” -Robert N. Anthony.

Role of Responsibility Accounting

Following are the main roles or contribution of responsibility accounting:

2.     Performance Evaluation- Responsibility accounting establishes a sound and fair system of performance evaluation of each manager and personnel. The performance of each responsibility center is measured and presented periodically on performance report.

3.     Motivation- Responsibility accounting emphasizes on the individual achievement-based performance evaluation. Therefore, the job becomes more challenging for the employees and motivates them to use their full potentiality in achieving the results.

4.     Transfer Pricing - Responsibility accounting divides the organization in different autonomous responsibility centers or subunits. In such circumstances, product or service of one division or unit can be transferred to another division or unit within the same organization charging a transfer price. This creates an inter-competitive environment to make each subunit of the organization more profitable and efficient.

5.     Drop Or Continue Decision - If the organization is divided into subunits, it becomes possible to measure division wise or product wise profitability of the organization. If saving in costs exceeds the foregone revenues, the center can be discontinued.

Advantages of Responsibility Accounting:

Key takeaways-

   References