Cost Management

CHAPTER 1: MANAGEMENT ACCOUNTING

Introduction:

Accounting may be broadly classified into two categories – accounting which is meant to serve all parties external to the operating responsibility of the firms and the accounting which is designed to serve internal parties who take care of the operational needs of the firm. The first category which is conventionally referred to as financial accounting, looks to the interest of those who have primarily a financial stake in the organization's affairs – creditors, investors, employees etc. On the other hand the second category of accounting is primarily concerned with providing information relating to the conduct of the various aspects of a business like cost or profit associated with some portions of business operations to the internal parties viz., management. This category of accounting is called as Management accounting.

In order to perform the primary task of decision making managers of business enterprises need information about the past, present and future in the functional areas of management such as personnel, finance, marketing and production. Right decision making has to be based on quantitative and qualitative information. The management thus constantly needs accounting information to base its decisions upon. Thus management accounting provides the information needed by management personnel.

Definition:

The Institute of Chartered Accountants of England has defined management accounting as: "Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting".

As per American Accounting Association, "Management Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances.

As per Institute of Chartered Accountants of India, "Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting".

The Chartered Institute of Management Accounts (UK) defines management accounting as under:

"Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for:

1. Formulating strategy

2. Planning and controlling activities

3. Decision making

4. Optimizing the use of resources

5. Disclosures to shareholders and others external to the entity

6. Disclosure to employees

7. Safeguarding assets."

Nature of management accounting:

Managerial personnel are entrusted with authority and responsibility of operating business activities. Management accounting provides information to the personnel are entrusted with authority and responsibility of operating business activities. Management accounting provides information to the managerial personnel at three levels of management viz., top, middle and lower levels of management. It provides the management with the tools for an analysis of its administrative action that can lay suitable emphasis on the possible alternatives in terms of costs, prices and profits. The decisions made by management are based on quantitative information and common sense, foresight, knowledge and experience. Management accounting includes financial accounting information and raw material from several other disciplines such as costing, statistics, mathematics, political science, sociology, psychology, management economics, law etc. With all these data he can ensure optimum utilization of all the resources including employees by maintaining sound morale of the employees, maximization of output and minimization of inputs, analyze the managerial questions in terms of costs, revenues, profits and growth. It is thus a highly personalized service with the help of which management can explore and exploit business opportunities and take sound and correct decisions. It is not a precise science as it uses its own conventions rather than standardized principles. Therefore the inferences drawn from the facts provided, depends on the skill, judgment and common sense of different management accountants. Thus it is said that management accounting serves as a management information system which enables the effective management of an enterprise.

Scope of management accounting:

Management accounting