Management Accounting: Definition

MANAGEMENT ACCOUNTING
Management accounting is not a specific system of accounting. It could be any form of

accounting which enables a business to be conducted more effectively and efficiently.
Management A c c o u n t i n g i s c o m p r i s e d o f t w o w o r d s “ Management and
Accounting‟. It means the study of managerial aspect of accounting. The emphasis of
management accounting is to redesign accounting in such a way that it is helpful to the
management in formation of policy, control of execution and appreciation of effectiveness.
Management accounting is of recent origin. This was first used in 1950 by a team of
accountants visiting U. S. A under the auspices of Anglo-American Council on Productivity
Definition:
Anglo-American Council on Productivity defines Management Accounting as, “the
presentation of accounting information in such a way as to assist management to the creation
of policy and the day to day operation of an undertaking”
The American Accounting Association defines Management Accounting as “the methods and
concepts necessary for effective planning for choosing among alternative business actions
and for control through the evaluation and interpretation of performances”.
The Institute of Chartered Accountants of India defines Management Accounting as

follows: “Such of its techniques and procedures by which accounting mainly seeks to aid the
management collectively has come to be known as management accounting”
From these definitions, it is very clear that financial data is recorded, analyzed and presented
to the management in such a way that it becomes useful and helpful in planning and
running business operations more systematically.
OBJECTIVES OF MANAGEMENT ACCOUNTING:

The fundamental objective of management accounting is to enable the management to
maximize profits or minimize losses. The evolution of management accounting has given a
new approach to the function of accounting. The main objectives of management accounting
are as follows:
1. Planning and policy formulation:
Planning involves forecasting on the basis of available information, setting goals;
framing polices determining the alternative courses of action and deciding on the programme of
activities.
2. Interpretation process:
Management accounting is to present financial information to the management. Financial
information is technical in nature. Therefore, it must be presented in such a way that it is easily
understood.
3. Assists in Decision-making process:
With the help of various modern techniques management accounting makes decision-
making process more scientific.
4. Controlling:
Management accounting is a useful for managerial control. Management accounting tools like
standard costing and budgetary control are helpful in controlling performance.
5. Reporting:
Management accounting keeps the management fully informed about the latest position of the
concern through reporting. It helps management to take proper and quick decisions. The
performance of various departments is regularly reported to the top management.
6. Facilitates Organizing:
“Return on Capital Employed” is one of the tools of management accounting. Since
management accounting stresses more on Responsibility Centres with a view to control costs
and responsibilities, it also facilitates decentralization to a greater extent. Thus, it is helpful in
setting up effective and efficiently organization framework.
7. Facilitates Coordination of Operations:

Management accounting provides tools for overall control and coordination of business
operations. Budgets are important means of coordination.
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:

Management accounting involves furnishing of accounting data to the management for basing
its decisions. It helps in improving efficiency and achieving the organizational goals. The
following paragraphs discuss about the nature of management accounting.
1. Provides accounting information:

Management accounting is based on accounting information. Management accounting is a
service function and it provides necessary information to different levels of management.
2. Cause and effect analysis.
The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss;
management accounting goes a step further. Management accounting discusses the cause and
effect relationship.
3. Use of special techniques and concepts.
Management accounting uses special techniques and concepts according to necessity to make
accounting data more useful. The techniques usually used include financial planning and
analyses, standard costing, budgetary control, marginal costing, project appraisal, control
accounting, etc.
4. Taking important decisions.

It supplies necessary information to the management which may be useful for its decisions.
The historical data is studied to see its possible impact on future decisions. The implications of
various decisions are also taken into account.
5. Achieving of objectives.
Management accounting uses the accounting information in such a way that it helps in
formatting plans and setting up objectives. Comparing actual performance with targeted figures
will give an idea to the management about the performance of various departments.
6. No fixed norms.
No specific rules are followed in management accounting as that of financial accounting.
Though the tools are the same, their use differs from concern to concern. Increase in
efficiency.
The purpose of using accounting information is to increase efficiency of the concern. The
performance appraisal will enable the management to pin-point efficient and inefficient
spots.
8. Supplies information and not decision.
Management accountant is only to guide and not to supply decisions. The data is to be used by
the management for taking various decisions.
9. Concerned with forecasting.
The management accounting is concerned with the future. It helps the management in planning
and forecasting. The historical information is used to plan future course of action. The informat
ion is supplied with the object to guide management for taking future decisions.
LIMITATIONS OF MANAGEMENT ACCOUNTING:
Management Accounting is in the process of development. Hence, it suffers form all the
limitations of a new discipline. Some of these limitations are:
1. Limitations of Accounting Records:

Management accounting derives its information from financial accounting, cost accounting and
other records. It is concerned with the rearrangement or modification of data.
2. It is only a Tool:
Management accounting is not an alternate or substitute for management. It is a mere tool for
management. Ultimate decisions are being taken by management and not by management
accounting.
3. Heavy Cost of Installation:
The installation of management accounting system needs a very elaborate organization. This
results in heavy investment which can be afforded only by big concerns.
4. Personal Bias:
The interpretation of financial information depends upon the capacity of interpreter as one has
to make a personal judgment. Personal prejudices and bias affect the objectivity of
decisions.
5. Psychological Resistance:
The installation of management accounting involves basic change in organization set
up. New rules and regulations are also required to be framed which affect a number of
personnel and hence there is a possibility of resistance form some or the other.
6. Evolutionary stage:
Management accounting is only in a developmental stage. Its concepts and conventions
are not as exact and established as that of other branches of accounting. Therefore, its results
depend to a very great extent upon the intelligent interpretation of the data of managerial use.
7. Provides only Data:

Management accounting provides data and not decisions. It only informs, not prescribes. This
limitation should also be kept in mind while using the techniques of management
accounting.
8. Broad-based Scope:
The scope of management accounting is wide and this creates many difficulties in the
implementations process. Management requires information from both accounting as well as
non-accounting sources. It leads to inexactness and subjectivity in the conclusion obtained
through it.

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MANAGEMENT ACCOUNTING

Management accounting is not a specific system of accounting. It could be any form of

The Institute of Chartered Accountants of India defines Management Accounting as

OBJECTIVES OF MANAGEMENT ACCOUNTING:

7. Facilitates Coordination of Operations:

NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:

1. Provides accounting information:

4. Taking important decisions.

LIMITATIONS OF MANAGEMENT ACCOUNTING:

1. Limitations of Accounting Records:

7. Provides only Data:

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