7 E’s in Management Accounting

• Economy: Spend less(not spending Rs.2 when

the same thing can be bought for Re.1)
• Efficiency: Spend well and avoid waste
• Effectiveness: Spend wisely and add value
• Environment: Being environment friendly
• Equity: Due share of success to be given to all
• Ethics: Divine values
• Efficacy: Goal congruence
 Management Accounting
Definition:
The “process of identification, measurement, examination, analysis, preparation,
integration and communication of information (both financial and operating)
used by management to plan, evaluate and control within an organization and to
assure use of and accountability for its recourses”.

Management accounting, therefore , is an integral part of organization process . It

provides information essential for :

Controlling the current activities of an organization

 Planning its future strategies, tactics and operations
Optimizing the use of its resources
Measuring and evaluating performance
 reducing subjectivity in the decision making process and
Improving internal and external communication
 The Concept
• Accountability
• Reliability
• Relevance
• Controllability
• Transparency
 The Concept

Accountability:
Management accounting presents information measuring the achievement of the
objectives of an organization and appraising the conduct of its internal affairs in
that process. In order that further action necessary can be taken, based on this
information, it is necessary at all times to identify the responsibilities and key
result areas of the individuals within the organization.
Controllability:
Management accounting identifies the elements of activities which management can
or cannot influence, and seeks to assess the risk and sensitivity factors. This
facilitates the proper monitoring, analysis, comparison and interpretation of
information which can be used constructively in the control, evaluation and
corrective functions of management.
Reliability:
Management accounting information must be of such quality that confidence can be
placed in it. Its reliability to the user is dependent on its source, integrity and
comprehensiveness.
 The Concept
Interdependency:
Management accounting, in recognition of the increasing complexity
of business, must access both external and internal information
sources from interactive functions such as marketing, production,
personnel, procurement, finance, etc. This assists in ensuring that
the information is adequately balanced.
Relevancy:
Management accounting must ensure that flexibility is maintained in
assembling and interpreting information. This facilitates the
exploration and presentation, in a clear, understandable and timely
manner, of as many alternatives as are necessary for impartial and
confident decisions to be taken. The process is essentially forward
looking and dynamic. Therefore, the information must satisfy the
criteria of being applicable and appropriate.
 EVOLUTION AND CHANGE IN
MANAGEMENT ACCOUNTING
The field of organizational activity encompassed by management accounting has developed through
four recognizable stages:
• Stage 1 – Prior to 1950, the focus was on cost determination and financial control, through the use
of budgeting and cost accounting technologies.
• Stage 2 – By 1965 the focus have been shifted to the provision of information for management
planning and control, through the use of such technologies as decision analysis and responsibility
accounting.
• Stage 3 – By 1985, attention was focused on the reduction of waste in resources used in business
processes, through the use process analysis and cost management technologies.
• Stage 4 – By 1995, attention had shifted to the generation or creation of value, through the use of
technologies which examine the drivers of customer value, shareholder value, and organizational
innovation.
While these four stages are recognizable, the process of change from one to another has been
evolutionary.
• Cost determination and financial control
• Information for management Planning and control
• Reduction of waste of resources in business processes
• Creation of value through effective resource use

International management accounting practice statement Revised March

1998
 Comparison OF Financial Accounting
and Management Accounting
Financial Accounting Management Accounting
1- Origin Since 1497- Double Entry book keeping From 19th century.
System.
2. Purpose The main purpose of Financial Accounting The main purpose of
is to prepare profit and loss account and management accounting is to
balance sheet. provide detailed information.
3. Target Reporting to owner and outside agencies. Mainly to management.
Group
4. Statutory These accounts have to be prepared Maintenance of these
Requirements according to the legal requirements of accounts is voluntary.
Companies Acts.
5. Analysis of Financial Account reveal the profit or loss Management accounts show
Cost and Profit of the business as a whole during a the detailed cost and profit
particular period. It does not show the data for each product line,
figures of cost and profit for individual department, process etc.
products, departments and processes.
 Financial Accounting Management Accounting
6-Periodicity Of Financial Statements are prepared Management Reporting is
reporting periodically, usually on an annual a continuous process may
basis. be daily, monthly, as
required by management.
7-Control Aspect It lays emphasis on the recording of It provides for a detailed
financial transactions and does not system of controls with the
attach any importance to control help of certain special
aspect. techniques like standard
costing and budgetary
control.
8- Nature It is concerned almost exclusively It is concerned not only
with historical records. The with historical costs but
historical nature of financial also with predetermined
accounting can be easily understood costs. This is because
in the context of the purposes for management accounting
which it was designed. does not end with what
has happened in the past
but extends to plans and
policies to improve
performance in the future.
 Financial Accounting Management Accounting
9-Audit There is an audit There is no such audit
requirement of financial requirements. Cost audit
statements. concept is getting
importance in some
countries.
10- International Standards There are international There are few guidelines
accounting standards to be issued by MAC
followed. ( Management Accounting
Committee).
 Role of Management Accountant
• Traditional role
In a traditional role, the Management
Accountant is primarily concerned with the
application of accounting techniques and to
the provision of information designed to assist
all levels of management in planning,
reporting and controlling the activities of the
organization.
 Role of Management Accountant
• Dynamic Role
In today’s business environment, role of a
Management Accountant is much more
dynamic than his traditional role. This is to
create and enhance value of the organization
through stakeholders. This concept of value
creation gives Management Accountant a
more dominant position in the organization.
 Dynamic Role Includes
• Value addition
• Change facilitator
• Business Advisor not just a Corporate Policeman
• Being pro-active
• Able to address perceived concerns
• Business objectives
• Project Management
• Cash Flow preparation
• Growth initiator
• Conducting SWOT Analysis
• Cost auditor
• Audit process developer
 Installation of a Management
Accounting System
The following factors to be considered before installing a management accounting system.
1. Primarily investigations should be made relating to the technical aspects of the business. For
instance, the nature of the product and methods of production will determine the type of
management system to be applied.
2. The organization structure of the business should be studied to ascertain the scope of authority of
each executive. The existing organization should be disturbed as little as is advisable after full
consideration.
3. The methods of purchase storage and issue of materials should be examined and modified as per
the requirements.
4. The existing method of remunerating labor should be examined for the purpose of introducing any
incentive plans.
5. Forms and accounting records should be designed so as to involve minimum clerical labor and
expenditure.
6. The size and layout of the factory should be studied.
7. The system should be effective in cost control and cost reduction.
8. Management system should be simple and easy to operate. Unnecessary details should be
avoided.
9. The installation and operation of system should be economical.
10. The system should be introduced gradually.
11. Effective internal control system.
 Management Accounting System
Characteristics of an ideal management accounting system.
1. Suitability to the business
2. Simplicity
3. Flexibility
4. Economical
5. Comparability
6. Capacity of presenting information at the desired time.
7. Minimum changes in the existing setup.
8. Uniformity of forms
9. Minimum clerical work.
10. Efficiency system
11. Adequate wage procedure
12. Departmentalization of expenses.
13. Reconciliation of management and financial accounts
14. Duties and responsibilities of the cost accountant.
 Difficulties in installing a
management accounting system
• Lack of support from top management.
• Resistance from existing accounting staff.
• Non- cooperation at other levels of
organization.
• Shortage of trained staff.
• Heavy cost of operating a system.
 Cost Classification
• Classification according to function:
– Manufacturing cost
– Administration cost
– Selling and distribution costs
– Financial costs
– Research and development costs
• Classification according to variability
– Fixed Cost
– Variable Cost
– Semi-variable or semi-fixed costs
• Classification according to identifiability with cost units:
– Direct costs
– Indirect costs
• Classification according to controllability
– Controllable costs
– Uncontrollable Costs
• Classification on the basis of time.
– Historical costs
– Predetermined Costs
• By department
• Budgeted Cost and Standard Costs
• For Analytical Process
 Functional Classification
Functional Classification:-
This is a traditional classification. A business has to perform a
number of functions like manufacturing, administration,
selling, distribution and research. Cost may have to be
ascertained for each of these functions. On this basis, costs are
classified into the following groups:
• Manufacturing Cost
• Administration Cost
• Selling & distribution costs
• Financial Cost
• Research and development cost
 Behavioral Classification
1. Fixed Cost
2. Variable Cost
3. Semi-variable or semi-fixed cost