Quick summary
Management accounting (व्यवस्थापन लेखाशास्त्र) is the use of accounting information to help managers plan, control and take decisions. It takes data from financial accounting and cost accounting and presents it in a useful form for the internal management. This topic covers its meaning, nature, scope, functions, tools and limitations.
Key points
- Definition (Anglo-American Council on Productivity, 1950): management accounting is the presentation of accounting information in such a way as to assist management in creating policy and in the day-to-day operation of an undertaking.
- CIMA describes it as the application of accounting and management skills to generate, analyse and use information for planning, decision-making and control.
- Nature: forward-looking (future oriented), selective, no fixed rules (not governed by GAAP), uses both money and non-money data, serves internal management.
- It does not take decisions itself; it supplies information for decisions.
- Scope: financial accounting, cost accounting, budgeting and forecasting, cost control, reporting to management, tax planning, internal audit, statistical methods, office services and data processing.
- Functions: planning and forecasting, organising, controlling, coordinating, motivating, communicating and interpreting data.
- Tools and techniques: financial statement analysis, ratio analysis, fund flow and cash flow statements, marginal costing, budgetary control, standard costing, decision accounting, responsibility accounting.
- The person in charge is the management accountant or controller.
- Limitations: depends on the accuracy of basic records, wide scope requires knowledge of many subjects, costly to install, personal bias in interpretation, it is only a tool and not a substitute for management.
Important terms
- Decision-making – choosing the best course from alternatives.
- Controller – management accountant who looks after planning, reporting and control.
- Responsibility accounting – costs and revenues are traced to the managers responsible for them.
- Management Information System (MIS) – system providing timely information to managers.
Formats and formulas
| Basis | Financial accounting | Management accounting |
|---|---|---|
| Purpose | Report to outsiders | Help internal management |
| Legal need | Compulsory for companies | Optional |
| Period | Past (historical) | Future oriented |
| Rules | Follows GAAP / Accounting Standards | No fixed rules |
| Data | Only money | Money and non-money |
| Reports | Annual | As often as needed |
| Audit | Audited | Not audited |
5 important questions
Q1. Define management accounting.
Management accounting is the presentation of accounting information in a way that helps management in making policies, planning, controlling and running the business day to day.
Q2. State any four tools of management accounting.
Ratio analysis, budgetary control, standard costing and marginal costing (also cash flow analysis and decision accounting).
Q3. Explain the nature and scope of management accounting.
Outline: nature (forward-looking, selective, provides data not decisions, no fixed format, cause-and-effect study, uses many disciplines); scope (list and explain eight areas above with one line each).
Q4. Distinguish between financial accounting and management accounting.
Outline: draw the table above and add points on precision (financial needs exact figures, management can use estimates), users, and publication.
Q5. Explain the functions and limitations of management accounting.
Outline: functions – planning, controlling, organising, coordinating, motivating, communicating, interpreting; limitations – as listed above, and the conclusion that it supports but cannot replace managerial judgement.
Exam tip
Begin a long answer with the Anglo-American Council definition, then give a short example, such as using marginal costing to decide whether to accept a special order.