Download - AFM Introduction
-
7/30/2019 AFM Introduction
1/35
MANAGEMENTACCOUNTING
-
7/30/2019 AFM Introduction
2/35
Accounting
Accounting is a business language.
Accounting is defined as a system for
collecting, summarizing, analyzing, presentingand reporting, in monetary terms, anyrelevant information about the enterprise.
As a business language, accounting communicates
about business transactions and its results on various
interested parties.
-
7/30/2019 AFM Introduction
3/35
Branches of Accounting
The three main branches of
accounting are :(1) Financial Accounting ;
(2) Cost Accounting; and
(3) Management Accounting.
-
7/30/2019 AFM Introduction
4/35
Financial Accounting
Financial Accounting records monetary
transactions, prepares necessary
accounts, analyses and interprets
financial statements. It reveals the
financial position of a business over a
particular period of time.
-
7/30/2019 AFM Introduction
5/35
Cost AccountingCost Accounting may beregarded as a specialized
branch ofaccounting which involves
classification, accumulation,assignment and control of
costs.
-
7/30/2019 AFM Introduction
6/35
Management AccountingManagement Accounting is
concerned with the presentation of
accounting information tomanagement in such a way as to
assist them in their managerial
functions of decision-making,
planning and control.
-
7/30/2019 AFM Introduction
7/35
Management accounting Defined
Management accounting is a system
of collection and presentation of
relevant economic information relatingto an enterprise for planning,
controlling and decision-making.[I.C.W.A.I., India]
-
7/30/2019 AFM Introduction
8/35
The main purposes of Management Accounting
To provide management with financial data, cost data and
other qualitative information for planning and decision-making;
To express financially the plans in terms of individual
responsibilities for all levels of management;
To get an insight into the profitability, solvency, liquidity,
etc., of the organisation;
To measure and interpret the results of operations at all
levels of management with necessary comments and
conclusions;
To report on the effectiveness of the organisation as
regards utilization of resources;
To meet the changing needs of management functions.
-
7/30/2019 AFM Introduction
9/35
Nature of Management Accounting
The nature of management accounting can beenumerated as follows :
Advisory nature : It provides relevant
information to the management to achievean organization's strategic, tactical andoperating objectives.
It gets an insight into the profitability,solvency, liquidity, etc., of the organisation andrenders advise to the management on thesematters.
-
7/30/2019 AFM Introduction
10/35
contd..
Analytical in nature : Management accounting is
analytical in nature. It analyses and interprets accountingand other data to make them understandable and usable
to the management. Such an in-depth analysis assists the
management in pinpointing responsibilities and to effect
necessary changes in the organizational set up. Interpreting results of operation : It measures and
interprets the results of operations to all levels of
management with necessary comments and conclusions.
Aid to the management : It provides both quantitative
and qualitative information to the management to assist
them in their managerial functions of decision making,
planning and control.
-
7/30/2019 AFM Introduction
11/35
Contd..
Feedback control : It expresses financially the plans in terms
of individual responsibilities for all levels of management. Itdevelops a chain of responsibility reporting and monitorsperformance against plans.
Future-oriented : Management accounting is forward-looking and dynamic. It processes historical data for projectingfuture trends in order to take better decisions.
Absence of standard format : There is no standard format topresent management accounting information. Managementaccountant prepares formats according to the demands of asituation. Thus, the style of presentation of information istailored to the requirement of a situation.
Selective approach : It takes into account only relevantinformation which affects decision-making from voluminousfinancial and cost data. It provides useful and understandableinformation to the management for their proper decision-making.
-
7/30/2019 AFM Introduction
12/35
Scope of Management Accounting
Financial Accounting : Management accounting
data is mostly derived from financial accounting.
Management accounting has its roots in financial
accounting. Management accounting uses the
principles and practices of financial accounting. Cost Accounting : Management accounting
involves the application of appropriate techniques
and concepts drawn from cost accounting.
Management accounting can be viewed as anextension of managerial aspects of cost
accounting. However, the scope of management
accounting is broader than the scope of cost
accounting.
-
7/30/2019 AFM Introduction
13/35
cont..
Management Information System (MIS) : MIS providesrelevant information to the management for itsdecision-making. Computers have added a newdimension to MIS by facilitating the processing of largevolumes of data with great speed and accuracy. MIS is
expected to supply information as needed at differentlevels in the organization.
Quantitative Techniques : Operations research (OR)technique is used bymanagement accountants to solve
the existing problems in the decision-making process.In a decision-making situation, all variables arequantified for the purpose of analysis. Capital Budgeting, Ratios Analysis, FFS & CFS are important
techniques applied for decision-making.
-
7/30/2019 AFM Introduction
14/35
cont Benchmarking Technique : Benchmarking is
the process of studying and adapting the bestpractices of competing organisations toimprove the organisation's own performance.Benchmarking helps to understand one's ownperformance against the best practice in theindustry. Benchmarking is a modern techniquefor strategic improvement.
Total Quality Management (TQM) : Totalquality is an approach to a continuous
improvement in products, services, people,processes and environment. This approach isused in management accounting to maximisean organisations' competitiveness.
-
7/30/2019 AFM Introduction
15/35
cont
Management By Objectives (MBO) : MBO is a technique
which helps a managerto achieve his objectives in anefficient manner. MBO leads to effective management
by integrating the goals of an organisation and
individuals. It increases the organisational capability of
achieving goals at all levels through a high degree ofsatisfaction of employees.
Management Reporting : It provides relevant
information to various levels ofmanagement in the
forms of reports at regular intervals. It supplies data forpolicy making and operating decisions. It is the
instrument for making decisions and controls effective.
Management reports are used internally and are the
subject matter of management accounting.
-
7/30/2019 AFM Introduction
16/35
Objectives of Management Accounting Interpretation of financial results : Management
accounting analyses andinterprets the financialresults of the concern. Various tools (such as ratioanalysis, fund-flow statement, etc.) are used by themanagement accountant for analysing and
interpreting the financial position of theorganisation.
Proper planning : Management accounting helps inthe preparation of plans andpolicies of anorganisation. Management accountant uses variousforecasting techniques (such as Regression analysis,Time series analysis, etc.) to predict future trends.Forecasting is necessary for a planning process.
-
7/30/2019 AFM Introduction
17/35
cont..1. Proper control : Management control is a process
that assures resources are used effectively andefficiently for achieving the objectives of theorganisation. The management accountant usesvarious techniques for ensuring efficient
managerial control (such as standard costing,budgetary control, internal audit, responsibilityaccounting, management audit, etc.).
Proper communication : Communication has
become an essence of management.Management functions cannot be performedefficiently without an effective network ofcommunication in the organisation.
-
7/30/2019 AFM Introduction
18/35
Objectives of Management Accounting
cont..2. Making decisions : Decision-making is necessary
for the effective functioning ofmanagement. Thesuccess of management depends upon the qualityof any decision. The management accountanthelps the management in taking various decisions(by applying marginal costing, differential costing,etc.).
Tax planning : The management accountant helps
the management in determining various tax reliefsand rebates. He assists the management in taxplanning, computation of different tax liabilitiesand reduction of burden of tax.
-
7/30/2019 AFM Introduction
19/35
Differences betweenManagementAccounting andFinancial Accounting
-
7/30/2019 AFM Introduction
20/35
Differences between Financial A/cting and Management A/cting
Points of
DistinctionFinancial Accounting Management Accounting
Basicfunction
Recording ofmonetarytransactions and
publication offinancial
statements.
Supporting decisions of
the management
by providing relevant
information.
Party to beserved
For use ofinternal parties
only.
For use ofexternal parties
(may also be used by
internal parties).
Format ofreports
Format is tailored to the
requirement
Format is specified by the
relevant provisions
of the Companies Act.
-
7/30/2019 AFM Introduction
21/35
Differences between Financial A/cting and Management A/cting
Points of
DistinctionFinancial Accounting Management Accounting
Objectivity of
reports
Auditing of
reports
Management reports are
not subject to
statutory audit.
Financial reports are
subject to statutory
audit.
Publication of
reports
Management reports
are meant for internal
use only.
Annual reports are to be
published for
circulation among external
parties.
Reports may contain
both the objective and
subjective figures.
Report is supported by
relevant figures. It lays
emphasis on objectivity of
data.
-
7/30/2019 AFM Introduction
22/35
Differences between Financial A/cting and Management A/cting
Points of
DistinctionFinancial Accounting Management Accounting
Period of
coverage
As required by
the management.Usually one year.
Availabilityof reports
Confidential innature.
Publicly available.
Unit of study Detailed study of
a segment.
Overall performance of the
organisation.
Governed by Needs of managers.Companies Act.
-
7/30/2019 AFM Introduction
23/35
Differencesbetween Cost
Accounting andFinancialAccounting
-
7/30/2019 AFM Introduction
24/35
Points of
DistinctionCost AccountingFinancial Accounting
Differences between Cost Accounting and Financial Accounting
Applicability
Principlesfollowed
Scope of
measurement
Financial Accounting isapplicable to all types of
accounting entities.
It adheres to Generally
Accepted Accounting
Principles (GAAP).
It measures the financial
performance ofthe entityas a whole during a
particular period.
Cost Accounting isapplicable to
manufacturing concerns.
It adheres to costingconcepts and
principles.
It measures the cost of
each product line,
department, process, etc.
-
7/30/2019 AFM Introduction
25/35
Points of
DistinctionCost AccountingFinancial Accounting
Differences between Cost Accounting and Financial Accounting
Periodicity ofreporting
Requirement
served
System of
control
Financial reports areprepared periodically,
usually at the end of an
accounting period.
It does not attach
importance to control
during transactions.
It provides for a detailed
system of controls with
the help of certain
special techniques (like
Standard Costing,
Budgetary Control, etc.)
Cost reporting is a
continuous process and it
may be prepared as and
when desired (either
weekly or monthly, etc.)
Financial Accounts areprepared according to the
requirements of the
Companies Act and
Income Tax Act.
Cost Accounts are kept as
per the requirement of
Management.
-
7/30/2019 AFM Introduction
26/35
Points of
DistinctionCost AccountingFinancial Accounting
Differences between Cost Accounting and Financial Accounting
Scope ofcorrection
Party to be
served
Nature of
approach
Valuation of
stock
It does not bring out areaswhich need correction and
improvement.
It is mainly meant for providing
information to shareholders,
creditors, government,
employees, etc.
It deals mainly with actual
figures and, thus, it is historical
in approach.
Stocks are valued at cost or
market price, whichever is
lower.
Stocks are always valued at
cost.
It measures the cost of each
product line, department,
process, etc.
Cost Accounts are kept as per
the requirement of
Management.
Cost reporting is a continuous
process and it may be
prepared as and when desired(either daily or weekly or
monthly, etc.)
-
7/30/2019 AFM Introduction
27/35
Points of
DistinctionCost AccountingFinancial Accounting
Differences between Cost Accounting and Financial Accounting
Statutoryneed
Analysis of
Profit
Control
aspect
Nature of
analyses
It is compulsory to meet therequirements of the Companies
Act, Income Tax Act, etc.
It fails to show profit for each
product, department, process,,etc.
It does not provide for adequate
control on expenses.
It is concerned with historical
transactions only (i.e. post-
mortem analysis).
It is not compulsory
It helps in the measurement of
shortfall and failure which
need immediate management
action.
It is mainly meant for providing
detailed cost information to
the management. Therefore,
cost information are not meant
for outsiders.
It deals partly with actual
figures (i.e., historical data) and
partly with estimates.
-
7/30/2019 AFM Introduction
28/35
Differencesbetween Cost
Accounting andManagementAccounting
Differences between Cost Accounting and Management Accounting
-
7/30/2019 AFM Introduction
29/35
Points of
DistinctionCost Accounting Management Accounting
Differences between Cost Accounting and Management Accounting
Principlesfollowed
Nature of
approach
Scope of
study
Primaryobjective
It uses the principles andpractices of both Cost and
Financial Accounting.
It looks ahead through
long-term planning apartfrom current operations.
It is an extension of
managerial aspects of Cost
Accounting.
The primary object is toprovide the relevant
information to the
management to take an
appropriate decision.
It uses the principles andpractices of Cost Accounting.
It generally deals with current
operations.
It is a complement of
Management Accounting.
The primary object is toascertain the cost of a
product (or service) and to
control the cost after careful
analysis.
Differences between Cost Accounting and Management Accounting
-
7/30/2019 AFM Introduction
30/35
Points of
DistinctionCost Accounting Management Accounting
Differences between Cost Accounting and Management Accounting
The main emphasis is on theefficient operation of
business.
Management Accountant
not only makes variance
analysis but also suggeststhe ways and means for
improving operations.
Double entry system is not
adopted while submitting
reports to the management.
Management accountant
concentrates on matters
relating to finance,
profitability and
productivity.
Mainemphasis
Contents of
report
System of
recording
Basis of
work
The main emphasis is on costdetermination and cost
control.
Cost Accountant compares
Actual Cost with Standard
Cost and submits reports tothe management regarding
variances for appropriate
action.
Double entry system of
recording transactions can be
adopted.
Cost accountant is to work
through set routines, budgets
and standards.
Differences between Cost Accounting and Management Accounting
-
7/30/2019 AFM Introduction
31/35
Points of
DistinctionCost Accounting Management Accounting
Differences between Cost Accounting and Management Accounting
Statutoryverification
Utility of
reports
Type of data
used
Accounting
period
Management reports arenot subject to any statutory
audit.
Management reports are
useful only to the
management.
It uses both quantitative
and qualitative data.
It does not follow any
specific accounting period
as such.
Cost accounts and reports aresubject to statutory
verification (i.e. cost audit).
Cost reports are meant for
management and even usefulto external parties.
It uses quantitative cost data
only.
It is done for a specific
accounting period.
Differences between Cost Accounting and Management Accounting
-
7/30/2019 AFM Introduction
32/35
Points of
DistinctionCost Accounting Management Accounting
Differences between Cost Accounting and Management Accounting
Coverage ofdata
Derivationof data
Term of
Planning
Installation
of the
It deals with both cost andfinance-related data.
It derives data from both
financial records and costrecords.
It is equally concerned with
short-term and long-term
planning.
It cannot be installed
without a proper cost
accounting system.
It uses quantitative cost dataonly. It is done for a specific
accounting period.
It deals with cost data only. It
derives data from financial
records.
It is concerned with short-
term planning.
It can be installed without
management accounting
system.
-
7/30/2019 AFM Introduction
33/35
Needs Determine the Form of Accounting Data
Managers need changing information to meetchanging needs!
Types of Accounting Systems
Financial Accounting
Rules and procedures
Accounting information systems and internalcontrols
Auditing
Cost Accounting Product costing
Activity-based costing
-
7/30/2019 AFM Introduction
34/35
Management Accounting Decision support
Organizational control
Cost management
Profit management Investment management
Tax Accounting
Individuals
Partnerships and corporations
Estate and trusts
International taxation
Special tax issues and topics
-
7/30/2019 AFM Introduction
35/35
New Management Trends to Create Value
Encourage Management AccountingSystems Redesign, for example.
Customer focus
Quality focus
Delivery focus
Outsourcing and the virtual company
Communications
Shortening product life cycles Team development
Deregulation in the service sector