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Corporate and Management Accounting (B. Com IIIrd Year) Notes

B.Com IIIrd Years

UNIT : I
MANAGEMENT ACCOUNTING : AN INTRODUCTION
Q.1 What do you mean by Management Accounting ? Explain it with features.
Ans. Meaning : The Word 'Management Accounting' is the combination of two words 'Management' and 'Accounting'.
Management refers to the art of planning organisation and directing the human efforts in accomplishing the desired objectives.
On the other hand, 'Accounting', is the process of recording, classifying and summarising the monetary effects of business
transactions and events so that concerned parties may know the results thereof. Thus, by assimilating the two definitions, the
management accounting can be defined as an art of management and accounting. In other words "Management accounting
denotes every accounting technique which may be useful to management in discharging its functions viz planning, organising,
directing, co-ordinating, communicating and controlling.
Nature or Characteristics of Management Accounting
Management accounting comprises of various financial and non-financial data, subjects, formats and other related facts.
The nature of management accounting can be studied on the basis of following characteristics :
(1) Management accounting is related with future—In management accounting, the the future are prepared. The actual
results are compared with these forecasts. This helps the management in effective controlling. We include budgetary control,
standard in management accountancy. In all these methods facts relating to future are studied, thus we say management
accounting is related with future.
(2) Management accounting is of a selective nature—In management accounting the most profitable and best alternative is
chosen after analysis and comparative study of various the same way, only selected information is presented to the
management. Thus at every stage it requires selection and presentation of necessary information to the management,
therefore management accounting is selective in nature.
(3) Established financial accounting rules are not followed in Management Accounting—The work of management accoun-
tant is to increase the efficiency. For this purpose, he can frame his own rules different from that of set rules on the basis of his
logic, knowledge, experience and imagination and creates an information system which can serve the cause. Therefore it is
more apt to say that there are no set of rules for management accounting.
(4) Management accounting furnishes facts and not the decisions—The management accountant only collects and analyses
the data and presents it to the management. He does not take any decision over it. Decision-making is in the perview of
management and he helps in decision-making.
(5) In management accounting special emphasis is laid on Cause and its Effect—In management accounting not only the
results are seen but also attempt is made to understand that the result is affected with what factors and how it can be improved.
For Example, in financial accounting only profit is calculated but in management accounting it is studied that why the profit
remains at certain level and what will be its effect on the health of the enterprise and how it can be increased.
(6) Emphasis is placed on the study and analysts of the nature of elements of cost—The study of cost elements is of great
importance in management accounting. Total cost can be distributed in various parts such as variable cost, fixed cost and
semi-variable cost. In management accounting this classification has an important place. For taking managerial decisions,'
marginal costing, cost volume- profit analysis, variance analysis etc. are used, which are based on this classification.
(7) Service function—Management accounting is a service function through which, the information necessary for deciding
policies of the organisation and taking decisions is provided on time. This information can be related to cost, price; income and
profits etc.
(8) Integrated system—Management accounting is an integrated system of various systems, methods and techniques. In
this we include cost accounts, budgetary control, financial accounts along with economics, psychology, statistics and other
related subjects.
(9) Developing subject—Management accounting had developed in less than 50 years and till today it has not developed fully.
Its tools, methods, and systenis are constantly progressing because of which it is getting more refined.
(10) Potentiality of development as a profession—lt has not evolved as a profession in India, as yet. But some institutions are
trying to establish it in that way. Among them the main are Institute of Chartered Accountants of India and Institute of Cost &
Work Accounts of India.

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Q.2 Define the scope of Management Accounting and discuss its objectives.
Ans. Objectives of Management Accounting
The main objective of management accounting is to provide information for successfully carrying out the managerial duties.
According to Henry Fayol, "To mar ages to forecast and plan, to organise, to command, to co-ordinate and to control.
(1) Helps in planning--For the set on future goals what should be done, is"called planning. For achieving the desired goals of
business it is necessary for management to prepare plan of action. Management accounting gives an ample help in this cause
of management. The forecast of Production, sale, purchase, capital, investment and cash etc. helps the management in
framing a profitable plan for future. The best alternative is chosen by the managers with the help of management accounting.
(2) Helps in organising—Every management tries to unite its organisation and departments in the best possible way. The
distribution of authorities and responsibilities of carrying out the plans comes under the organising. Management accounting
helps into thisby emphasising more on the Budget and Cost Centres. The responsibilities can be divided easily on the basis of
budget and cost centres and by calculating the rate of return on investment made in each cost centre, the profitability and
effectiveness of each can be checked. On the basis of investigation the weak areas can be strengthen. The employees remain
conscious and work properly due to the constant investigation through the system and methods of management accounting.
(3) Helps in co-ordination—Every manager tries to establish co-ordination between the activities carried out under him so that
organisation can prove to be more profitable and efficient. Management accounting helps the management in this work. For
example, there should be a co-ordination between production and sale, according to estimated production the raw material,
finance and labour should be available. This co-ordination is facilitated by budgetary_ control system.
(4) Helps in communication—By communication, we mean the transfer of information' between the employees of the
organisation (Managers and Labourers) and among the organisation and external institutions like customers, creditors,
suppliers, government etc. For correct and immediate communication the management should have up to date information.
Through management accounting the daily reports can be presented in form of reports. The yearly performance can be
presented in the form of final accounts and yearly reports. Through the cost accountancy, the cost of production,. operations
and processes can be known and it can be presented 'to management in the form of details. For keeping the employees
informed memos. circulars and notices can be prepared. For taking any solid decision, information remains the base. For this
proper explanation and interpretation of information is required and management accounting helps in the smooth flow of this.
(5) Helps in controlling—Controlling means the comparison of actual and expected results and taking the corrective action
wherever the untolerable deviations are found. In managerial tasks, controlling comes on front seat. Various techniques are
employed by management accountant to have a better control mechanism. Through standard and overhead costs and
budgetary, control, control is kept on various activities and departments. It also. helps in controlling the expectations and
activities of extern al parties. The yearly/annual financial statements are prepared for the use of external parties only.
(6) Helps in motivating employees—Every manager tries to make his subordinates a loyal employee. For this a good
leadership is required. And good leadership is possible only if correct information are available. This is taken care of by the
management accounting and the management accountant keeps on increasing the knowledge of management by providing
adequate and timely information. This keeps the self-confidence of the managers at high levels and they lead better.
(7) Helps in analysis and interpreting the financial information—This is again one of the main objectives of management
accounting. accounting is a technical subject. Management is not expected to understand the minute details of it. Thus it is the
responsibility of management accountant to interpret this information and present it in most new technical form so that it could
be understood by each and every one. For this, graphs and diagrams etc are used.
(8) Helps In decision-making—The most important part of management is decision-making. Decision means choosing the
best out of the rest. Management has to take various decisions in business. For taking decision on complex matters, it is the
responsibility of Management accountant to present the data and information various possible alternatives. Various tools and
techniques are available for this purpose.
(9) Helpful in reporting—The most important work of management accountant is to provide data and contents to the manage-
ment for taking important decisions. This work is done through reports. Various departmental heads pass on the operation.
reports of their departments to the top management. In this job, management accounting plays a major role.
(10) Helpful in fixing responsibility—With the help of management accounting techniques the responsibility centres are
formed in the undertaking, which fixes responsibility of particular person for a particular work.

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Scope of management Accounting

This way the purview of management accounting is too vast and includes various aspects of business operations.
Following subjects are included in management accounting :—
(1) Financial Accounting—It is the general accounting which includes the primary record of transactions, ledger posting and
finding out the balances. Aftet this final accounts are prepared, which show the profit & loss of the business and the balance
sheet shows the position as on that date. The financial accounting forms the basis of details and reports to be presented under
the management accounting; without them, management accounting cannot establish control and co-ordination over the
activities.
(2) Cost Accounting—It is one of the branches of accounting. It is the process and technique of knowing the cost. The effective
planning, decisions and control are the basic work of management accounting and its\tools are standard costing, budgetary
control, marginal costing ' etc.
(3) Budgeting and Forecasting—Budgeting means planning, policies and goals for a specified future time. All this work is
done on the basis of business forecasting. The responsibilities for various departments of organisation and their goals are pre-
decided. And the actual performance is known by comparing actuals with standards.
(4) Statistical Methods—Statistical tools like graphs, charts, tables, index' numbers etc. make the presentation of informa-
tion more attractive. Various methods of statistics are helpful for forecasting purposes.
(5) Inventory Control—The material from the time of procurement till the time of its consumption, remains under control and
that is called as inventory control. It is important because a huge amount is spent on the materials. Management needs to
decide maximum stock level, minimum stock level, re-order level and other things. The study of inventory control is very
useful for the management.
(6) Interpretation of data—The analysis and interpretation of financial statements is very necessary. The comparison of
financial statements can be made with that of previous years or with the other related firms.
(7) Tax Planning and Management—In present times, tax planning and management is very essential. Central and State
Governments put so many taxes and require the filing of returns, 'assessment of tax and payment of tax. Every work is to be
done in stipulated time period.
(8) Internal Audit—For assessing the work of various departments of the organisation it is necessary to internally audit them.
It helps in holding the officials responsible for the work done under their departments.
(9) Reporting—The. reports prepared at .various levels of organisation should be synchronised and presented to the top
management so that they can take proper steps. Sending them after delay makes them stale. Reporting can be done on
quarterly, half-yearly or yearly basis. It can be related to cash, profit and loss, funds etc.
(10) Methods and Procedures—Generally the secretarial or official service administration should also fall under the work of
management accountant. The processing and use of data, filling, copying and postage are the official works. The optimum
utilisation of machines and other electronic equipments is to be insured. Various types of surveys and forecasts are also
made.
Due to the information given above it is clear that the scope of management accounting is increasing day by day.
Q.3 Discuss the tools and techniques of Management Accounting.
Ans. Tools and Techniques of Management Accounting
The development of this subject was done for the facilitation of managerial work. Therefore following tools and techniques
have been adopted :
(1) Financial Planning—Financial planning is that technique by which total capital resources are estimated and their sources
are decided. Under this it has to be decided that (i) What will be the sources of finance for business, (ii) What will be the
proportion of equity. and preference capital, (iii) How much business will depend upon long-term and short-term loans, (iv)
What will be the ratio of share capital and loan capital etc. It is necessary to prePare a sound policy for the management.
(2) Financial Accounting—The basic ingredient of the success of management accounting is the financial accounting.
Therefore, it is compulsory to have strong and well organised financial accounting systems to support management
accounting.

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(3) Historical Cost Accounting—In historical cost accounting all those accounting procedures are included on the basis of
which actual production expenses are classified and recorded. From historical point of view, only job costing and process
costing are included in the cost accounting. But in present era this subject has developed widely. In modern times it includes
standard costing, budgetary control, marginal costing and decision accounting etc. Without the knowledge of the various cost
concepts management accounting cannot make a profitable use of its accounting information.
(4) Standard Costing—Standard costing is a technique through which cost of 'a job or process is decided in advance on the
basis of average efficiency or past cost data ar.alysis. Thus the predetermination of cost criteria are known as standards. The
comparison of actual cost and standard cost is made and variances are found for corrective action.
(5) Budgetary Control and Forecasting—Budgetary control is a technique of management control, in which the future' plans
of organisation are presented in the monetary form. On the forecasting of various business operations the responsibilities of
managers are fixed. In receiving the performance results they are compared with the budgets made. Budget coinmittee
maintains co-ordination among the various departments of the organisation. Time to time each department prepares its
operational details and report's and such documents give the level of efficiency of each department.
(6) Marginal Costing—In the marginal cost accounting the various production costs are divided into the fixed and variable
costs. In the traditional cost accounting methods, the fixed cost is also associated with the cost centres but in this, fixed costs
are deducted from the revenue generated through sales of the period in which they were incurred. The cost-volume-profit
analysis or marginal costing helps in the determination of optimal level of production. Thus it is very helpful in knowing the
short term production capacity and its utilisation.
(7) Decision Accounting—Decision-making is the most essential function of management and decisions are made for the
selection of the best alternative. For selecting the best alternative, various decision accounting techniques are used. It has to
decide that each available alternative affects production level, related costs, sale, profit and other things, to what extent. After
this only the best alternative should be selected. Sometimes, decisions are taken on trial and error method and intuitions,
which prove to be disastrous mostly. Decision accounting do not have any separate accounting methods, but it is just a
process to make decisions with great caution.
(8) Control Accounting—It is not an accounting method or proCedure but it is an area where the management accountant can
show his knowledge, talent and insight by providing essential information to his supervisors and managers at various levels.
Standard costing, budgetary control, internal check, statutory audit and other techniques are used for control accounting.
(9) Revaluation Accounting—In this accounting method, fixed assets are valued at replacement cost and not on historical
cost. The aim of this method to create' confidence that the capital of the organisation is intact, i.e, the change in the valuation,
of assets is taken into consideration and thus profit and loss is calculated on that basis.
(10) Responsibility Accounting—In- the words of C.C. ,D "Responsibility . Responsibility accounting can be defined as the
arrangement of accounts and reports so that those persons responsible for operations are given financial data pertaining to
thesekoperations." Here it should be cleared that the use of providing data to someone is to make -him accountable for his
responsibilities on the basis of standards set, so that he can assess his work efficiency. In the words of another scholar Mr.
R.M. Bhandari, "Responsibility Accounting is a system under which costs are accumulated and reported at each level of
responsibility so that the accounting and cost data may be used by management at each level in controlling their operations
and their costs."
(11) Quantitative Methods—In the modern times, quantitative techniques are being used in the management accounting. On
the basis of these techniques the element of risk can be reduced. Operational research, Linear programming, Game theory and
Queueing theory, Network analysis, Simulation theory, Regression analysis, Correlation, Time-series analysis, Standard
deviation, Quality control techniques, Systems analysis etc. are included in it. In modem era, data analysis and classification
is made through computers.
(12) Economics—Business and monetary operations has a strong relaticin. The managers of any organisation have a specific
financial motive—to increase its assets, by operating the financial activities.
(13) Development Accounting—Under this method of accounting costs are controller and they are reduced to the all possible
extents. New products, design, production process c are developed and introduced only after the indepth research. Through
development accounting it is decided whether research work will be of great use on implementation or not.
(14) Tax Planning and Management Accounting - Today all the big organisations and industrial houses have a very high tax
liability, they have to produce in huge quantity and have high volume of sales and pay very high taxes. Tax planning and
management tools and techniques are very useful.

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(15) Reporting—Management Accountant helps to various departments and-he preparEs the reports as per their require-
ments and decisions.
(16) Auditing—Auditing is basically divided into financial auditing, cost auditing, management auditing and tax auditing. The
purpose of management auditing is to increase the managerial efficiency. Thus the purpose of both management auditing and
management. accounting has a same purpose.

Q.4 Give Difference Between Financial Accounting and Management Accounting.

Ans. Difference Between Financial Accounting and Management Accounting
(1) Object—the object of financial accounting is to chronologically record the business transactions, its income measure-
ment and showing the financial position on given date.- Whereas the object of management accounting is to provide such
information to management which can be used for increasing efficiency.
(2) Nature—Financial accounting is historical in nature but management accounting is futuristic. Thus actual data is used in
financial accounting but projected data in management accounting.
(3) Scope - The scope of management accounting is much wider than that of financial accounting. Management accounting
includes financial accounting, cost accounting; revaluation accounting, control accounting, deciSion accounting, statistics
and economics etc. whereas financial accounting does not include them.
(4) Usefulness—Financial accounting is useful for external users like shareholders, creditors, government and institutions
whereas management accounting is used by management to carry out its work. That is why main question of management
accounting is "Is this information useful for the management work ?" but in financial accounting it is "Is the given informatiob
is according to generally accepted principles of accounting ?"
(5) Accounting principles—In financial accounting the financial information is written according to accepted principles
whereas in management accounting information tten on - the basis of management needs and thought.
(6) Form—The form in which financial accounts are prepared is generally actAated one. But the form of presenting information
relating to management accounting, no specified form is there and is prepared and presented on the basis of requirement.
(7) Subject matter—Financial accounts are prepared for the whole business but the preparation of managerial accounts
information is done on the basis of department. The way financial accounting are related to all the business whereas
management accounting related only to product or particular department and sometimes it is related to the whole
departments.
(8) Compulsion—It is compulsory for the organisation to keep the financial accounts but keeping management accounting is
not mandatory. And management accounting is introduced only where the benefits derived from it are greater than its cost.
(9) Reporting—The aim of'financial accounting is to inform the shareholders, creditors, government and other outsiders about
the financial soundness and profitability of the business whereas management accounting increases the efficiency of the
managers in the organisation.
Thus the information from the financial accounts is fol- the external parties but management accounting is for the internal use
by the managers.
(10) Precision—The precision is required, of high level, in case of financial accounting whereas it is not emphasised upon in
the case of management accounting, approximations can work there.
(11) Period—In financial accounting the information is generally related to one operating cycle, i.e. a year whereas in the case
of management accounting reports are prepared from time to time.
(12) Standard—The main purpose of financial accounting is to provide information to external sources and thus the state-
ments under it are prepared on the basis of standards set by these external parties. The details and information under the
management accounting is prepared for the internal use, therefore, the standards for it are decided by the internal management
and they are changed from time to time according to circumstances.
(13) Quickness of communication—The quickness of information is required more in the case of management accounting
because the management requires the latest information and reports all the while. It is not so in the case of financial
accounting.
(14) Description—Financial accounting includes only those facts which can be expressed in monetary terms whereas
management accounting consists of the facts which are both quantitative and qualitative in nature. The qualitative facts like
technical charges, change in customer preferences, competitive environment and other factors are of much interest to the
management.

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(15) Publication—The financial. statements prepared through financial accounting are published in the interest of public. But
the reports and details prepared by management accountant are for internal use only.
(16) Implicit costs—The financial accounting prepares the statements for the actual expenses incurred but the expenses are
shown in statements, used for management accounting are the estimated or projected costs or expenses. In financial
statements the total cost does not include the cost of factors used in business and owned by the businessmen..On the other
hand, management accounting accounts for such costs also, while calculating the total costs.
(17) Checking and Examination—It is possible to check and examine the. financial statements prepared under financial
accounting through the process of auditing. But such checking and examination is not possible in the case of management
accounting because the facts and figures used in it are projected or estimated ones and they are related more to future rather
than past and present. Moreover, it also accounts for the qualitative facts, which cannot be audited.
(18) Characteristics—The information prepared under the financial accounting emphasises more on monetary terms,
validity, absoluteness, objectivity etc. so that people can rely more on them, whereas in management accounting stress is
given more on the usefulness and practicability of the reports and they are more subjective too.
Q.5 Describe the limiatations of Management Accounting.
Ans. Limitations of Management Accounting
In the present corporate world, management accounting is of great importance but it has some limitations like any other
science :
(1) Based on financial and cost accounting—Most of the information presented by management accounting are based on the
financial and cost accounting. Thus the conclusions drawn by the management accountant are affected, by the limitations of
the financial and cost accounting to a great extent. The information in their statements are generally based on historical figures,
which make the information of management accounting less useful.
(2) Wide scope—Management accountant tries to provide forecasts, analysis and reports for all the areas of management,.
which has a very wide scope thus making it very hard for him to generate such information.
(3) Lack of continuity in efforts—The conclusions derived by management accountant are of no use till they are constantly
and cautiously used by the management. For this it is essential that information provided by him should be used at each level
of management and treated as the part of management process.
(4) Effect of human factor—The information whatsoever is called in the management accounting is affected by the "personal
biases" and human factor. From the collection to the analysis of the information there comes some part of effect because of the
character, intentions, and behaviour of the person doing it. These decisions are affected by personal influence and the self
knowledge to a great extent. That's why the conclusions drawn from them are also affected.
(5) Lack of thorough knowledge—The right conclusions, from the information collected in management accounting, can be
drawn only if the person is having in-depth knowledge of accountancy, statistics, economics, auditing, principles of manage-
ment and engineering etc. Management accountant and managers both don't have this much knowledge, which ultimately
affects the quality of decisions.
(6) Not an alternative of administration—Management accounting is just a tool in the hands of management and it cannot
replace the administration and management Management accountant just supplies some information to the management,
taking decision and activating them are not in his peripheria. Thus, management accounting provides basis for decision-
making and not the decision.
(7) Effect of time factor—Most of the information gathered by management accountant is of historical nature. When any
forecast is made regarding a project at that time if this information is used, then it can pOse some problems, which puts
management in awkward situations. Sometimes quick decisions are needed regarding the project and at such time manage-
ment accountant cannot reproduce effective information, which is a failure.
(8) Top heavy structure—For the establishment of management accounting system there is a requirement of a broad
organisation and employees, which makes it a costly affair, therefore it can be adopted only by large organisations.
(9) Evolutionary stage—The tools of management accounting has not developed fully as yet, there is a constant change in it
from time to time, which makes them instable for use.
(10) Use of alternative techniques—In management accounting various techniques can be used for solving a problem.
Different conclusions will be drawn for the same problem on using different tools.
(11) Psychological resistance—Managers generally resist the information of management accounting because it can change
the basis of the whole established management system and it can be used as a tool against manager. Therefore, managers
oppose it from the beginning itself.
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Q.6 Qualities of Management Accountant. Explain.

Ans. Qualities of Management Accountant or Controller
Generally a controller should have following qualities :—
(1) Knowledge of Accounting—He should have full knowledge of financial and cost accounting. If he does not have that then
how would he provide correct information to the managers.
(2) Knowledge of Statistics—The proper knowledge of statistics is necessary to present the information in the form of graphs,
charts, tables etc. to make them more understandable.
(3) Knowledge of Economics—Most of the economic decisions of the organisation are based on the principles of economics.
Thus, he should have its knowledge, price fixation, production decisions, capital expenditure etc. are based on this.
(4) Knowledge of Law—The law complexities are increasing day by day, thus controller should know all the laws which can
affect the business. New capital issue, distribution of dividend, depreciation and reserve accounts, publishing and auditing etc.
are bounded by legal obligations which has to be fulfilled.
(5) Knowledge of Psychology—He needs to take work from his colleagues and subordinates. If he has good knowledge of
psychology then he can maintain good relations with them.
(6) Knowledge of mercantile and Industrial laws—Companies Act., Partnership Act, Sale of Goods Act, Factories Act etc. are
some legislations which must be known to him.
(7) Effective Personality—Controller should have qualities like good nature, dignity, integrity, honesty, hard work, fun-loving
etc.
(8) Deep Interest in the firm—Controller should be able to relate his success with the success of the firm.
(9) Understanding—He should of indepth understanding about the problems of the firm then only he can be effective or
otherwise he will be unsuccessful.
(10) Balanced outlook—He should of indepth understanding about the problems of the firm present situation and the
potentialities of future.

Q.7 Enumerate the functions of Management Accountant or Controller.

Ans. Functions of Managemen ccountant or Controller
The scope of duties of the controller is very vast. In his organisation his status, terms of employment, management's relations
with him and personal ability is very much responsible for the functions to be performed by him. The main work of
management accountant is to help the managers to carry out their work efficiently. The Controller's Institute ,of America has
mentioned seven functions of them :
(1) Planning for control—To act as the part of management it is essential to "formulate the plans, co-ordinate the work and
implement them. On the basis of size it may firm, to include the standard costing, expenses budget, sales forecast, profit
planning and capital investment. Even the procedure to activate a project can be given by him.
(2) Reporting and Interpreting—Comparing the actual performance with the projected plans and effects and explaining the
deviations and their courses to each level of managers. In this work deciding upon the accounting policy, co-ordination of
procedures, expected statistical data and preparation of special reports is included.
(3) Evaluation and Consultations—For the validity of the goals and for the fulfilment of these goals the policies used,
organisational structure and measuring the effectiveness of the procedures and presenting information in this regard is the
work of management accountant.
(4) Tax Planning and Administration—Management accountant has to follow the tax policies and rules and get the work done
through the processes. This work is called tax planning. He is able to reduce the tax liability of the firm in a valid legal way.
(5) Reporting to Government—The various reports to be sent to the government are prepared, inspected, co-ordinating
among them and sending them on time are included in the functions of controller.
(6) Protection of Assets—Management accountant uses internal inspection, internal audit and insurance arrangements to
protect the assets of the company. Otherwise there is a risk of deterioration of assets. The safety of their title deeds is also his
function.
(7) Economic Appraisal—The effect of success and failure of business and reporting about its reasons is also the work of
controller. For this he constantly evaluates the effect of economic and social forces and government policies on the business.
In case they are unfavourable he tries to find the ways to avoid them.

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