Accounting for Managerial Decisions

UNIT – 1 INTRODUCTION TO
ACCOUNTING

STRUCTURE
1.0 Objectives
1.1 Introduction
1.2.Management accounting as an area of accounting,
1.3 Objectives
1.4 Nature and scope of financial accounting
1.5 Cost accounting and management accounting
1.6 Management accounting and managerial decisions
1.7 Management Accountants position
1.8 Role and Responsibilities
1.9 Accounting plan and responsibilities centres
1.10 Meaning and significance of responsibility accounting
1.11 Responsibilities centre
1.12 Objective and determinants of centres
1.13 Let Us Sum Up
1.14 Key Words
1.15 Some Useful Books
1.16 Answer to check your progress
1.17 Terminal Questions

1.0 OBJECTIVES

● To understand the concepts, methods,and techniques of manageme

nt accounting.
● To discuss the usage in managerial decision making and control.
● To state the meaning and
andsignificance of responsibility accounting;Responsibility centers

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1 INTRODUCTION TO ACCOUNTING

Accounting can be defined as a process of reporting, recording,

interpreting and summarising economic data. The introduction of
accounting helps the decision-makers of a company to make effective
choices, by providing information on the financial status of the business.
The American Institute of Certified Public Accountants (AICPA) had
defined accounting as the “art of recording, classifying, and summarising
in a significant manner and in terms of money, transactions and events
which are, in part at least, of financial character, and interpreting the
results thereof”.
Today, accounting is used by everyone and a good understanding of it is
beneficial to all. Accountancy act as a language of finance. To understand
accounting efficiently, it is important to understand the aspects of
accounting.
• Economic Events- It is a consequence of a company has to
undergo when the number of monetary transactions is involved.
Such as purchasing new machinery, transportation, machine
installation on-site, etc.
• Identification, Measurement, Recording, and
Communication- The accounting system should be outlined in
such a way that the right data is identified, measured, recorded and
communicated to the right individual and at the right time.
• Organization-In refers to the size of activities and level of a
business operation.
Interested Users of Information- It is about communicating important
financial information to the customers, according to which they will make
the correct decision.

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Accounting for Managerial Decisions

1.2 MANAGEMENT ACCOUNTING AS AN

AREA OF ACCOUNTING

Management accounting is the provision of financial and non-financial

decision-making information to managers. In management accounting or
managerial accounting, managers use the provisions of accounting
information to inform themselves better before they decide matters within
their organizations, which allows them to manage better and perform
control functions.
The part of accounting that helps managers in making decisions providing
accounting information is called management accounting.
Management accounting is a special branch of accounting. It is a modern
and scientific innovation of accounting. Management accounting is
accounting for effective management.
Meaning and Definition of Management Accounting
Management accounting is the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of
information that assists executives in fulfilling organizational objectives.
It helps the management to perform all its functions, including planning,
organising, staffing, direction, and control. In other words, the field of
accounting that provides economic and financial information for managers
and other internal users is called management accounting.
Some beautiful definitions of management accounting are mentioned
below:
The Institute of Chartered Accountants of England and Wales defines,
“Management Accounting is that form of accounting which enables a
business to be conducted more efficiently.”
According to R. N. Anthony, “Management Accounting is concerned with
accounting information that is useful to management.”
Professor J Batty defines, “It is the term used to describe the accounting
methods, systems, and techniques, which, coupled with special knowledge
and ability, assist management in its task of maximising profits or
minimising losses.”

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The Institute of Cost and Management Accountants London has defined,

“Management Accounting as the application of professional knowledge
and skill in the preparation of accounting information in such a way as to
assist management in the formulation of policies and the planning control
of the operation of the undertakings.”
Similarly, according to the American Accounting Association, “It includes
the methods and concepts necessary for effective planning for choosing
among alternative business actions and for control through the evaluation
and interpretation of performances.
From the above definitions, we can say that the part of accounting that
provides information to the managers for use in planning, controlling
operations, and decision making is called management accounting.
Characteristics/Nature of Management Accounting
The nature/characteristics of management accounting may be summarised
as under:
Management accounting is a technique of selective nature. It does not use
the whole data provided by financial records. It selects and picks up only
that information form different financial records (such as profit and loss
account or balance sheet), which are relevant and useful to the
management to arrive at important decisions on different aspects of the
business.
Management accounting is concerned with the future. It collects and
analyses data to plan the future. The primary function of management is
to decide bout the future course of action. Management accounting, with
the help of different techniques, formats the future course of action.
Management Accounting makes available useful information which helps
the management in planning and decision-making. It can only provide
information but cannot proscribe. It is up to management to what extent it.
It can make use of the information depending upon its efficiency and
wisdom.
Management accounting studies the relation between causes and effects.
Financial accounting does and analyses the causes responsible for profits
or losses. Management accounting attempts to study the cause-and-effect
relationship by analysing the different variables affecting the profits and
profitability of the business.
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Accounting for Managerial Decisions
Management accounting is no bound by the rules of financial accounting.
Financial accounting procedures are designed based on GAAPs.
Functions of Management Accounting
The basic function of management accounting is to assist the management
in performing its functions effectively. The functions of the management
are planning, organising, directing, and controlling.

Fig 1.1 function Of Management Accounting

Management accounting is a part of accounting. It has developed out of
the need for making more use of accounting for making managerial
decisions.
Management accounting helps in the performance of each of these
functions in the following ways:
• Provides data
Management accounting serves as a vital source of data for management
planning. The accounts and documents are a repository of a vast quantity
of data about the past progress of the enterprise, which is a must for
making forecasts for the future.

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 Accounting for Managerial Decisions
• Modifies data
Management accounting modifies the available accounting data
rearranging in such a way that it becomes useful for management.
The modification of data in similar groups makes the data more useful and
understandable. The accounting data required for management decisions
is properly compiled and classifies.
For example, purchase figures for different months may be classified to
know total purchases made during each period product-wise, supplier-
wise, and territory-wise.
• Communication
Management accounting is an important medium of communication.
Different levels of management (top, middle, and lower) need different
types of information.
The top management needs concise information at relatively long
intervals, middle management needs information regularly, and lower
management is interested in detailed information at short-intervals.
Management accounting establishes communication within the
organization and with the outside world.
• Analyses and interprets data
The accounting data is analysed meaningfully for effective planning and
decision-making. For this purpose, the data is presented in a comparative
form, Ratios are calculated, and likely trends are projected.
• Serves as a means of communicating
Management accounting provides a means of communicating
management plans upward, downward, and outward through the
organization.
Initially, it means identifying the feasibility and consistency of the various
segments of the plan. The later stages it keeps all parties informed about
the plans they have been agreed upon and their roles in these plans.
• Facilitates control
Management accounting helps in translating given objectives and strategy
into specified goals for attainment t by a specified time and secures the
effective accomplishment of these goals efficiently. All this is made
possible through budgetary control and standard costing, which is an
integral part of management accounting.

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• Uses also qualitative information

Management accounting does not restrict itself to financial data for
helping the management in decision making but also uses such
information that may be capable of being measured in monetary terms.
Such information may be collected from special surveys, statistical
compilations, engineering records, etc.
• To assist in planning.
Management Accounting assists the management in planning as well as to
formulate policies by making forecasts about the production, selling the
inflow and outflow of cash, etc.
Not only that, but it may also forecast how much may be needed from
alternative courses of action or the expected rate of return from that place
and at the same time decides upon the programmed of activities to be
undertaken.
• To assist in organising.
By preparing budgets and ascertaining specific cost centres, it delivers the
resources to each centre and delegates the respective responsibilities to
ensure their proper utilisation.
As a result, an interrelationship grows among the different parts of the
enterprise.
• Decision-Making
Management accounting furnishes accounting data and statistical
information required for the decision-making process, which vitally
affects the survival and the success of the business.
Management accounting supplies analytical information regarding various
alternatives, and the choice of management is made easy.
• To assist in motivation.
By setting goals, planning the best and economic courses of action, and
also by measuring the performances of the employees, it tries to increase
their efficiency and, ultimately, motivate the organization as a whole.

• To Coordinate
It helps the management in coordination the whole activities of the
enterprise, firstly by preparing the functional budgets, then co-
coordinating the whole activities of the enterprise, firstly, by preparing the
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functional budgets, then co-coordinating the whole activities by
integrating all functional budgets into one which goes by the name of
‘Master Budget.’
In this way, it helps the management by con-coordinating the different
parts of the enterprise. Besides, overall coordination is not at all possible
without budgetary control.’
• To Control
The actual work done can be compared with ‘Standards’ to enable the
management to control the performances effectively.
What Is Managerial Accounting?
Managerial accounting is the practice of identifying, measuring, analysing,
interpreting, and communicating financial information to managers for the
pursuit of an organization's goals.
Managerial accounting differs from financial accounting because the
intended purpose of managerial accounting is to assist users internal to the
company in making well-informed business decisions.
How Managerial Accounting Works
Managerial accounting encompasses many facets of accounting aimed at
improving the quality of information delivered to management about
business operation metrics. Managerial accountants use information
relating to the cost and sales revenue of goods and services generated by
the company. Cost accounting is a large subset of managerial accounting
that specifically focuses on capturing a company's total costs of production
by assessing the variable costs of each step of production, as well as fixed
costs. It allows businesses to identify and reduce unnecessary spending
and maximize profits.
Managerial Accounting vs. Financial Accounting
The key difference between managerial accounting and financial
accounting relates to the intended users of the information. Managerial
accounting information is aimed at helping managers within the
organization make well-informed business decisions,
while financial accounting is aimed at providing financial information to
parties outside the organization.
Financial accounting must conform to certain standards, such as generally
accepted accounting principles (GAAP). All publicly held companies are
required to complete their financial statements in accordance with GAAP
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as a requisite for maintaining their publicly traded status.1 Most other
companies in the U.S. conform to GAAP in order to meet debt covenants
often required by financial institutions offering lines of credit.
Because managerial accounting is not for external users, it can be modified
to meet the needs of its intended users. This may vary considerably by
company or even by department within a company. For example,
managers in the production department may want to see their financial
information displayed as a percentage of units produced in the period. The
HR department manager may be interested in seeing a graph of salaries by
employee over a period of time. Managerial accounting is able to meet the
needs of both departments by offering information in whatever format is
most beneficial to that specific need.
Types of Managerial Accounting
• Product Costing and Valuation
Product costing deals with determining the total costs involved in the
production of a good or service. Costs may be broken down into
subcategories, such as variable, fixed, direct, or indirect costs. Cost
accounting is used to measure and identify those costs, in addition to
assigning overhead to each type of product created by the company.
Managerial accountants calculate and allocate overhead charges to assess
the full expense related to the production of a good. The overhead
expenses may be allocated based on the number of goods produced or
other activity drivers related to production, such as the square footage of
the facility. In conjunction with overhead costs, managerial accountants
use direct costs to properly value the cost of goods sold and inventory that
may be in different stages of production.
Marginal costing (sometimes called cost-volume-profit analysis) is the
impact on the cost of a product by adding one additional unit into
production. It is useful for short-term economic decisions. The
contribution margin of a specific product is its impact on the overall profit
of the company.
Margin analysis flows into break-even analysis, which involves
calculating the contribution margin on the sales mix to determine the unit
volume at which the business’s gross sales equal total expenses. Break-
even point analysis is useful for determining price points for products and
services.
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• Cash Flow Analysis
Managerial accountants perform cash flow analysis in order to determine
the cash impact of business decisions. Most companies record their
financial information on the accrual basis of accounting. Although accrual
accounting provides a more accurate picture of a company's true financial
position, it also makes it harder to see the true cash impact of a single
financial transaction. A managerial accountant may implement working
capital management strategies in order to optimise cash flow and ensure
the company has enough liquid assets to cover short-term obligations.
When a managerial accountant performs cash flow analysis, he will
consider the cash inflow or outflow generated as a result of a specific
business decision. For example, if a department manager is considering
purchasing a company vehicle, he may have the option to either buy the
vehicle outright or get a loan. A managerial accountant may run different
scenarios by the department manager depicting the cash outlay required to
purchase outright upfront versus the cash outlay over time with a loan at
various interest rates.
• Inventory Turnover Analysis
Inventory turnover is a calculation of how many times a company has sold
and replaced inventory in a given time period. Calculating inventory
turnover can help businesses make better decisions on pricing,
manufacturing, marketing, and purchasing new inventory. A managerial
accountant may identify the carrying cost of inventory, which is the
amount of expense a company incurs to store unsold items.
If the company is carrying an excessive amount of inventory, there could
be efficiency improvements made to reduce storage costs and free up cash
flow for other business purposes.
• Constraint Analysis
Managerial accounting also involves reviewing the constraints within a
production line or sales process. Managerial accountants help determine
where bottlenecks occur and calculate the impact of these constraints on
revenue, profit, and cash flow. Managers can then use this information to
implement changes and improve efficiencies in the production or sales
process.

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• Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order
to acquire assets and increase its return on investments. Through balance
sheet analysis, managerial accountants can provide management with the
tools they need to study the company's debt and equity mix in order to put
leverage to its most optimal use.
Performance measures such as return on equity, debt to equity, and return
on invested capital help management identify key information about
borrowed capital, prior to relaying these statistics to outside sources. It is
important for management to review ratios and statistics regularly to be
able to appropriately answer questions from its board of directors,
investors, and creditors.
• Accounts Receivable (AR) Management
Appropriately managing accounts receivable (AR) can have positive
effects on a company's bottom line. An accounts receivable aging report
categories AR invoices by the length of time they have been outstanding.
For example, an AR aging report may list all outstanding receivables less
than 30 days, 30 to 60 days, 60 to 90 days, and 90+ days.
Through a review of outstanding receivables, managerial accountants can
indicate to appropriate department managers if certain customers are
becoming credit risks. If a customer routinely pays late, management may
reconsider doing any future business on credit with that customer.
• Budgeting, Trend Analysis, and Forecasting
Budgets are extensively used as a quantitative expression of the company's
plan of operation. Managerial accountants utilise performance reports to
note deviations of actual results from budgets. The positive or negative
deviations from a budget also referred to as budget-to-actual variances, are
analysed in order to make appropriate changes going forward.
Managerial accountants analyse and relay information related to capital
expenditure decisions. This includes the use of standard capital budgeting
metrics, such as net present value and internal rate of return, to assist
decision-makers on whether to embark on capital-intensive projects or
purchases. Managerial accounting involves examining proposals, deciding
if the products or services are needed, and finding the appropriate way to

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finance the purchase. It also outlines payback periods so management is
able to anticipate future economic benefits.
Managerial accounting also involves reviewing the trend-line for certain
expenses and investigating unusual variances or deviations. It is important
to review this information regularly because expenses that vary
considerably from what is typically expected are commonly questioned
during external financial audits. This field of accounting also utilises
previous period information to calculate and project future financial
information. This may include the use of historical pricing, sales volumes,
geographical locations, customer tendencies, or financial information.
Is Financial Accounting the Same as Managerial Accounting?
While they often perform similar tasks, financial accounting is the process
of preparing and presenting official quarterly or annual financial
information for external use. Such reports may include audited financial
statements that help investors and analysts decide whether to buy or sell
shares of the company. Because of this managerial accounting in the U.S.
must adhere to GAAP standards.
Conclusion
Managerial accounting is important for drafting accurate and complete
financial statements for internal use and crafting a company's long-term
strategy. Without good managerial accounting, corporate leadership can
struggle to make appropriate choices or misunderstand the firm's true
financial picture. Because managerial accounting documents are not
official, they do not have to conform to GAAP and can be used internally
for a variety of purposes.

1.3 OBJECTIVES OF FINANCIAL

ACCOUNTING

What is financial accounting?

Financial accounting’s main goal is to disclose the company’s profits and
losses and to present a genuine and fair picture of the company to protect
the interests of all internal and external stakeholders that have a stake in
the company.

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Financial accounting objectives vary in nature, from compliance with

statutory requirements, focus on externalities of a business, stakeholder
objectives to be met, etc.
A predetermined periodic reporting period, typically quarterly, half-
yearly, and annually, is used when performing financial accounting. It
makes comparisons simple and maintains the information’s relevance and
educational value for different stakeholders.
One of the prime aspects of accounting, financial reporting’s main goal of
creating financial accounts, is to determine whether a business made a
profit or suffered a loss during the relevant time.
Objectives of Financial Accounting
1 Compliance with Statutory Requirements
One of the objectives is to ensure compliance with local laws related to
taxation, the Companies Act and other statutory requirements relevant to
the country where the business undertakes. It ensures that the business
affairs adhere to such laws and relevant provisions comply while business
is conducted.
2 – Safeguarding of Interest of Various Stakeholders
It provides suitable and relevant information related to business
operations to stakeholders such as Shareholders, Prospective Investors,
Financers, customers, and creditors. They are not just appropriate for those
who have existing business relationships but also for those who are
interested in having future collaboration with the business by providing
them with meaningful information about the business. In addition, further
financial accounting standards ensure control over accounting policies of
businesses to protect the interest of investors.
3 – Helps in the Measurement of Profit and Loss of Business
It measures the business’s profitability for a particular period and discloses
the net profit or loss of the business as a whole. It also exhibits the Assets
and Liabilities of the business.
4 – Presentation of Historical Records
Unlike other accounting, it focuses on the presentation of historical records
and not on forecasting the future. Therefore, the primary rationale for
preparing Financial Accounts is ascertaining profit earned or loss incurred
by the business in the period concerned.
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5 – Focus on External Transaction of Business
It focuses on a transaction that the business enters into with external
parties, such as customers, suppliers, etc. The accounts are prepared to
quantify the business, costs incurred as expenses, and resultant profit or
loss earned based on these transactions.
6 – Periodic Reporting and Wide Availability
Financial Accounting is undertaken with a pre-specified periodic reporting
period, usually quarterly, half-yearly, and annually. It enables easy
comparison and keeps the information relevant and informative for various
stakeholders. Further Financial Accounts are available publicly and are
accessible to everyone who wants to know about the business and its
performance.
7 – Basis for Other Accounting
The other types of accounting, namely cost accounting or management
accounting, provides their base data from financial accounting. It acts as a
source for different types of accounting undertaken by the business. It
deals with business transactions broadly, which acts as a base for Cost
Accounting to further identify costs with products and services.

Check Your Progress- 1

1. Which of the following describes the primary objective of financial
accounting?

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2. State the importance of financial accounting?

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3. What are the types of managerial accounting?

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1.4 NATURE AND SCOPE OF FINANCIAL

ACCOUNTING

The nature of financial accounting can be explained as below:

(i) It is a service providing system
It is a service providing system; its function is to provide quantitative
financial information, about economic activities of a firm that is useful in
making economic decisions by users. Financial accounting may not create
wealth though on its own, but it assists in wealth creation and maintenance.
(ii) It is a profession
Accounting is a profession. It is a systematized body of knowledge
emerged with the development of trade and business. The accounting
education is being imparted to the students by national and international
recognised the bodies like The Institute of Chartered Accountants of India
(ICAI), and American Institute of Certified Public Accountants (AICPA)
in USA etc. The members of these professional bodies usually have their
own associations or organizations, where in they are Associate member of
the Institute of Chartered Accountants (A.C.A.) and fellow of the Institute
of Chartered Accountants (F.C.A.). Thus, accountancy is a profession.
(iv) It acts as a language of business
Accounting is the means of reporting and communicating information
about a business. To converse and communicate, one has to learn a new
language, so also accounting is to be learned and practiced to communicate
business events.
Accounting is based on fundamental rules and regulations just as any
language has grammatical rules. The presentation of accounting data such

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as a numerals and debits and credit are accepted as symbols which specific
to accounting.
(v) It is both science and art
Just like any science is based on some fundamental principles, accounting
is also based on principles like double entry system, which explains that
every transaction has two fold aspects i.e. debit and credit. It also has rules
of journalising and posting and in presentation of financial statements.
Accounting is also an art as it requires knowledge, interest and experience
to maintain the books of accounts in a systematic manner. It can be
concluded from the above discussion that accounting is both an art and a
science.
(vi) Accounting is an information system
In this age of information explosion, managers require accurate
information for their decision-making Accounting provides this
quantitative information to managers and external users. The information
requirement of different external users of accounting is different from each
of them. For example, creditors look into the loan repaying capacity of a
company but investors watch the dividend policy or capital returns of the
company’s shares. Accounting process has evolved from manual system
to computer-based method with the advancement of technology.
Scope of Accounting
Reporting the account statement to various stakeholders highlights the
scope of accounting. Various parties in various forms use this information
for their benefit and the benefit of the company.
Financial accounting keeps the company’s various stakeholders updated
about its financial health. It should help each stakeholder make decisions
regarding the company’s business. For example, it allows shareholders to
understand the profit-making subsidiaries of the business. To indirect and
direct investors, it gives them an idea of whether the company is worth
investing in or not. Employees need to stay updated about it too, so they
know whether the company they are working in is in good financial health
or not.
• Reporting to shareholders: Shareholders are entities who invest
their money in the business seeking profit from their investment.
Since they have invested their own money in the business, they
need to be reported on the overall financial position of the company
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involving the number of outstanding loans, assets, expenses,
revenue streams, and so on.
• Reporting to the Public: The companies listed on the stock
exchange are the ones in which the general public can also invest.
Since the public also becomes an investor, account statements have
to be made public so that they are fully aware of their investment
choices.
• Reporting to Government: It is necessary for tax purposes.
Governments need to be aware of the financial position of the
businesses which come under their jurisdiction.
• Reporting to employees: Employees are indirect stakeholders and
they must know about the company’s financials which helps them
stay informed regarding their job security.
Conclusion
Over time, the scope of financial accounting has widened. Earlier limited
to shareholders and a few selected entities, today it involves reporting to
communities, employees, and the general public. It also helps prevent
financial frauds and scams that shake the foundation of the economy.
Accounting is the art of identifying, recording, classifying, analysing and
interpreting the financial information of a company, which is then used to
fulfil certain objectives.

1.5 COST ACCOUNTING AND MANAGEMENT

ACCOUNTING

Cost Accounting Vs Management Accounting

In order to sustain profitability and improve efficiency, Business owners
need to keep track of both financial and non-financial transactions of their
firm. Doing so, they would be able to ensure overall growth and
development of their Business operations and would improve their scope
of generating more revenue.

However, to ensure it, they need to employ effective means of collecting

and assessing data about all the transactions their firm is involved in. This
is where both Cost Accounting and Management Accounting come in.

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Let’s find out more about the two concepts and try to figure out the
difference between Cost Accounting and Management Accounting in
brief.
What is Cost Accounting?
Cost Accounting is a practice of Business in which we record, examine,
summaries and study the Cost of a company which is spent on any of the
company's processes, it's services, products or any thing of the company.
In other words we can say that Cost Accounting is a process through which
we can determine the Costs of goods and services of any organisation. It
is used in financial Accounting and includes the recording, classification
and allocation of various expenditures. Cost Accounting helps in
calculating the Costs of various goods of any organisation. It eventually
helps any organisation in controlling its Cost and plan their strategies
along with preparing them for making efficient decisions regarding Cost
improvement. It also helps the organization to understand the proper
utilisation of Cost spent and to correct their wrong decisions.
Cost Accounting is a method wherein, firm owners collect, classify and
analyse quantitative information pertaining to manufacturing Cost. With
the help of the accumulated financial data, Business owners can develop
required Business strategies.
Contrary to popular belief, Cost Accounting is not the same as financial
Accounting and is not necessarily reported at the end of a fiscal year.
Notably, there are 3 essential elements of Cost Accounting –
Cost of raw material
Labour Cost
Overhead Cost
Hence, it can be said that Cost Accounting factors in the Cost accrued at
each level of production along with fixed Costs to analyse their impact on
a specific production level accurately.
Cost Accounting Functions
• Cost Accounting helps the organization in ascertaining the per unit
Cost of every product which it manufactures.
• It also helps in analysing any wastages made in products, expenses,
tools, etc. Along with it, it also suggests the ways for minimising
these wastages.

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• Cost Accounting also helps in calculating the profitability of every

product of the company. It also finds out the ways of maximizing

their profits.
• Cost Accounting is also responsible for the amount of orders being
made of the raw material and to control them. So, it makes sure
that the raw material must not be over ordered which results in the
locking up of the capital.
Calculating Cost
Arguably, it is the primary function of Cost Accounting and serves as the
source of other associated Cost Accounting functions. The said method is
responsible for figuring out the Cost per unit of product produced by the
firm.
Controlling Cost
Cost Accounting is also responsible for identifying the areas where
operational Cost can be controlled, and helps firms to limit their expenses
within the budget constraint. Such a function helps to allocate limited
resources more optimally and helps improve efficiency.
Reducing Cost
With effective Cost Accounting, one can identify unwarranted expenses
and build suitable strategies to lower them in the long run. In turn, it plays
an essential role in maximising the profit margin per product significantly.
Now that we have become familiar with this concept, let's proceed to the
other equally important concept so that we can distinguish between Cost
Accounting and Management Accounting easily.
What is Management Accounting?
Management Accounting or managerial Accounting can be defined as the
process of preparing reports on Financial and Non-financial transactions
with the help of available data. Such reports are made by accumulating,
assessing and interpreting both Statistical and Qualitative and Quantitative
data and are also heavily based on the firm’s financial statements.
Usually, a firm uses some of these tools to practice effective Management
Accounting
Accounting ratios
Key performance indicators
Key result areas
Financial modelling
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The information compiled through this process is considered to be quite
useful for formulating Business policies and strategies for the short-term.
Notably, the reports formulated with the help of managerial Accounting
are accessed and used by the firm’s Management. Resultantly, it is not
mandatory to report the information compiled at every year-end.
Management Accounting is also known as Managerial Accounting. It is a
process which provides financial information and the resources to the
managers of the organization in making effective decisions. The only thing
which makes Management Accounting different from Financial
Accounting is that it is only used by the internal team of the organization.
Management Accounting presents the financial data along with Business
activities for the Internal Management of the organization. Management
Accounting also has a lot of benefits which includes decision making,
planning, controlling the operations of the Business, organizing,
understanding the financial data, identifying and managing the Business
problems and Management of strategies.
Management Accounting Functions
• Management Accounting helps in providing the necessary
information and data so that we can plan for the operations of the
organization.
• It helps the Management team to organise the resources (both
human and non - human) of the organization and analyses different
functions and responsibilities along with assigning the
responsibilities for making the working better.
• Management Accounting helps in increasing the efficiency of the
organization and to maximize its profits.
• It also controls the performance of the organization by using
budgetary control, standard Costing, Cost reduction programs etc.
Forecasting Cash Flow
With Management Accounting’s help, one can estimate a firm’s future
cash flow. Notably, a company’s Management factors in financial trends
uses budgeting measures to predict future cash flow effectively. Also,
depending on such estimates, the firm plans its future endeavours in terms
of investment and production.

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Accounting for Managerial Decisions

Analysing Performance Variance

Management Accounting tends to incline towards predictive analysis and
is subjected to variances, i.e. difference in estimated Cost and actual Cost.
However, by employing effective measures of Accounting Management,
a firm can bridge the gap between estimated Cost and actual Cost
significantly.
Facilitates Production-oriented Decisions
With the help of the data compiled through Management Accounting,
Business owners can easily analyse the Cost and profits behind different
managerial decisions. This, in turn, helps them to make a more informed
decision as to whether they should create raw materials or outsource the
same for a more Cost-effective production process.
With that being said, let’s move onto the basis of Cost Accounting vs
Management Accounting to find out the prominent differences.
This table highlights the Cost Accounting and Management Accounting
differences –
Difference between Cost Accounting and Management Accounting
Cost Accounting is all about the Cost and it includes things like Cost
control, Cost computation and Cost reduction. Whereas Management
Accounting is about managing the organization and making effective
decisions.
Cost Accounting has a narrow scope whereas Management Accounting
has much broader scope.
Cost Accounting helps the Business in preventing irrelevant spending
which sometimes goes beyond the budget. Whereas Management
Accounting gives an idea about how Management should strategize.
Cost Accounting is quantitative in nature whereas Management
Accounting is both quantitative and qualitative in nature.
Cost Accounting is used for shareholders, Management and vendors
whereas Management Accounting is only used for Management of the
Business.

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 Accounting for Managerial Decisions

Basis of Comparison Cost Accounting Management

Accounting
Meaning The recording, The accounting in
classifying and which both financial
summarizing of cost and non-financial
data of an information is
organisation is known provided to managers
as cost accounting. is known as
management
accounting.
Information Type Quantitative. Quantitative and
qualitative.
Objective Determining the cost Providing information
of production. to managers to set
goals and forecast
strategies.
Scope Interested in Impart and effect
determining, aspect of costs.
allocating,
distributing and
accounting for costs.
Specific Procedure Yes No
Recording Records past and It focuses on the
present data analysis of future
projections.
Planning Short range planning Short and long-range
planning
Interdependency Can be installed Cannot be installed
without management without cost
accounting. accounting.
Table 1.1 Difference between Cost Accounting and

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Accounting for Managerial Decisions

Management Accounting
Examples to Determine the Differences Between Cost and
Management Accounting
In business, there are two main types of accounting: Cost accounting and
management accounting. Cost accounting focuses on the direct costs
associated with manufacturing a product or service, while management
accounting provides information that can be used to make decisions about
running the business. Both types of accounting are important, but they
serve different purposes.
For example, let's say that a company makes widgets. The cost accountant
would track the direct costs of making the widgets, such as the cost of raw
materials and labour. The management accountant would track other costs,
such as the cost of advertising and marketing, and use this information to
make decisions about allocating resources.
In general, cost accounting is more focused on the past, while management
accounting is more focused on the future. Cost accounting looks at how
much it costs to produce a widget, while management accounting tries to
predict how much it will cost to produce a widget in the future.
This difference is important because it can help managers to make
decisions about where to allocate resources. For example, if a company is
trying to decide whether to invest in new machinery, the management
accountant would use forecasting techniques to estimate the future costs
of production and make a recommendation based on that information.
Both cost and management accounting are important tools for business
decision-making. By understanding the differences between these two
types of accounting, you can choose the right method for the job at hand.
Pros and Cons of Cost and Management Accounting
Cost accounting and management accounting are two important tools that
businesses use to track and control expenses. Cost accounting focuses on
the cost of production, while management accounting provides insights
into how those costs can be reduced. Each approach has its own
advantages and disadvantages.
Cost accounting is a useful tool for businesses that want to understand the
actual cost of production. By tracking all of the expenses associated with

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 Accounting for Managerial Decisions
production, businesses can make informed decisions about where to cut
costs. However, cost accounting can be time-consuming and complex,
requiring businesses to keep detailed records of all their expenses.
In addition, cost accounting does not always provide insights into how
costs can be reduced.
Management accounting, on the other hand, helps businesses to identify
opportunities for cost savings. By looking at expenses across different
departments and areas of the business, management accountants can spot
inefficiencies and areas where costs can be cut. However, management
accounting can be less accurate than cost accounting, as it often relies on
estimates and calculations rather than hard data. In addition, management
accounting requires a significant investment of time and resources to be
effective.
Ultimately, businesses need to weigh the pros and cons of each approach
to decide which is best for their needs. Both cost accounting and
management accounting have their own advantages and disadvantages,
but each can be a valuable method for reducing expenses and controlling
costs.
The Benefits of Using Cost Accounting and Management Accounting
In any business, it is important to have a clear understanding of the costs
associated with production and operations. This is where cost accounting
and management accounting come in. These two types of accounting
provide businesses with critical information about where their money is
going and how they can save money. Here are seven benefits of using cost
accounting and management accounting in a business:
Cost accounting can help businesses to identify areas where they are
wasting money. This information can then be used to make changes that
will save money.
Cost accounting can also help businesses to negotiate better prices with
suppliers. If businesses are equipped with accurate information about their
costs, they can bargain for better deals on the material they need to produce
their products or services.
Management accounting provides businesses with information about their
production costs, which can be used to make decisions about pricing their
products or services. By understanding their costs, businesses can avoid

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Accounting for Managerial Decisions
pricing their products or services too low and losing money, or pricing
them too high and missing out on sales.
Management accounting can also help businesses to understand where
they are most efficient and where they could improve their efficiency.
This information can be used to make changes that will save the business
time and money.
Cost accounting and management accounting can both help businesses to
prepare financial statements. These statements are essential for applying
for loans, attracting investors, and making important financial decisions.
Cost accounting and management accounting can provide valuable
information for making marketing decisions. For example, if a business
knows that its product is more expensive to produce than its competitor's
products, it may choose to advertise its product as being of a higher quality
and durable.
Finally, cost accounting and management accounting provide valuable
information for decision-making in general. By giving businesses a clear
picture of their costs, these two types of accounting help businesses make
informed decisions about all aspects of their operations.
Who Should Use Cost Accounting and Management Accounting?
Cost accounting and management accounting are two important methods
of finance that businesses can use to track and manage their finances. Both
types of accounting provide valuable information that can help businesses
make informed decisions about their expenses and pricing. However, there
are some key differences between the two disciplines.
Cost accounting focuses on the costs associated with manufacturing a
product or providing a service. This information can be used to make
decisions about how to price products and services and to assess the
profitability of different business activities. Management accounting, on
the other hand, provides information about a company's financial
performance. This information can be used to make decisions about where
to allocate resources and to set financial goals.
So, who should use cost accounting and management accounting? The
answer depends on the needs of the business. Businesses that need to make
decisions about pricing and profitability would benefit from cost
accounting. Businesses that need to make decisions about resource
allocation and financial planning would benefit from management
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 Accounting for Managerial Decisions
accounting. Ultimately, both types of accounting can be useful
for businesses, but it's important to choose the right type of accounting for
the specific needs of the company.
Conclusion:
The main difference between cost accounting and management
accounting is that cost accounting focuses on understanding past costs
while management accounting focuses on predicting future costs and
making better business decisions. Both are important for companies
looking to be efficient and profitable. However, it is crucial to understand
which type of accounting you need for a specific situation. If you are
interested in learning more about either cost accounting or management
accounting, there are plenty of resources available online and in libraries.

1.6 MANAGEMENT ACCOUNTING AND

MANAGERIAL DECISIONS

Financial accounting is a statutory requirement for a business to maintain

financial records and compile financial statements. These statements are
useful for submission to authorities, financial institutions, management
and shareholders. But, financial information is also essential to monitor
the business and drive business decisions on a day to day basis.
Management accounting is the process of managing the financial
information that is related to the operational aspects of a business. It is
vital for a business to have an accurate and relevant management
accounting system and reports so that the organization can respond and
make decisions that are based on the actual financial metrics. It helps the
managers study the actual financial results and implications and results of
their decisions. Financial accounting is aimed at creating financial reports
and statements that are useful to present externally and internally.
Management accounting is most useful for the organization internally.
What is management accounting?
Accounting is the process by which a business keeps track of their daily
transactions. It also includes analysis and summarization of the
transactions into accounting reports. Financial accounting looks at the
overview of the financial transactions and produces the reports and
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Accounting for Managerial Decisions
analysis that is often used for submission to statutory bodies and
shareholders.
Management accounting which may also be called cost accounting is a
more internal process. Management accounting is the process of managing
and extracting reports and analysis of the financial data of the organization
for decision making. Management accounting helps managers strategize,
course correct and make informed decisions based on the analysis and
interpretation of the financial data related to the internal operations of the
company. Management accounting is a virtual tool to help the managers
of an organization steer it towards their goals. Management accounting
analyses financial information, interprets it and presents insights to the
management. It helps non-accounting personnel understand and make
sense of the financial data within the company. It translates the facts and
figures of business transactions into useful reports and insights to drive
fact based decision making.
Why management accounting is important for decision making
Decision making in business should be driven by facts and figures. Most
of the daily transactional information of an organization is too minute and
detailed to assess at a glance. Management accounting extracts reports and
insights from the actual data to answer important questions.
So, management accounting helps in making decisions based on the actual
accounting data. It also helps study trends and the effects of past decisions.
Management can base their strategic decisions based on the actual data
and trends. The more detailed operational decisions such as purchase and
inventory will also benefit from the insights provided by management
accounting. It is important to make accurate cash flow forecasts when
making business decisions. Trend charts for cash flows can be based on
the historical accounting data of the organization. The performance of the
business over a period of time is important to drive future decision making.
A business considering an expansion or fresh investment can analyse
management accounting reports to estimate what their cash flows may be
and how long it would take to break even.
• Relevant costs analysis
How a company spends its money directly impacts the bottom line. To
improve profit margins, a company will have to perform a cost analysis to
analyse expenses and better plan future expenses.
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 Accounting for Managerial Decisions
Since expenses are likely to be spread out, expense analysis involves
comparing different suppliers, products, services and other factors to
determine the one that would be most advantageous and profitable.
When current and historical accounting data is compared, it is easy to
determine which service provider or supplier is more advantageous for the
company. The advantages may be more than cost driven. Rather than
merely pick the vendor who quotes the least amount, the organization can
determine the other benefits such as reliability, timely delivery, quality,
accuracy and other factors. Expenditure decisions that are based on reports
are more likely to be fact driven. There is greater transparency and more
confidence in vendor selection and expenditure decisions. Expenditure and
cost analysis can be used to plan and spend the company budget more
efficiently.
• Audience Targeting
Product or service design is successful when it fulfils the needs of the end
user or customer. A company that knows its target audience well will be
able to align both its products as well as its advertising campaigns to better
suit them. Many organizations do not take advantage of the valuable
information that they have about their existing customers. A company that
analyses their customer data will be able to understand their demographics.
Management accounting can be used to sift through customer data and
generate a buyer profile based on factors such as; age, gender, location,
educational level, income level, lifestyle etc. The customer profile factors
are unique to different industries and organizations. Not all customers are
the same. Certain customers or buyers are more lucrative than others.
Management can use their customer profile data to determine which
customers generate the most volume and the ones that have better profit
margins. This can help shape policies that pay more attention to enhance
the number of lucrative customers. When you invest more time and effort
into the target audience you get more returns for it. It is a good business
strategy to use resources in a way that will gain you the maximum benefit.
• Make or buy evaluations
Manufacturing industries have a large amount of data that they can analyse
to optimise every stage of production. Product production is the core focus
of the company. While some companies perform every stage of production
consecutively, other industries may use components sourced from outside.
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Accounting for Managerial Decisions

Sometimes it may be more time or cost effective to manufacture the

required components internally rather than to source them from a vendor.
If there are plenty of vendors who are able to supply the required input
components of the required quality, on time and at competitive prices,
buying from suppliers may be the better option.
Since the pros and cons of making or buying can differ wildly across
industries, geographies and products, make or buy decisions must be made
after analysing all these factors. A make or buy decision can greatly impact
the bottomline of the business. This decision can be made with greater
confidence when management accounting is used properly. A company’s
management accountant can prepare a comparison report on the relative
costs of manufacturing in house vs sourcing externally. If a company
determines that they have a greater advantage by manufacturing in house
they can make the required investments and changes for the same.
Management accountants will also be able to estimate how quickly the
company will be able to recover the additional investment made for in-
house manufacturing capabilities. The rate-of-return is essential to make
or buy decisions.
• Define budgets
Budgets that are decided at random are often wasted, misallocated or
insufficient. They may even be excessive and lock in money that could be
better used elsewhere in the company. The most intelligent way of
defining the budget for a period is to study the historical expense data.
Insufficient budget allocation may potentially stall a project or marketing
campaign mid way. This may cause the entire expenditure to be wasted or
stall the optimal operations of the company. Budget planning and
allocation is vital to the success of every action of the company. It would
be foolhardy to embark on any project, product development, manufacture
or marketing unless there are enough funds allocated to complete the
process.
Management accounting helps determine the budget forecast for the
coming time period. This budget planning can be done at different levels
of the company. Budgets can be planned for each project, department,
product, location, marketing campaign or any other planned action by the
company.
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 Accounting for Managerial Decisions
This ensures that there is an optimal allocation of resources for each
function of the company. There will be no sudden unexpected difficulty in
operations caused by insufficient resources.
A company may have many projects, products or planned projects that call
for attention. It is essential that the company chooses the right one to spend
resources on for the best returns. If there are limited funds or resources,
this choice becomes even more important. Management accounting helps
management compare the cost analysis and determine which expenditure
would be the wisest. Budget planning using management accounting takes
the guesswork out of budget allocation.
• Controlling
Management can have better control over all the different functions and
departments of a company when they have the right data. Rather than word
of mouth, it is essential to also assess the details of each department
through the facts and figures. Management accounting is essential to
transform the data from departments into easy to understand reports that
keep management informed. So, if a department is underperforming,
management will be able to assess which aspects of that department are
lagging behind. Detailed analysis helps target the problem and address it.
If there is a department or project that is doing exceptionally well, the
relevant data can be analysed to understand what has contributed to its
success. So, good management accounting helps the different levels of
management better control the operations of the company. By cutting costs
that drain the company’s resources and allocating more resources to the
projects that work well, a company can increase its profits.
• Planing
Management of a company is about managing the current operations of a
company and also making future plans and steering the company towards
its goals. Planning that is based on data has a better chance of success. By
studying the historical and current patterns in the industry and company,
management accounting helps forecast future trends. Today’s highly
competitive markets require that a business should use every opportunity
to get one step ahead of the rest. Management accounting helps companies
extract and use the information that is readily available in their records to
make better decisions.

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Accounting for Managerial Decisions
Management accounting generates reports that give you the larger picture
and also drill down to finer details. It can be used to spot trends and keep
tweaking and adjusting plans in response.
• Meaningful report generation
Management accounting analyses large amounts of data to extract vital
information. Creating these reports can be a time consuming effort without
the proper tools. An intelligent enterprise management software such as
Tally helps a management accountant create reports quickly and
accurately. This also ensures that every report that is generated uses the
real time data. Computerized management accounting with accounting
software also helps the accountant easily access and compare historical
data and trends. Accurate and insightful reports drive the success of the
company. Use of the complete accounting software solution, Tally,
empowers management to make confident data-driven informed decisions.

1.7 MANAGEMENT ACCOUNTANT’S

POSITION

The following five points highlight the five roles of management

accountant.
Role # 1. Investment Opportunities:
A management accountant can assist either a person or a firm regarding
the investment in different ways.
He can suggest how, when, and where the investment should be made so
that the investor or the firm will earn a maximum return.
Role # 2. Expansion of the Undertaking:
When the existing undertaking is expanded or developed, the management
accountants, by interpreting accounts, making suggestions relating to
schemes for cost and financial matters, can render a valuable advice. He
can also advice the directors on problems relating to the issue of shares
and their allotment and also to borrow money if so needed.
Role # 3. Financial Investigations:
A management accountant can assist the management about the financial
investigations which is extremely desired in the following manner:

34
 Accounting for Managerial Decisions
(a) To determine the financial position for the interested parties relating to
issue of shares, amalgamation/mergers, reconstructions etc.
(b) To ascertain the reason of decreasing profit or increasing costs, if so
happened,
(c) To assist the management when a particular product will be
manufactured or will be purchased from outside.
Role # 4. Working Capital Requirement:
Proper requirement of working capital and its efficient use improve
productivity, inventory control, credit control, cash management, sources
and applications of funds etc. which can properly be ascertained by a
management accountant.
Role # 5. Corporate Planning:
He can assist management for long-term planning and advise management
regarding amalgamation/mergers/reconstructions, including financial
planning—to see whether effective utilisation of resources is made or not.
Thus, the role of management accountants cannot be ignored. As such,
their services are primarily desired for the efficient management of an
undertaking.

1.8 ROLE AND RESPONSIBILITIES OF

MANAGEMENT ACCOUNTANT

Management Accountant is an officer who is entrusted with Management

Accounting function of an organization. He plays a significant role in the
decision making process of an organization. The organizational position
of Management Accountant varies from concern to concern depending
upon the pattern of management system. He may be an executive in some
concern, while a member of Board of Directors in case of some other
concern. However, he occupies a key position in the organization. In large
concerns, he is responsible for the installation, development and efficient
functioning of the management accounting system. He designs the frame
work of the financial and cost control reports that provide with the most
useful data at the most appropriate time. The Management Accountant
sometimes described as Chief Intelligence Officer because apart from top
management, no one in the organization perhaps knows more about
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Accounting for Managerial Decisions
various functions of the organization than him. Tandon has explained the
position of Management Accountant as follows:
“The management accountant is exactly like the spokes in a wheel,
connecting the rim of the wheel and the hub receiving the information. He
processes the information and then returns the processed information back
to where it came from”.
7 Roles of Management Accountant
The following points will highlight the seven roles of management
accountant in decision-making process of the organisation. The seven
roles are: 1. Stewardship Accounting 2. Long-term and Short-term
Planning 3. Developing Management Information System (MIS) 4.
Maintaining Optimum Capital Structure 5. Participating in Management
Process 6. Control and 7. Decision-making.
Management Accountant Role # 1. Stewardship Accounting:
Management accountant designs the frame-work of cost and financial
accounts and prepares reports for routine financial and operational
decision-making.
Management Accountant Role # 2. Long-term and Short-Term
Planning:
Management accountant plays an important role in forecasting future
business and economic events for making future plans i.e., long-term
plans, strategic management accounting, formulating corporate strategy,
market study etc.
Management Accountant Role # 3. Developing Management
Information System (MIS):
The routine reports as well as reports for long-term decision-making are
forwarded to managerial personnel at all levels to take corrective action at
the right time.
The management accountant also uses these reports for taking important
decisions.
Management Accountant Role # 4. Maintaining Optimum Capital
Structure:
Management accountant has a major role to play in raising of funds and
their application. He has to decide about maintaining a proper mix between
debt and equity. Raising of funds through debt is cheaper because of tax
benefits.
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 Accounting for Managerial Decisions
However, it is risky as because interest on debt has to be paid whether the
firm earns adequate profits or not.
Management accountant has, therefore, to maintain an optimum capital
structure and give due consideration to various cost of capital theories,
leverage and possibility of trading on equity.
Management Accountant Role # 5. Participating in Management
Process:
The management accountant occupies a pivotal position in the
organisation. He performs a staff function and also has line authority over
the accountant and other employees in his office. He educates executives
on the need for control information and on the ways of using it. He shifts
relevant information from the irrelevant and reports the same in a clear
form to the management and sometime to interested external parties.
Management Accountant Role # 6. Control:
The management accountant analyses accounts and prepares reports e.g.,
standard costs, budgets, variance analysis and interpretation, cash and fund
flow analysis, management of liquidity, performance evaluation and
responsibility accounting etc. for control.
Management Accountant Role # 7. Decision-Making:
Management accountant provides necessary information to management
in taking short-term decision e.g., optimum product mix, make-or-buy,
lease or buy, pricing of product, discontinuing a product etc. and long-
term decisions e.g., capital budgeting, investment appraisal, project
financing etc.

However, the job of management accountant is limited to provision of

required information in a comprehensive as well as reliable form to the
management for decision-making purposes. But the actual decision-
making responsibility lies with the management. In other words, neither
the management accountant nor the internal accounting reports can make
the decisions for the management.

Duties and Responsibilities of Management Accountant

The primary duty of Management Accountant is to help management in
taking correct policy-decisions and improving the efficiency of operations.

37
Accounting for Managerial Decisions
He performs a staff function and also has line authority over the
accountants.
If management accountant feels that a decision likely to be taken by the
management based on the information tendered by him shall be
detrimental to the interest of the concern, he should point out this fact to
the concerned management, of course, with tact, patience, firmness and
politeness. On the other hand, if the decision taken happens to be wrong
one on account t of inaccuracy, biased and fabricated data furnished by the
management accountant, he shall be held responsible for wrong decision
taken by the management. Following are the duties of Management
Accountant or controller:
• The installation and interpretation of all accounting records of the
corporative.
• The preparation and interpretation of the financial statements and
reports of the corporation.
• Continuous audit of all accounts and records of the corporation
wherever located.
• The compilation of costs of distribution.
• The compilation of production costs.
• The taking and costing of all physical inventories.
• The preparation and filing of tax returns and to the supervision of
all matters relating to taxes.
• The preparation and interpretation of all statistical records and
reports of the corporation.
• The preparation as budget director, in conjunction with other
officers and department heads, of an annual budget covering all
activities of the corporation of submission to the Board of
Directors prior to the beginning of the fiscal year. The authority of
the Controller, with respect to the veto of commitments of
expenditures not authorized by the budget shall, from time to time,
be fixed by the board of Directors.
• The ascertainment currently that the properties of the corporation
are properly and adequately insured.
• The initiation, preparation and issuance of standard practices
relating to all accounting, matters and procedures and the co-

38
 Accounting for Managerial Decisions
ordination of system throughout the corporation including clerical
and office methods, records, reports and procedures.
• The maintenance of adequate records of authorised appropriations
and the determination that all sums expended pursuant there into
are properly accounted for.
• The ascertainment currently that financial transactions covered by
minutes of the Board of Directors and/ or the Executive committee
are properly executed and recorded.
• The maintenance of adequate records of all contracts and leases.
• The approval for payment(and / or countersigning ) of all
cheques, promissory notes and other negotiable instruments of the
corporation which have been signed by the treasurer or such other
officers as shall have been authorized by the by-laws of the
corporation or form time to time designated by the Board of
Directors.
• The examination of all warrants for the withdrawal of securities
from the vaults of the corporation and the determination that such
withdrawals are made in conformity with the by-laws and /or
regulations established from time by the Board of Directors.
• The preparation or approval of the regulations or standard
practices, required to assure compliance with orders of regulations
issued by duly constituted governmental agencies.

1.9 ACCOUNTING PLAN AND

RESPONSIBILITIES CENTRES

What Is Account Planning? (And How to Plan Accounts)

Marketers, sales professionals and account managers contribute valuably
to the success of sales efforts and generating revenue. There are several
types of plans and strategies these individuals may use to enhance their
marketing efforts, maintain client relationships and optimize lead
interactions. Understanding one of these strategies, account planning, may
help you more effectively form and maintain long-term, high-value
relationships with your existing accounts. In this article, we define account

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Accounting for Managerial Decisions
planning, provide a list of its benefits and offer a step-by-step guide and
additional tips to help you successfully perform account planning.
What is account planning?
Account planning is a marketing strategy that sales, marketing and account
management professionals use to cater marketing efforts to their existing
client base. They may create account plans to better understand their
clients' motivations and needs and to form meaningful partnerships with
their accounts. To do this, they often conduct research on their target
audience and apply it to their marketing strategies.
Account planning can help companies gain long-term consumer retention,
which increases revenue potential. When professionals create an account
plan for a consumer base, they compile their goals and relevant research
into a single document. This allows these professionals to reference
valuable data about their clients and more accurately tailor ongoing and
future campaigns.
Benefits of account planning
There are many benefits of adding account planning to your marketing
efforts, including:
Increased customer loyalty
Account planning focuses primarily on forming mutually beneficial
relationships with your clients and agreeing on an objective that satisfies
the interest of both parties. Much of the research associated with account
planning focuses on the needs of your existing accounts and how to best
fulfil those needs. By offering beneficial value through a partnership, you
may incrzase client loyalty and retention.
Reduced acquisition costs
Finding and converting new accounts through marketing campaigns,
advertising and client outreach can be expensive and time-consuming.
Account planning may allow you to focus more of your efforts on
generating business through existing accounts instead of trying to attract
new ones. This may help you reduce acquisition costs and focus more of
your resources on strengthening your current client relationships.
Focused efforts
Account planning may provide insight into which of your accounts and
client bases have the most growth potential. By focusing your marketing
efforts on accounts that are most likely to result in revenue, you may be
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 Accounting for Managerial Decisions
able to more efficiently target and maintain relationships with high-value
clients.
Faster sales
Because account planning focuses on generating revenue from current
accounts, it may result in faster sales and increased efficiency. Many of
the lengthy, detailed efforts of acquiring a new client have already taken
place, meaning professionals can focus more of their time and energy on
closing high-value sales with existing clients.
Continued education
Account planning offers an opportunity to continually learn about your
clients' priorities and may provide valuable knowledge that can help
professionals more accurately position value based on client needs.
Account planning may also help to develop skills such as critical thinking,
decision making, research and data analysis.
How to perform account planning
Understanding the steps necessary to successfully perform account
planning can help you be more impactful in your marketing efforts.
Consider following these steps to effectively perform account planning:
1. Research your current accounts
The first step in the process of account planning often involves
understanding the position of your current accounts. Consider researching
your current accounts' metrics, such as revenue, profitability, growth,
geographic location and initiatives. Compiling and analysing this
information may help you more effectively determine the strategies and
interactions that are most likely to result in beneficial relationships and
increased revenue.
If possible, you may discuss these items with your accounts to gain first-
hand information that may be valuable to apply to your marketing
strategies. Questions to consider asking your current client base may
include:
• Which areas of your business are most important to you?
• What do you hope to gain through a partnership with our
organization?
• What kinds of obstacles do you worry about?
• Where do you see yourself and your business in five years?

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• What would you like to see from a primary supplier?
• What is your primary business concern?
• What do you consider essential to the success of this partnership?
2. Identify your clients' needs
In order to provide valuable offers to your accounts, it's important to
identify and prioritise their needs. Using the information gathered in your
account research, consider the challenges, concerns, and problems your
clients may be facing. Then, you may think of ways your products and
services can assist in their challenges and solve their problems.
Understanding the needs of your accounts may help you develop new
offers or implement changes to existing ones to best fulfil the needs of
your accounts and maintain high-value, mutually beneficial relationships.
3. Manage your accounts
It's important to implement a strategic account management process to
organise your communication and marketing efforts with your clients. To
do this, you may seek the help of an account manager to track and record
the last date of contact, sales progress, financial transactions and contract
changes of your current accounts. This may help to ensure that each
account receives the appropriate amount of communication throughout
each stage of the sales cycle and prevent any organizational oversight.
4. Create a map of relationships
It's equally important to understand and manage the human relationships
within your accounts. Consider mapping each of your accounts onto a
visual representation of their organization. Include each key member of
the account, their job titles and relationships with each other. Consider
determining and recording important information such as who controls the
budget, who influences whom, and who has authority in business
transactions.
This may help you determine who is the best point of communication for
varying tasks within your marketing efforts. It may also contribute to the
productiveness of your client relationships by ensuring you engage the
appropriate individuals throughout different phases of the sales cycle. This
may help you optimise your lead interactions by understanding the
relationships and influences of individuals within your accounts.

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5. Maintain and update your records
It's important to maintain and update your account information and
relationship maps as your relationships with existing accounts evolve and
new accounts enter your client base.
Consider updating your documents with any relevant information as it
becomes available to ensure you have all the updated resources necessary
to continue successful account planning and client management.
Tips for account planning
Below are some additional tips to help you successfully perform account
planning:
Create actionable steps
When creating long-term account plans, it may be helpful to create
actionable steps for each phase of the process. Doing this may help you
remain organised and better understand how to prioritise your tasks.
Consider creating a timeline with milestones and objectives for each phase
of your account planning process to increase efficiency and maintain a
focus on your long-term objectives.
Focus on mutual success
Throughout each phase of your account plan, consider the mutual benefits
for you and your clients. Often, a successful account plan focuses more on
creating valuable partnerships than selling products or services. Keeping
the benefits of a partnership in mind may help you develop offers that
contribute to the success of both parties and could help you maintain long-
term, highly valuable relationships with your clients.

1.10 MEANING AND SIGNIFICANCE OF

RESPONSIBILITY ACCOUNTING

Responsibility Centre
Definition: Responsibility Centre refers to an operating segment within the
firm, lead by the manager who is accountable for its activities,
performance and results, in terms of expenditure, profit, and return on
investment.

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A responsibility centre has its own goal and objectives, plans and
strategies, policies and procedures. Further, it has a dedicated team or staff
who works for the achievement of its goals and performance targets.
As the firm grows and expands, its size, functions, activities and overall
structure also change and so, for better management and control over
the organization,
it is split into various centres and the management assigns the
responsibility to the supervisor or manager These centres are termed as
responsibility centres.
Examples of Responsibility Centre
Given below are the examples of the responsibility centre.
Revenue Centre: A good example would be the sales department or the
salesperson.
Cost: A good example, in this case, would be the janitor department.
Profit Center: This would be a product line for which the product
manager will be responsible.
Investment Center: Example would be that of a subsidiary entity for
which the subsidiary’s president is held responsible.

1.11 RESPONSIBILITIES CENTRES

Types of Responsibility Centre

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Fig 1.2 Types of Responsibility Centre

Cost Centre: The smallest segment of an organization for which a specific
accumulation of cost is attempted, is called cost centre. It is that unit of the
firm into which the entire factory is divided appropriately. It can be a
department or a team,
which represent one job, activity, process or machine, whose costs are
allocated equitably and practically to cost unit, for the purpose of costing.
The performance of the cost centre can be measured against set standards
and budgets. Cost centres are created after determining a rational basis, for
tracing and attributing the cost of production and a person is authorised to
control the centre and is accountable for its performance and cost charged
to the centre.
Profit Centre: A type of responsibility centre, which is held accountable
for all the production-related activities and the sale of products, and
provision of services. Meaning that the managers of the profit centres are
not only responsible for the incurrence of expenditure, but also for the
generation of revenue. Hence, both inputs and outputs are measured, so as
to identify the firm’s profitability.
The profit centres aim at adopting new ways and implementing such
strategies which help in earning more profits on a product, service or
activity. Strategic business units are one of the examples of profit centres
Revenue Centre: Revenue Centre is a uniquely identifiable subunit of the
organization which is held accountable for generating revenue for the
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organization from selling products and rendering services. The efficiency
of the revenue centre is evaluated on the basis of its ability to generate

Fig 1.3 Revenue Centre

sales and not on the costs incurred. The manager of the revenue centre is
held responsible for achieving sales targets.
A company’s sales department is an example of a revenue centre, which
is responsible for attaining the sales targets.
Investment Centre: Responsibility Centres which are not just
accountable for the profitability of the unit but are authorized to take
important decisions concerning the capital investments, such as
company’s credit policy, monetary policy, inventory policy, etc.
The head of the investment centre is held accountable for making decisions
regarding investment in the production, advertising and assets. Return on
Investment acts as the basis for measuring the performance of the
investment centres.
One can gauge the performance of the responsibility centre against a pre-
defined standard. Thereafter, the actual results are compared with the
standard ones and are evaluated against the objectives of the firm.

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1.12 OBJECTIVES AND DETERMINANTS OF

RESPONSIBILITIES CENTRES

Advantages of Responsibility Center

Given below is how the responsibility center helps an organization.
Assignment of Role and Responsibility: When there is a responsibility
attached to each segment, each individual is aligned and directed towards
a purpose with the responsibility in line with their roles. The person or
department will be tracked, and nobody can shift the responsibility to
anybody else, suppose anything goes wrong.
Improves Performance: The idea of assigning tasks and responsibilities
to a particular person would stand to act as a motivational factor. Knowing
that their performance will be tracked and reported to the top management,
the departments and persons involved will try to give their best
performance.
Delegation and Control: The assignment of responsibility center with
roles assigned to various segments helps the organization bring about and
achieve the purpose of delegation. The responsibility of multiple persons
is fixed, which will help the management control their work. Thus, it now
helps the management achieve the desired dual objective of delegating and
controlling the tasks.
Helps in Decision Making: Responsibility centres help the management
in decision making as the information disseminated and collected from
various centres helps them plan their future actions. It helps them
understand the segment-wise breakups of revenues, costs, issues, plans of
action, etc.
Helps in Cost Control: Having segment-wise breakup responsibility
centres help the top management in having to assign different budgets for
the various centres, thereby achieving cost control as per the requirements.
Determinants of responsibility centres
1. Inputs and Outputs or Costs and Revenues:
The implementation and maintenance of responsibility accounting system
is based upon information relating to inputs and outputs. The physical
resources utilized in an organisation; such as quantity of raw material used
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and labour hours consumed, are termed as inputs. These inputs expressed
in the monetary terms are known as costs.
Similarly outputs expressed in monetary terms are called revenues. Thus,
responsibility accounting is based on cost and revenue information.
2. Planned and Actual Information or Use of Budgeting:
Effective responsibility accounting requires both planned and actual
financial information. It is not only the historical cost and revenue data but
also the planned future data which is essential for the implementation of
responsibility accounting system. It is through budgets that responsibility
for implementing the plans is communicated to each level of management.
The use of fixed budgets, flexible budgets and profit planning are all
incorporated into one overall system of responsibility accounting.
3. Identification of Responsibility Centres:
The whole concept of responsibility accounting is focused around
identification of responsibility centres. The responsibility centres
represent the sphere of authority or decision points in an organisation. In
a small firm, one individual or a small group of individuals, who are
usually the owners may possibly manage or control the entire
organisation.
However, for effective control, a large firm is, usually, divided into
meaningful segments, departments or divisions. These sub- units or
divisions of organisation are called responsibility centres. A responsibility
centre is under the control of an individual who is responsible for the
control of activities of that sub-unit of the organisation.
This responsibility centre may be a very small sub-unit of the organisation,
as an individual could be made responsible for one machine used in
manufacturing operations, or it may be very big division of the
organisation, such as a divisional manager could be responsible for
achieving a certain level of profit from the division and investment under
his control. However, the general guideline is that “the unit of the
organisation should be separable and identifiable for operating purposes
and its performance measurement possible”.
For effective planning and control purposes, responsibility centres are,
usually, classified under three categories:
(i) Cost centres;
(ii) Profit centres; and
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(iii) Investment centres.
4. Relationship between Organisation Structure and Responsibility
Accounting System:
A sound organisation structures with clear-cut lines of authority—
responsibility relationships are a prerequisite for establishing a successful
responsibility accounting system. Further, responsibility accounting
system must be so designed as to suit the organisation structure of the
organisation. It must be founded upon the existing authority- responsibility
relationships in the organisation. In fact, responsibility accounting system
should parallel the organisation structure and provide financial
information to evaluate actual results of each individual responsible for a
function.
The following chart shows relationship between organisation structure and
responsibility centres:

Fig 1.4 Relationship between Organisation Structure and

Responsibility Accounting System
5. Assigning Costs to Individuals and Limiting their Efforts to
Controllable Costs:
After identifying responsibility centres and establishing authority-
responsibility relationships, responsibility accounting system involves
assigning of costs and revenues to individuals.

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Only those costs and revenues over which an individual has a definite
control can be assigned to him for evaluating his performance.
Responsibility accounting has an appeal because it distinguishes between
controllable and uncontrollable costs. Unlike traditional accounting where
costs are classified and accumulated according to function such as
manufacturing cost or selling and distribution cost, etc. or according to
products, responsibility accounting classifies accumulated costs according
to controllability.
Controllable costs’ are those costs which can be controlled or influenced
by a specified person or a level of management of an undertaking. Costs
which cannot be so controlled or influenced by the action of a specified
individual of an undertaking are known as ‘uncontrollable costs’. The
difference in controllable and uncontrollable costs may only be in relation
to a particular person or level of management.
The following guidelines recommended by the Committee of the
American Accounting Association in regard to assigning of costs may be
followed:
(a) If the person has authority over both the acquisition and use of the
services, he should be charged with the cost of these services.
(b) If the person can significantly influence the amount of cost through his
own action, he may be charged with such costs.
(c) Even if the person cannot significantly influence the amount of cost
through his own direct action, he may be charged with those elements with
which the management desires him to be concerned, so that he will help
to influence those who are responsible.
6. Transfer Pricing Policy:
In a large scale enterprise having decentralised divisions, there is a
common practice of transferring goods and services from one segment of
the organisation to another. In such situations, there is a need to determine
the price at which the transfer should take place so that costs and revenues
could be properly assigned.
The significance of the transfer price can well be judged from the fact that
for the transferring division it will be a source of revenue, whereas for the
division to which transfer is made it will be an element of cost. Thus, there
is a need of having a proper transfer policy for the successful
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 Accounting for Managerial Decisions
implementation of responsibility accounting system. There are various
transfer pricing methods in use, such as cost price, cost plus normal profit,
incremental cost basis, negotiated price, standard price, etc.
These methods of intra-company transfers have been discussed in detail
later in this chapter.
7. Performance Reporting:
As stated earlier, responsibility account is a control device. A control
system to be effective should be such that deviations from the plans must
be reported at the earliest so as to take corrective action for the future. The
deviations can be known only when performance is reported.
Thus, responsibility accounting system is focused on performance reports
also known as ‘responsibility reports’, prepared for each responsibility
unit. Unlike authority which flows from top to bottom, reporting flows
from bottom to top. These reports should be addressed to appropriate
persons in respective responsibility centres.
The reports should contain information in comparative form as to show
plans (budgets) and the actual performance and should give details of
variances which are related to that centre. The variances which are not
controllable at a particular responsibility centre should also be mentioned
separately in the report. To be effective, the reports should be clear and
simple. Use of diagrams, charts, illustrations, graphs and tables may be
made to make them attractive and easily understandable.
A specimen of a performance report is given below:

Fig 1.5 performance report

8. Participative Management:
The function of responsibility accounting system becomes more effective
if participative or democratic style of management is followed, wherein,
the plans are laid or budgets/ standards are fixed according to the mutual

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consent and the decisions reached after consulting the subordinates. It
provides motivation to the workers by ensuring their participation and self
imposed goals.
9. Management by Exception:
It is a well accepted fact that at successive higher levels of management in
the organisational chain less and less time is devoted to control and more
and more to planning. Thus, an effective responsibility accounting system
must provide for management by exception, i.e., it should focus attention
of the management on significant deviations and not burden them with all
kinds of routine matters, rather condensed reports requiring their attention
must be sent to them particularly at higher levels of management.
The following diagram explains the flow and reporting details at different
levels of management:

Fig 1.6 flow and reporting details

10. Human Aspect of Responsibility Accounting:
‘The aim of responsibility accounting is not to place blame. Instead it is to
evaluate the performance and provide feedback so that future operations
can be improved’. Goals and objectives are achieved through people and,
hence, responsibility accounting system should motivate people. It should
be used in positive sense. It should not be taken as a device to punish
subordinates.
It should rather help in improving their performance. Subordinates
sometimes dislike control because they take them as restraints. The best
responsibility accounting system enlightens employees about the positive
side of control. To ensure the success of responsibility accounting system,
it must look into the human aspect also by considering needs of

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subordinates, developing mutual interests, providing information about
control measures and adjusting according to requirements.

Check Your Progress-2

4. Is management and cost accounting the same?

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5... What is the significance of Accounting plan and responsibility?

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6. What are the types of responsibility centres?

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1.13 LET US SUM UP

1. Managerial accounting, also called management accounting, is

a method of accounting that creates statements, reports, and
documents that help management in making better decisions
related to their business’ performance. Managerial accounting is
primarily used for internal purposes.
2. The main objective of managerial accounting is to assist the
management of a company in efficiently performing its functions:
planning, organizing, directing, and controlling.
3. The main objective of managerial accounting is to maximize profit
and minimize losses. It is concerned with the presentation of data
to predict inconsistencies in finances that help managers make

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important decisions. Its scope is quite vast and includes several
business operations.
4. Managerial accounting is a rearrangement of information on
financial statements and depends on it for making decisions. So the
management cannot enforce the managerial decisions without
referring to a concrete financial accounting system.
5. Managerial accounting uses easy-to-understand techniques such
as standard costing, marginal costing, project appraisal, and
control accounting.
6. Managerial accounting is used for forecasting. It concentrates on
supplying information that would ease the effect of a problem
rather than arriving at a final solution.

1.14 KEY WORDS

1. Management accounting- Managerial accounting, also called

management accounting, is a method of accounting that creates
statements, reports, and documents that help management in making better
decisions related to their business' performance. Managerial accounting is
primarily used for internal purposes.

2. Financial accounting- Financial accounting is the field of accounting

concerned with the summary, analysis and reporting of financial
transactions related to a business. This involves the preparation of
financial statements available for public use

3. Cost center- A cost center is a department or function within an

organization that does not directly add to profit but still costs the
organization money to operate. Cost centers only contribute to a
company's profitability indirectly, unlike a profit center, which contributes
to profitability directly through its actions

4. Profit centre- A profit center is a branch or division of a company that

directly adds or is expected to add to the entire organization's bottom line.
It is treated as a separate, standalone business, responsible for generating
its revenues and earnings.

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5. Investment centre- An investment center is a center that is responsible
for its own revenues, expenses, and assets and manages its own financial
statements which are typically a balance sheet and an income statement.

1.15 ANSWER TO CHECK YOUR PROGRESS

1. Refer 1 for Answer to check your progress- 1 Q. 1 …

Ans.1 To provide useful financial information about a business to help
external parties make informed decisions. Financial accounting standards
are known collectively as GAAP.
2. Refer 1 for Answer to check your progress- 1 Q. 2 …
Ans.2 It is used to compare reports so that stakeholders and investors
can decipher and use the data to make better decisions in the future. It
provides clarity in internal and external communication regarding the
sources and destinations of finances in the company.
3. Refer 1 for Answer to check your progress- 1 Q. 3…
Ans.3 Managerial accounting provides the information needed to fuel
the decision-making process. Managerial decisions can be categorized
according to three interrelated business processes: planning, directing,
and controlling.
4. Refer 2 for Answer to check your progress- 2 Q. 4…
Ans.4 Management accounting provides both quantitative and qualitative
data, whereas cost accounting focuses solely on quantitative data.
Management accounting is important for strategy development and goal
setting, whereas cost accounting helps prevent unnecessary costs.
5. Refer 2 for Answer to check your progress- 2 Q. 5 …
Ans.5 it creates a sense of efficiency within individual employees as
their work and achievements will be reviewed. It guides the
management to plan and structure the future expenditure and revenue
of a company. Being a cost control tool, it creates 'cost consciousness'
among workers.
6. Refer 2 for Answer to check your progress- 2 Q. 6 …
Ans.6 Corporate social responsibility is traditionally broken into four
categories: environmental, philanthropic, ethical, and economic
responsibility.
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Accounting for Managerial Decisions
• Environmental Responsibility.
• Ethical Responsibility.
• Philanthropic Responsibility.
• Economic Responsibility.

1.16 SOME USEFUL BOOKS

1. R K Sharma & Shashi K Gupta, “Management

Accounting”, Kalyani Publishers, 2013.
2. M N Arora, “Cost and Management Accounting”, VikasPublishing
House.
3. M E Thukaram Rao, “Management Accounting”, New Age
International Publishers, 2007.
4. S P Jain, K L Narang, Simmi Agarwal, Monika Sehgal, “Cost &
Management Accounting”, Kalyani Publishers, 2013.
5. V K Saxena & C D Vashist, “Basics of Cost and Management
Accounting”, Sultan Chand & Sons, 2004.
6. M C Shukla, T S Grewal, M P Gupta, “Cost Accounting – Text and
Problems, S. Chand & Co. Ltd., 2000.
7. Khan and Jain, “Management Accounting & Financial Analysis” Tata
McGraw-Hill.
8. Dr. S N Maheshwari & Shard K Maheshwari, “Advanced Problems
and Solutions in Cost Accounting”, Sultan Chand & Sons

1.17 TERMINAL QUESTIONS

1. Give the meaning of ‘reissue of shares’

2. What are the primary objectives of financial accounting ?
3. What is nature and scope of financial accounting?
4. What is an Investment Center?
5. What are responsibility centers?

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