AFM Introduction

7/30/2019 AFM Introduction

1/35

MANAGEMENTACCOUNTING


2/35

Accounting

Accounting is a business language.

Accounting is defined as a system for

collecting, summarizing, analyzing, presentingand reporting, in monetary terms, anyrelevant information about the enterprise.

As a business language, accounting communicates

about business transactions and its results on various

interested parties.


3/35

Branches of Accounting

The three main branches of

accounting are :(1) Financial Accounting ;

(2) Cost Accounting; and

(3) Management Accounting.


4/35

Financial Accounting

Financial Accounting records monetary

transactions, prepares necessary

accounts, analyses and interprets

financial statements. It reveals the

financial position of a business over a

particular period of time.


5/35

Cost AccountingCost Accounting may beregarded as a specialized

branch ofaccounting which involves

classification, accumulation,assignment and control of

costs.


6/35

Management AccountingManagement Accounting is

concerned with the presentation of

accounting information tomanagement in such a way as to

assist them in their managerial

functions of decision-making,

planning and control.


7/35

Management accounting Defined

Management accounting is a system

of collection and presentation of

relevant economic information relatingto an enterprise for planning,

controlling and decision-making.[I.C.W.A.I., India]


8/35

The main purposes of Management Accounting

To provide management with financial data, cost data and

other qualitative information for planning and decision-making;

To express financially the plans in terms of individual

responsibilities for all levels of management;

To get an insight into the profitability, solvency, liquidity,

etc., of the organisation;

To measure and interpret the results of operations at all

levels of management with necessary comments and

conclusions;

To report on the effectiveness of the organisation as

regards utilization of resources;

To meet the changing needs of management functions.


9/35

Nature of Management Accounting

The nature of management accounting can beenumerated as follows :

Advisory nature : It provides relevant

information to the management to achievean organization's strategic, tactical andoperating objectives.

It gets an insight into the profitability,solvency, liquidity, etc., of the organisation andrenders advise to the management on thesematters.


10/35

contd..

Analytical in nature : Management accounting is

analytical in nature. It analyses and interprets accountingand other data to make them understandable and usable

to the management. Such an in-depth analysis assists the

management in pinpointing responsibilities and to effect

necessary changes in the organizational set up. Interpreting results of operation : It measures and

interprets the results of operations to all levels of

management with necessary comments and conclusions.

Aid to the management : It provides both quantitative

and qualitative information to the management to assist

them in their managerial functions of decision making,

planning and control.


11/35

Contd..

Feedback control : It expresses financially the plans in terms

of individual responsibilities for all levels of management. Itdevelops a chain of responsibility reporting and monitorsperformance against plans.

Future-oriented : Management accounting is forward-looking and dynamic. It processes historical data for projectingfuture trends in order to take better decisions.

Absence of standard format : There is no standard format topresent management accounting information. Managementaccountant prepares formats according to the demands of asituation. Thus, the style of presentation of information istailored to the requirement of a situation.

Selective approach : It takes into account only relevantinformation which affects decision-making from voluminousfinancial and cost data. It provides useful and understandableinformation to the management for their proper decision-making.


12/35

Scope of Management Accounting

Financial Accounting : Management accounting

data is mostly derived from financial accounting.

Management accounting has its roots in financial

accounting. Management accounting uses the

principles and practices of financial accounting. Cost Accounting : Management accounting

involves the application of appropriate techniques

and concepts drawn from cost accounting.

Management accounting can be viewed as anextension of managerial aspects of cost

accounting. However, the scope of management

accounting is broader than the scope of cost

accounting.


13/35

cont..

Management Information System (MIS) : MIS providesrelevant information to the management for itsdecision-making. Computers have added a newdimension to MIS by facilitating the processing of largevolumes of data with great speed and accuracy. MIS is

expected to supply information as needed at differentlevels in the organization.

Quantitative Techniques : Operations research (OR)technique is used bymanagement accountants to solve

the existing problems in the decision-making process.In a decision-making situation, all variables arequantified for the purpose of analysis. Capital Budgeting, Ratios Analysis, FFS & CFS are important

techniques applied for decision-making.


14/35

cont Benchmarking Technique : Benchmarking is

the process of studying and adapting the bestpractices of competing organisations toimprove the organisation's own performance.Benchmarking helps to understand one's ownperformance against the best practice in theindustry. Benchmarking is a modern techniquefor strategic improvement.

Total Quality Management (TQM) : Totalquality is an approach to a continuous

improvement in products, services, people,processes and environment. This approach isused in management accounting to maximisean organisations' competitiveness.


15/35

cont

Management By Objectives (MBO) : MBO is a technique

which helps a managerto achieve his objectives in anefficient manner. MBO leads to effective management

by integrating the goals of an organisation and

individuals. It increases the organisational capability of

achieving goals at all levels through a high degree ofsatisfaction of employees.

Management Reporting : It provides relevant

information to various levels ofmanagement in the

forms of reports at regular intervals. It supplies data forpolicy making and operating decisions. It is the

instrument for making decisions and controls effective.

Management reports are used internally and are the

subject matter of management accounting.


16/35

Objectives of Management Accounting Interpretation of financial results : Management

accounting analyses andinterprets the financialresults of the concern. Various tools (such as ratioanalysis, fund-flow statement, etc.) are used by themanagement accountant for analysing and

interpreting the financial position of theorganisation.

Proper planning : Management accounting helps inthe preparation of plans andpolicies of anorganisation. Management accountant uses variousforecasting techniques (such as Regression analysis,Time series analysis, etc.) to predict future trends.Forecasting is necessary for a planning process.


17/35

cont..1. Proper control : Management control is a process

that assures resources are used effectively andefficiently for achieving the objectives of theorganisation. The management accountant usesvarious techniques for ensuring efficient

managerial control (such as standard costing,budgetary control, internal audit, responsibilityaccounting, management audit, etc.).

Proper communication : Communication has

become an essence of management.Management functions cannot be performedefficiently without an effective network ofcommunication in the organisation.


18/35

Objectives of Management Accounting

cont..2. Making decisions : Decision-making is necessary

for the effective functioning ofmanagement. Thesuccess of management depends upon the qualityof any decision. The management accountanthelps the management in taking various decisions(by applying marginal costing, differential costing,etc.).

Tax planning : The management accountant helps

the management in determining various tax reliefsand rebates. He assists the management in taxplanning, computation of different tax liabilitiesand reduction of burden of tax.


19/35

Differences betweenManagementAccounting andFinancial Accounting


20/35

Differences between Financial A/cting and Management A/cting

Points of

DistinctionFinancial Accounting Management Accounting

Basicfunction

Recording ofmonetarytransactions and

publication offinancial

statements.

Supporting decisions of

the management

by providing relevant

information.

Party to beserved

For use ofinternal parties

only.

For use ofexternal parties

(may also be used by

internal parties).

Format ofreports

Format is tailored to the

requirement

Format is specified by the

relevant provisions

of the Companies Act.


21/35


Points of


Objectivity of

reports

Auditing of

reports

Management reports are

not subject to

statutory audit.

Financial reports are

subject to statutory

audit.

Publication of

reports

Management reports

are meant for internal

use only.

Annual reports are to be

published for

circulation among external

parties.

Reports may contain

both the objective and

subjective figures.

Report is supported by

relevant figures. It lays

emphasis on objectivity of

data.


22/35


Points of


Period of

coverage

As required by

the management.Usually one year.

Availabilityof reports

Confidential innature.

Publicly available.

Unit of study Detailed study of

a segment.

Overall performance of the

organisation.

Governed by Needs of managers.Companies Act.


23/35

Differencesbetween Cost

Accounting andFinancialAccounting


24/35

Points of

DistinctionCost AccountingFinancial Accounting

Differences between Cost Accounting and Financial Accounting

Applicability

Principlesfollowed

Scope of

measurement

Financial Accounting isapplicable to all types of

accounting entities.

It adheres to Generally

Accepted Accounting

Principles (GAAP).

It measures the financial

performance ofthe entityas a whole during a

particular period.

Cost Accounting isapplicable to

manufacturing concerns.

It adheres to costingconcepts and

principles.

It measures the cost of

each product line,

department, process, etc.


25/35

Points of



Periodicity ofreporting

Requirement

served

System of

control

Financial reports areprepared periodically,

usually at the end of an

accounting period.

It does not attach

importance to control

during transactions.

It provides for a detailed

system of controls with

the help of certain

special techniques (like

Standard Costing,

Budgetary Control, etc.)

Cost reporting is a

continuous process and it

may be prepared as and

when desired (either

weekly or monthly, etc.)

Financial Accounts areprepared according to the

requirements of the

Companies Act and

Income Tax Act.

Cost Accounts are kept as

per the requirement of

Management.


26/35

Points of



Scope ofcorrection

Party to be

served

Nature of

approach

Valuation of

stock

It does not bring out areaswhich need correction and

improvement.

It is mainly meant for providing

information to shareholders,

creditors, government,

employees, etc.

It deals mainly with actual

figures and, thus, it is historical

in approach.

Stocks are valued at cost or

market price, whichever is

lower.

Stocks are always valued at

cost.

It measures the cost of each

product line, department,

process, etc.

Cost Accounts are kept as per

the requirement of

Management.

Cost reporting is a continuous

process and it may be

prepared as and when desired(either daily or weekly or

monthly, etc.)


27/35

Points of



Statutoryneed

Analysis of

Profit

Control

aspect

Nature of

analyses

It is compulsory to meet therequirements of the Companies

Act, Income Tax Act, etc.

It fails to show profit for each

product, department, process,,etc.

It does not provide for adequate

control on expenses.

It is concerned with historical

transactions only (i.e. post-

mortem analysis).

It is not compulsory

It helps in the measurement of

shortfall and failure which

need immediate management

action.

It is mainly meant for providing

detailed cost information to

the management. Therefore,

cost information are not meant

for outsiders.

It deals partly with actual

figures (i.e., historical data) and

partly with estimates.


28/35

Differencesbetween Cost

Accounting andManagementAccounting

Differences between Cost Accounting and Management Accounting


29/35

Points of

DistinctionCost Accounting Management Accounting


Principlesfollowed

Nature of

approach

Scope of

study

Primaryobjective

It uses the principles andpractices of both Cost and

Financial Accounting.

It looks ahead through

long-term planning apartfrom current operations.

It is an extension of

managerial aspects of Cost

Accounting.

The primary object is toprovide the relevant

information to the

management to take an

appropriate decision.

It uses the principles andpractices of Cost Accounting.

It generally deals with current

operations.

It is a complement of

Management Accounting.

The primary object is toascertain the cost of a

product (or service) and to

control the cost after careful

analysis.



30/35

Points of



The main emphasis is on theefficient operation of

business.

Management Accountant

not only makes variance

analysis but also suggeststhe ways and means for

improving operations.

Double entry system is not

adopted while submitting

reports to the management.

Management accountant

concentrates on matters

relating to finance,

profitability and

productivity.

Mainemphasis

Contents of

report

System of

recording

Basis of

work

The main emphasis is on costdetermination and cost

control.

Cost Accountant compares

Actual Cost with Standard

Cost and submits reports tothe management regarding

variances for appropriate

action.

Double entry system of

recording transactions can be

adopted.

Cost accountant is to work

through set routines, budgets

and standards.



31/35

Points of



Statutoryverification

Utility of

reports

Type of data

used

Accounting

period

Management reports arenot subject to any statutory

audit.

Management reports are

useful only to the

management.

It uses both quantitative

and qualitative data.

It does not follow any

specific accounting period

as such.

Cost accounts and reports aresubject to statutory

verification (i.e. cost audit).

Cost reports are meant for

management and even usefulto external parties.

It uses quantitative cost data

only.

It is done for a specific

accounting period.



32/35

Points of



Coverage ofdata

Derivationof data

Term of

Planning

Installation

of the

It deals with both cost andfinance-related data.

It derives data from both

financial records and costrecords.

It is equally concerned with

short-term and long-term

planning.

It cannot be installed

without a proper cost

accounting system.

It uses quantitative cost dataonly. It is done for a specific

accounting period.

It deals with cost data only. It

derives data from financial

records.

It is concerned with short-

term planning.

It can be installed without

management accounting

system.


33/35

Needs Determine the Form of Accounting Data

Managers need changing information to meetchanging needs!

Types of Accounting Systems

Financial Accounting

Rules and procedures

Accounting information systems and internalcontrols

Auditing

Cost Accounting Product costing

Activity-based costing


34/35

Management Accounting Decision support

Organizational control

Cost management

Profit management Investment management

Tax Accounting

Individuals

Partnerships and corporations

Estate and trusts

International taxation

Special tax issues and topics


35/35

New Management Trends to Create Value

Encourage Management AccountingSystems Redesign, for example.

Customer focus

Quality focus

Delivery focus

Outsourcing and the virtual company

Communications

Shortening product life cycles Team development

Deregulation in the service sector

Documents

AFM Introduction