Chapter-1.

Introduction to Management
Accounting
Q. Define management accounting?
Management accounting is concerned with the provisions and use of
accounting information to managers within organizations to provide them
with the basis to make informed business decisions that will allow them to
be better equipped in their management and control functions.
According by Charles T. Horngren- Management accounting is the
process of identification, measurement, accumulation, analysis,
presentation interpretation and communication of information that assist
executives in fulfilling organizational objectives.
According by Institute of Chartered Accountants in England and WalesManagement accounting is that form of accounting which enables a
business to be conducted more efficiently.
After the above discussion we can say that, management accounting is
the form of accounting that provides information to the management
accountant which helps to fulfill the business target.

Q:.What do you mean by management accounting?

Management accounting is a modern section of accounting. It is an
important tool to remove the limitations of financial accounting and to
make management efficient and fruit full.
According by J Batty- Management accounting is the term used to
describe the acting methods, systems and techniques which worked with
special knowledge and ability to assist management in the task of
maximizing profits or minimizing loss.
According by R. N Anthony- Management accounting is concerned with
accounting information that is useful to management

Q. Discuss the role of management accounting in

organization?
There are many important role of management accounting in an
organization. Some of them are given bellow Planning & forecasting: Management accounting work to make
efficient and effective planning and reliable forecasting to set plan.
For this it apply, some methods like marginal costing, standard
costing, capital budgeting etc.
Organizing: Established communication among different people in
a firm is called organizing. Proper and practical organizing is very
important to achieve the goal of a firm.
Performance evaluation: By using budgetary control method and
standard costing method, management accounting evaluates the
performance of employee. It evaluates the task of each employee,
department and all types of work.
Prepared by: BBA 7th Semester
Session:-2008-2009
Chittagong Cantonment Public College

Co-ordination: Management accounting helps in co-ordination. It

is very important to co-ordinate between organization goals and
activities in an organization.
Decision making: Management accounting plays an important role
in making organizational decisions. In that case it helps by giving
much necessary information which is effective for it.
Motivating: Another important role of management accounting is
motivating the employee of an organization. It motivate employee
by giving proper direction of work and inspiring them to do work
effectively.
Controlling: Control different work in an organization this
accounting system is very important. It compares the work of
employee with standard of work.
Creating stability: Proper planning, organizing, controlling etc
helps a financial organization to get a stable position in market.

Q. What are the implications of management accounting

in a modern business organization?
Now-a-days management accounting has become an essential part of
modern business organization. Some implications of management
accounting in a business organization are given bellow Financial accounting: Management accounting, collect the
information from financial accounts. Then analyze them to present
to the party of a firm, who need this.
Cost accounting: Some important method in management
accounting like budgetary control, marginal costing, opportunity
cost analysis etc is collected from cost accounting.
Statistical method: Management accountants have to work with
financial statistical analysis. For this they use chart, graph,
sampling, index number etc statistical method.
Management information system: It is a modern and
computer technology dependent method. By this method
necessary information can get by the manager in proper time.
Inventory control: Profit and loss of a company also depends on
inventory. So proper inventory system must be follow. Clear
picture of production cost can get by using proper inventory
control system.
Operation research techniques: The main tools of operation
research techniques are Linear programming, Network analysis,
Programmed evaluation techniques etc which are used to run an
organization by managers.
Reporting to management: Another important task of
managerial accounting is presenting regular report about the
present situation of an organization to director or related parties
Budgeting: Planning, policy and objectives of a company is
prepared according to budget for a specific time in future.
Different budget is being prepared for different department.

Q. What is the ethical responsibility of management

accounting?
Ethical responsibility of management Accounting:
A member failure to comply with the following standards may result in
disciplinary action.
Competence: Maintain an appropriate level of professional
expertise by continuing developing knowledge and skill. Perform
professional duties in accordance with relevant laws, regular and
technical standards. Provide decision support information and
recommendation that are accurate, clear, concise and timely.
Recognize and communicates professional limitations or other
constraints that would preclude responsible judgment or successful
performance of an activity.
Confidentially: Keep information confidential except when
disclosure is authorized or legally required. Inform all relevant
parties regarding appropriate use of confidential information. Retain
from using confidential information for unethical or illegal
advantage.
Integrity: Mitigate actual conflict of interest, Regarding
communicate with business associates to avoid apparent conflicts of
interest. Advise all parties of any potential conflicts. Retains from
engaging in any conduct that would prejudice carrying out duties
ethically. Abstain from engaging in or supporting any activity that
might discredit the profession.
Credibility: Communicate information fairly and objectively.
Disclose all relevant information that could reasonably be expected
to influence an intended users understanding of report, analysis or
recommendations. Disclose delays or deficiencies in information,
timeliness, processing or internal controls in conformance with
organization policy and applicable law.

Q. What are the tools and techniques of cost

accounting?
Tool and Techniques of cost accounting:
The types of costing techniques are used by management only for
controlling costs and making some important managerial decisions. As a
matter of fact, they are not independent methods of cost finding such as
job or process costing but are basically costing techniques which can be
used as an advantage with any of the methods. These are given below:
Marginal Costing: Marginal costing is a technique of costing in
which allocation of expenditure to production is restricted to those

expenses which arise as a result of production, e.g., materials, labor,

direct expenses and variable overheads. Fixed overheads are
excluded in cases where production varies because it may give
misleading results. The technique is useful in manufacturing
industries with varying levels of output.
Direct Costing: The practice of charging all direct costs to
operations, processes or products and leaving all indirect costs to be
written off against profits in the period in which they arise is termed
as direct costing. The technique differs from marginal costing
because some fixed costs can be considered as direct costs in
appropriate circumstances.
Absorption or Full Costing: The practice of charging all costs
both variable and fixed to operations, products or processes is
termed as absorption costing.
Uniform Costing: the basic idea behind uniform costing is that the
different firms in an industry should adopt a common method of
costing and apply uniformity the same principles and techniques for
better cost comparison and common good.
Standard costing: standard costing is a costing technique of cost
accounting which compares the standard cost of each product or
service with actual cost to determine the efficiency of the portion, so
that any remedial action may be taken immediately.
Historical costing: Historical costing is the ascertainment and
recording of actual costs when, or after, they have been incurred
and was one of the first stage in the growth of the cost accountants
work. Actual costs refer to material cost, labor cost and overhead
cost.

Q. What are the Techniques of Costing?

It has already been stated that there are two main methods used to
determine costs. These are:
1. Job cost method
2. Process cost method
It is possible to ascertain the costs under each of the above methods by
two different ways:
I. Historical costing
II.
Standard costing
I. Historical Costing: Historical costing can be of the following two types
in nature:
a) Post costing
b) Continuous costing
a) Post Costing: Post costing means ascertainment of cost after the
production is completed. This is done by analyzing the financial
accounts at the end of a period in such a way so as to disclose the
cost of the units which have been produced.
b) Continuous Costing: In case of this method, cost is ascertained as
soon as a job is completed or even when a job is in progress. This is
done usually before a job is over or product is made. In the process,

actual expenditure on materials and wages and share of overheads

are also estimated.
II.Standard Costing: Standard costing is a system under which the cost
of a product is determined in advance on certain pre-determined
standards. With reference to the example given in post costing, the cost of
product A can be calculated in advance if one is in a position to estimate
in advance the material labor and overheads that should be incurred over
the product. All this requires an efficient system of cost accounting.

Q. Briefly explain the scope of management accounting?

Management accounting is that form of accounting which enables a

business to be conduct more efficiently.
The scope of management accounting given below:
1. Financial accounting
2. Cost accounting
3. Budgeting & forecasting
4. Inventory control
5. Statistical method
6. Interpretation of data
7. Reporting to management
8. Internal audit
9. Tax accounting
10.
Methods of procedures
a. Financial accounting: Financial accounting helps to collect data
about finance for management of a firm.
b. Cost accounting: Marginal costing, opportunity cost, inventory etc are
finding by cost accounting which help to manager.
c. Statistical method: Chart, graph, index number etc are method of
statistic; it is one of the main scopes of management accounting.
d. Inventory control: Maximum level, minimum level, re-orders level are
help to measure about inventory.
e. Reporting to management: Report provide to manager is another
scope, accountant generally give report to management board.

Q. What are the various techniques of management

accounting? Explain three of them?
Techniques of Management Accounting:
Financial statement analysis
Funds Flow analysis
Cash Flow analysis
Standard costing
Budget & Budgetary control
Capital Budgeting
C-V-P analysis
Responsibility accounting

Marginal costing
Special report

Management accounting is that form of accounting which enables a

business to be conducted more efficiently. Various techniques are used in
management accounting. Now we discuss three of them.
Financial planning: Financial planning means to collect fund from
various sources on the bases of organization necessary for short
term and long term need.
Ratio analysis: Ratio analysis is the relation of one item to another
in simple mathematical form. It determines accurate debtors
investment, controlling different division for management.
Standard costing: Standard costing important technique to control
production cost. If any flatus in production cost it will analysis the
reason. It is increased work efficacy

Q. Distinguish between management accounting and

cost accounting?
The distinguish between management accounting and cost accountings
are as follows:
Point of
Differences
Definition

Output

Management accounting

Cost accounting

Management accounting is
concerned
with
decision
making, strategy formulation,
planning
and
budgetary
control.

Cost accounting is concerned

with analysis and evaluation
of cost incurred in order to
reduce
inefficiencies
and
improve the firms overall
productivity.
Many internal and external to
the organization use the cost
accounting information.
Cost accounting is backward
looking and evaluates past
data.
The
objective
of
cost
accounting is to ascertain the
costs and control it.

The output of mgt accounting

according
is
for
decision
making at the top level.
Backward vs. Mgt accounting is forward
Forward
looking and involves planning
looking
and procedures of the future.
Objective
The
objective
of
mgt
accounting is to provide mgt
all information as and when
required by them so that they
can take right decisions at
right time.
External &
Mgt accounting is done for top Cost accounting is done for
Internal
mgt only.
internal parties like top mgt,
parties
as well as external parties like
creditors,
employees,
government.

Scope
Function

Mgt accounting is still evolving

but its scope is much wider
than that of cost accounting.
Mgt accounting emphasizes
the use of financial and cost
for planning, control and
decision making purpose.

Cost accounting was evolved

many year, back and it is
limited in its scope.
Cost
accounting
is
cost
accumulation for inventory
valuation
and
income
determination.

Q. Distinguish between management accounting and

management audit?
Difference between management accounting and management audit are
as follows:
Management accounting
Management audit
1.
Management
accounting
is 1. Management audit is concerned
concerned with the preparing of with checking of financial statement.
financial statement.
2. The purpose of management 2.the purpose of management audit is
accounting is to show the performance to certify the true and fair view of
and financial position of a business.
financial statement
3. It requires that a management 3it requires that a management
accountant must have accounting auditor must have accounting as well
knowledge.
as auditing knowledge.
4. It is concerned with current data.
4. It is concerned with past data.
5.It is constructive in nature
5. It is analytical in nature.
6. Time period of management 6. Time period of management audit is
accounting is usually 1 year.
usually less than 1 year.
7.
Management
accountant
is 7.
Management
auditor
is
an
permanent employee of the business.
independent person.
8. A management accountant may not 8. A management auditor must be a
be a chartered accountant as per law.
chartered accountant as per law.

Q. Distinguish between management accounting and

financial accounting?
OR, The area and scope of management accounting is
different with comparing financial accounting-Explain.
The difference between financial accounting and management accounting
are as follows:
Contents

Management accounting

Definitio
n

Management accounting is the

form of accounting that
provides information to the
management accountant which

Financial
accounting
Financial accounting is
concerned with providing
information to stockholders,
creditors & others who are

Format
Planning
& control
External
vs.
Internal
Focus

helps to fulfill the business

target.

outside an organization

No specific format is designed

for management accounting
systems.
Mgt accounting helps mgt to
record, plan and control
activities to aid decision making
process.
A mgt accounting system
produces that is used within an
organization by managers &
employees.

Financial accounts are supposed

to be in accordance of with a
specific format by IAS.
Financial accounting helps in
making investment decision, in
credit rating.

Mgt accounting focuses on

future.
Departm Mgt accounting is not specific
ent
task of particular department;
coordination of all departments
creates mgt accounting.
Mandator There are no legal requirements
y vs.
to prepare report on MA.
Optional
Time
No specific time spam is fixed
spam
for producing financial
statements.
Monetary Mgt accounting information
vs. nonmay be monetary or non
monetary monetary.
Objective The objective of management
accounting is to help the
management in planning and
organizing
GAAP
Must follow GAAP.

A financial accounting system

produces information that is
used by parties external to the
organization, such as share
holders, bank & creditors.
Financial accounting focuses on
history.
Preparing financial accounting is
the work of finance department.
Preparing FA reports are
mandatory especially in limited
companies.
Financial accounting statements
are required to be produced for
the period of 12 months.
Most financial accounting
information is of a monetary
nature.
The objective of financial
accounting is calculating profitloss accounting in the end of
year.
Need not to follow GAAP.

Q. The area and scope of management accounting is

different with comparing financial accounting -Explain.
Management accounting is that from of accounting which is concern
with accounting information that is usually useful to management criteria.

0n the other hand financial accounting is that form of accounting

which is concern with all financial information of organization in the end of
time of accounting.
The difference between management accounting and financial accounting
are given below:Types of
Financial accounting
Management accounting
point
Nature
Every data and information is The data which is related with
used in financial account for future planning only accept that
entry in the financial statement kind if information.
as mathematical nature of uses.
Calculatio Generally
one
year
is It have no specific time, duration
n period
mentioned in the financial is depends on management
statement analysis.
sector.
Scope
The
scope
of
financial The scope of management is not
management is higher than the high then financial management
accounting.
but long run for future planning.
Dependen Financial
management
is Accounting
management
is
ce
dependent on the top level of dependent
on
financial
organization.
management.
Objective
The objective of management The
objective
of
financial
accounting is to help the accounting is calculating profitmanagement in planning and loss accounting in the end of
organizing
year.

Q. What is Responsibility Accounting?

Responsibility Accounting
It refers to a control system of management accounting and
reporting.
The
basis
of
Responsibility
Accounting
is
the
creation/recognition of various responsibility/decision centers in an
organization.
The individual managers of these centers are made
responsible for the insurance and control of costs relating to their
responsibility centers.
The main feature of responsibility accounting is that it is more concerned
with control of costs than their determination. The system would trace
costs (revenues, assets and liabilities, also where relevant) to the
individual managers who are primarily responsible for making decisions
about the costs under review.
Responsibility accounting system can be tailored according to the needs
of an organization. An effective system of responsibility accounting would
require that they require that the responsibility of each executive is clearly
defined. He should know, what he is required to do and what performance
is expected of him.

Q. Why is it necessary to prepare income statement in a

segmented form?

Income statement is necessary to prepare in a segmented form for

various reason. They are given below:
Determine total income: All types of income are includes in
income statement so it will be help to know about total income of
an organization.
Determine total expense: Expense are different types, it is
related with firm regular activates. Income statement show
expense and try to minimize the them.
Net profit: Net profit is calculated total income minus total
expense. Profit will make firm reserve fund. It shows firm condition.
Bad debt expense: Every year a firm shows an amount of bad
debt. Income statement help to know how much bad debt are in
this year, how much are collected.
Determine tax: Tax will be paying on the income bases .Income
statement must counts each year income of a firm. So it helps to
pay tax in just time.