Management accounting 9788131731789, 8131731782

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MANAGEMENT ACCOUNTING

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MANAGEMENT ACCOUNTING

Debarshi Bhattacharyya Assistant Professor S. R. Fatepuria College University of Kalyani, West Bengal

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Assistant Acquisitions Editor: Anshul Yadav Assistant Production Editor: Barun Kumar Sarkar Compositor: Ace Pro India Pvt. Ltd Copyright © 2011 Dorling Kindersley (India) Pvt. Ltd. This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher’s prior written consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser and without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. ISBN: 978-81-317-3178-9 10 9 8 7 6 5 4 3 2 1 Published by Dorling Kindersley (India) Pvt. Ltd., licensees of Pearson Education in South Asia. Head Office: 7th Floor, Knowledge Boulevard, A-8(A), Sector-62, Noida 201309, India Registered Office: 11 Community Centre, Panchsheel Park, New Delhi 110017, India

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This book is dedicated at the feet of my parents the late Dhurjati Prasad Bhattacharyya and the late Aparna Bhattacharyya who are in front of me round the clock with their blessings.

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Contents Preface

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Introduction to Management Accounting 1 1.1 Definition of Management Accounting 1 1.2 Nature or Features of Management Accounting 2 1.3 Scope of Management Accounting 2 1.4 Objectives of Management Accounting 3 1.5 Role or Functions of Management Accounting 4 1.6 Utility of Management Accounting 5 1.7 Limitations of Management Accounting 6 1.8 Tools and Techniques of Management Accounting 7 1.9 Requisites for Installation of Management Accounting System 8 1.10 How Does Management Accounting Differ from the other Branches of Accounting 8 1.10.1 Management Accounting and Financial Accounting 8 1.10.2 Management Accounting and Cost Accounting 9 Chapter Review Summary 9 • Chapter Review Quiz 10 • Exercise 11

2 Analysis and Interpretation of Financial Statements 12 2.1 Meaning of Financial Statements 12 2.2 Characteristics of Financial Statements 12 2.3 Anatomy/Components of Financial Statements 13 2.3.1 Income Statement or Profit & Loss Account 13 2.3.2 Balance Sheet 14 2.3.3 Statement of Changes in Financial Position 14 2.4 Relationship Between Income Statement and Balance Sheet 15 2.5 Concept of Financial Statement Analysis 16 2.6 Objectives of Financial Statement Analysis 16 2.7 Requisites of Financial Statement Analysis 17 2.8 Different Approaches to Financial Statement Analysis 17 2.8.1 Traditional Approach to Financial Statement Analysis 17 2.8.2 Modern Approach to Financial Statement Analysis 18 2.9 Types of Financial Statement Analysis 18 2.10 Techniques/Tools of Financial Statement Analysis 19 2.11 Comparative Financial Statement Analysis 20 2.11.1 Concept of Comparative Financial Statement Analysis 20 2.11.2 Advantages of Comparative Financial Statement Analysis 21 2.11.3 Disadvantages of Comparative Financial Statement Analysis 21

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2.12 Common-size Financial Statement Analysis 21 2.12.1 Concept of Common-size Financial Statement Analysis 21 2.12.2 Advantages of Common-size Statement 22 2.12.3 Disadvantages of Common-size Statement 22 2.12.4 Comparative Statement vs. Common-size Statement 23 2.13 Trend Analysis 23 2.13.1 Concept of Trend Analysis 23 2.13.2 Steps in Computing Trend Values (or Percentages) 23 2.13.3 Advantages of Trend Analysis 23 2.13.4 Disadvantages of Trend Analysis 23 2.14 Worked-out Problems 24 Chapter Review Summary 48 • Chapter Review Quiz 48 • Exercise

49

3 Accounting Ratios for Financial Statement Analysis 57 3.1 Financial Statements 57 3.2 What is a Ratio? 57 3.3 What is an Accounting Ratio? 58 3.4 What is Ratio Analysis? 58 3.5 Steps in Ratio Analysis 58 3.6 Role or Importance of Ratio Analysis 58 3.7 Uses of Ratio Analysis 59 3.8 Advantages of Ratio Analysis 59 3.9 Limitations of Ratio Analysis 59 3.10 Parties Interested in Ratio Analysis 60 3.11 Different Kinds of Ratios or Classification of Ratios 60 3.12 Standard or Ideal Ratio 61 3.13 Computation of Proprietors’ Fund, Capital Employed, Working Capital 61 3.14 Calculation and Interpretation of Various Ratios 65 3.14.1 Balance Sheet Ratios (Ratios as ascertained from various items of the Balance Sheet) 65 3.14.2 Revenue Statement Ratio (Ratios as ascertained from the various items of the Profit & Loss A/c) 68 3.14.3 Mixed or Composite Ratio (Ratio ascertained taking some items from the Balance Sheet and some other items from the Profit & Loss A/c) 71 3.15 Du Pont Analysis 75 3.16 Ratios to be used in Determining Solvency, Performance, Managerial Efficiency etc. of an Enterprise 76 3.17 Different Ratios at Glance 77 3.18 Worked-out Problems 79 Chapter Review Summary 177 • Chapter Review Quiz 178 • Exercise 179

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Cash Flow Analysis 199 4.1 What is Cash? 199 4.2 Difference Between Cash and Fund 199 4.3 What is Cash Flow Statement? 200 4.4 Why is Cash Flow Statement Prepared? 200 4.5 Importance of Cash Flow Statement 200 4.6 Uses of Cash Flow Statement 200 4.7 Advantages of Cash Flow Statement 201 4.8 Limitations of Cash Flow Statement 201 4.9 Differences Between Cash Book and Cash Flow Statement 202 4.10 Differences Between Cash Flow Statement and Fund Flow Statement 202 4.11 Proforma of Cash Flow Statement Prepared under Traditional/Conventional Method 203 4.12 Cash Flow Statement as Prescribed in AS-3 203 4.12.1 Cash Flows from Operating Activities 204 4.12.2 Cash Flows from Investing Activities 204 4.12.3 Cash Flows from Financing Activities 205 4.13 Proforma of Cash Flow Statement as Prescribed in AS-3 206 4.13.1 Proforma of Cash Flow Statement under Direct Method [Paragraph (a) Page II – 910] 206 4.13.2 Proforma of Cash Flow Statement under Indirect Method [Paragraph (b) Page II – 910] 206 4.14 Fundamental Differences Between Cash Flow Statement as per AS-3 and Traditional Method 207 4.15 Worked-out Problems 208 Chapter Review Summary 314 • Chapter Review Quiz 315 • Exercise 317

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Fund Flow Analysis 341 5.1 Meaning and Concept of Fund 341 5.2 Generally Accepted Concept of Fund 341 5.3 Meaning of Flow of Fund 342 5.4 What is Fund Flow Statement? 342 5.5 Importance or Purposes of Fund Flow Statement 342 5.6 Limitations of Fund Flow Statement 342 5.7 Proforma of Presentation of Fund Flow Statement 343 5.8 Different Sources of Fund 343 5.9 Different Applications of Fund 343 5.10 What is Fund from Operation? 343 5.11 Different Approaches of Computation of Fund from Operation 344 5.11.1 Direct Approach of Computation of Fund from Operation 344 5.11.2 Indirect Approach of Computation of Fund from Operation 344

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5.12 5.13 5.14 5.15

Is Depreciation a Source of Fund? 346 Comparison between Fund Flow Statement, Income Statement and Balance Sheet 347 Distinction between Fund Flow Statement and Cash Flow Statement 347 Worked-out Problems 348 Chapter Review Summary 405 • Chapter Review Quiz 406 • Exercise 407

6 Working Capital 420 6.1 Meaning and Concept of Working Capital 420 6.2 Importance of Working Capital 420 6.3 Need for Working Capital 420 6.4 Different Concepts and Classification of Working Capital 421 6.4.1 Classification of Working Capital on the Basis of Concept 421 6.4.2 Classification of Working Capital on the Basis of Time 422 6.5 Sources of Working Capital 422 6.5.1 Sources of Permanent Working Capital 422 6.5.2 Sources of Temporary Working Capital 422 6.6 Determinants of Working Capital 423 6.7 Components of Working Capital 423 6.8 Positive and Negative Working Capital 423 6.9 Working Capital or Operating Cycle 423 6.10 Estimation or Forecasting of Working Capital 424 6.11 Procedure for Estimation/Forecasting of Working Capital 424 6.12 Valuation of Stock of Work-In-Progress (WIP) 425 6.13 Different Approaches of Estimation/Forecasting of Working Capital 425 6.14 Worked-out Problems 427 Chapter Review Summary 459 • Chapter Review Quiz 460 • Exercise 460 7

Budget and Budgetary Control 467 7.1 Meaning of Budget 467 7.2 Meaning of Budgeting 467 7.3 Features of Budget 467 7.4 Budgetary Control 467 7.5 Objectives of Budgetary Control 468 7.6 Advantages of Budgetary Control 468 7.7 Limitations of Budgetary Control 468 7.8 Comparison between Budget and Budgetary Control 469 7.9 Comparison between Standard Costing and Budgetary Control 469 7.10 Zero-Based Budgeting (ZBB) 469

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7.11 Classification or Types of Budget 470 7.11.1 Classification on the Basis of Period 470 7.11.2 Classification on the Basis of Flexibility of Production 471 7.11.3 Classification on the Basis of Function or Coverage 471 Worked-out Problems 473 Chapter Review Summary 521 • Chapter Review Quiz 522 •

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8 Standard Costing and Variance Analysis 537 8.1 What is Standard Cost? 537 8.2 What is Standard Costing? 537 8.2.1 Features of Standard Costing 537 8.3 Preliminary Steps for Establishing Standard Costing System 538 8.4 Types of Standards 538 8.5 Distinction between Standard Cost, Estimated Cost and Actual/Historical Cost 538 8.6 Advantages of Standard Costing 538 8.7 Limitations of Standard Costing 539 8.8 Comparison between Standard Costing and Budgetary Control 539 8.9 Analysis of Variance 540 8.9.1 Direction of Variances 540 8.9.2 Nature of Variances 540 8.9.3 Purposes of Variance Analysis 540 8.10 Classification of Variances 541 8.10.1 Material Variances 541 8.10.2 Labour Variances 543 8.10.3 Variable Overhead Variances 544 8.10.4 Fixed Overhead Variances 546 8.10.5 Sales Value Variances 548 8.10.6 Sales Margin (Profit) Variances 549 8.11 Formulae of Various Variances at a Glance 551 8.12 Worked-out Problems 556 Chapter Review Summary 602 • Chapter Review Quiz 603 • Exercise 604 9

Absorption Costing and Variable Costing 9.1 Absorption Costing 615 9.2 Features of Absorption Costing 615 9.3 Advantages of Absorption Costing 616 9.4 Limitations of Absorption Costing 616 9.5 Variable Costing 616

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9.6 9.7 9.8 9.9

Features of Variable Costing 617 Advantages of Variable Costing 617 Limitations of Variable Costing 617 Income Determination under Absorption Costing and Variable Costing 618 9.9.1 Income Determination under Absorption Costing Technique 619 9.9.2 Income Determination under Variable Costing Technique 619 9.10 Distinction between Absorption Costing and Variable Costing 619 9.11 Worked-out Problems 620 Chapter Review Summary 627 • Chapter Review Quiz 628 • Exercise

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11

Marginal Costing and Cost–Volume–Profit Analysis 632 10.1 Concept of Marginal Cost 632 10.2 Definition of Marginal Costing 633 10.3 Features of Marginal Costing 633 10.4 Advantages of Marginal Costing 633 10.5 Limitations of Marginal Costing 634 10.6 Meaning of Cost–Volume–Profit (CVP) Analysis 634 10.7 Features of CVP Analysis 634 10.8 Objectives of CVP Analysis 634 10.9 Assumptions Underlying CVP Analysis 635 10.10 Classification of Cost Under CVP Analysis 635 10.11 Elements of CVP Analysis 635 10.12 Break-Even Analysis (BE Analysis) 640 10.13 Break-Even Chart (BE Chart) 640 10.13.1 Presentation of BE Chart 640 10.14 Angle of Incidence 641 10.15 Mathematical Representation of CVP Analysis 641 10.16 Different Formulae of CVP Analysis at a Glance 642 10.17 Worked-out Problems 644 Chapter Review Summary 689 • Chapter Review Quiz 691

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Exercise

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Decision Making 703 11.1 Concept of Decision Making 703 11.2 Steps in Decision Making 703 11.3 Cost Concepts in Decision Making 703 11.4 Concept of Relevant Cost and Relevant Revenue 704 11.5 Comparison of Differential Cost Analysis and Marginal Costing 705 11.6 Concept of Key or Limiting Factor 705 11.7 Different Situations of Decision Making 706 11.7.1 Determination of Most Profitable Product/Sales Mix 706

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11.7.2 Accept or Reject Decision 706 11.7.3 Make or Buy Decision 706 11.7.4 Operate or Shut-Down Decision 707 11.8 Worked-out Problems 707 Chapter Review Summary 732 • Chapter Review Quiz

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Capital Budgeting 743 12.1 Concept of Capital Budgeting 743 12.2 Features of Capital Budgeting 743 12.3 Importance of Capital Budgeting 744 12.4 Types of Investments 744 12.5 Types of Capital Budgeting Decisions 744 12.6 Evaluation Criteria of Capital Budgeting Decisions 745 12.7 Concept of Present Value (PV) 745 12.8 Determination of PV Factor or Discounting Factor 745 12.9 Concept of Discounted Cash Flow 745 12.10 Capital Budgeting Techniques 746 12.10.1 Non-discounted Techniques (Without Considering the Time Value of Money) 746 12.10.2 Discounted Cash Flow Techniques (Time-Adjusted Techniques) 747 12.11 Worked-out Problems 749 Chapter Review Summary 767 • Chapter Review Quiz 768 • Exercise 769

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Responsibility Accounting 775 13.1 Meaning and Concept of Responsibility Accounting 775 13.2 Prerequisites of Responsibility Accounting 776 13.3 Assumptions of Responsibility Accounting 776 13.4 Advantages or Benefits or Purposes of Responsibility Accounting 776 13.5 Limitations of Responsibility Accounting 777 13.6 Responsibility Centre 777 13.7 Types of Responsibility Centres 777 13.7.1 Cost Centre 777 13.7.2 Profit Centre 777 13.7.3 Investment Centre 778 13.8 Controllable and Non-controllable Costs 778 13.9 Responsibility Reporting 778 13.10 Types of Responsibility Reports 779 Chapter Review Summary 779 • Chapter Review Quiz 780 • Exercise 780 Appendix 783

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Preface I am delighted to introduce Management Accounting before the undergraduate students of commerce. This book covers the latest syllabi of B.Com. courses of almost all Indian universities. It presents conceptual and theoretical aspects of Management Accounting in a simple, lucid and comprehensive manner, together with a variety of problems, their solutions, and exercises. I have explained the fundamental aspects of the subject for beginners with mathematical examples. Every topic has been discussed from the basic level of the concept to the highest possible standard as permissible for students at this level. The highlight of the book is the pedagogical elements such as chapter review quiz and exercises at the end of every chapter. It also contains numerous theoretical questions and practical problems, so that students can assess their levels of performance. I firmly believe that this book will meet the varied requirements of students. My apologies for any error that might have crept into the book in spite of my best efforts. I assure you that I will amend any such errors, if any, at the earliest opportunity. I welcome suggestions for the improvement of the quality of the book and may be reached at [email protected]. I express my deepest sense of gratitude to innumerable teachers, friends and well-wishers who inspired me round the clock with their valuable guidance and suggestions. I express my gratitude to Anshul Yadav of Pearson Education (India), without whose constant support and cooperation this book would never have seen the light of day. I also express my indebtedness to Raza Khan, Praveen Tiwari and Barun Kumar Sarkar, also of Pearson Education (India), who extended their cooperation for the early publication of the book. My heartiest gratitude to Sarbani Roy Bhattacharyya and Archisman Bhattacharyya, without whose great sacrifice in my personal life this book would not have been possible. I believe that my honest endeavour will be amply rewarded if this book proves useful to students of all merits and qualities for whom it is intended.

Debarshi Bhattacharyya

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Introduction to Management Accounting

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LEARNING OBJECTIVES On completion of the study of the chapter, you should be able to understand: What is Management Accounting? Nature, scope, objectives, functions, utilities and limitations of Management Accounting. Tools and techniques of Management Accounting. Requisites for installation of Management Accounting System. Distinction between Management Accounting and Financial Accounting. Distinction between Management Accounting and Cost Accounting.

1.1 DEFINITION OF MANAGEMENT ACCOUNTING Management Accounting is that branch of accounting which deals with presenting and providing accounting information to the management in such a systematic way so that it can perform its managerial functions of planning, controlling and decision-making in an effective and efficient manner. It acts as a ‘decision-making support system’ to the management. Many distinguished accountants and accounting institutions have defined the term Management Accounting in different languages. Some of them are enumerated as follows: According to Robert N. Anthony, ‘Management Accounting is concerned with accounting information which is useful to the management’. ‘Management Accounting is a term used to describe the accounting methods, system and techniques which, coupled with special knowledge and ability, assists management in its task of maximizing profits or minimizing losses’, according to J. Batty. As per Institute of Cost and Works Accountants of India (ICWAI), ‘Management Accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making’. According to American Accounting Association (AAA), ‘Management Accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of an entry to assist management in establishing plans for reasonable economic objectives in the making of rational decisions with a view towards these objectives’. As per Certified Institute of Management Accountants (CIMA), United Kingdom, ‘Management Accounting is an integral part of management concerned with identifying, presenting and interpreting information used for formulating strategy, planning and controlling activities, decision-making, optimizing the use of resources, disclosure to shareholders and other external to the entity, disclosure to employees, and safeguarding assets’. Analysing the above definitions, it can be concluded that Management Accounting is concerned with collection of data from both internal as well as external sources and communication of relevant information to the management, after processing, analysing and interpreting those, to perform its managerial functions of planning, controlling and decision-making in an effective and efficient manner.

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1.2 NATURE OR FEATURES OF MANAGEMENT ACCOUNTING Management Accounting is basically the most effective tool to the management for the purpose of its planning, controlling and decision-making. Various distinguished nature or features of Management Accounting are discussed as follows: i. Management Accounting deals with the collection of accounting and other data, and it analyses, interprets and communicates all relevant information to the management which are effectively required for planning, controlling and decision-making for the organization. Hence, in a nutshell, one of the most important nature of Management Accounting is to analyse and interpret accounting and other data to make them understandable and usable to the management. ii. It interprets the analysed data as obtained from the operational and non-operational activities of the enterprise and makes necessary comments and conclusions on them. iii. It provides necessary information to the management to judge the effectiveness of its managerial functions. iv. It provides necessary information to the management to perform its managerial functions of decisionmaking, planning and controlling. v. It provides necessary information to the management to review whether the performance of the enterprise has been achieved towards its goals and objectives. vi. It acts as a yardstick for measuring the level of performance of the operational and non-operational activities of the enterprise. vii. It serves as a yardstick for measuring the effectiveness of managerial performance of the different activities of the enterprise. viii. It is a forward-looking tool to the management. It analyses and interprets historical data for projecting the future trends of the different activities of the enterprise. ix. It prepares necessary plans to implement various financial decisions of the management. It also develops a system of feedback reporting and monitoring performance against the plan of the management. 1.3 SCOPE OF MANAGEMENT ACCOUNTING Management Accounting has a very widespread scope. It covers a very wide area of accounting system, which is discussed as follows: i. Financial Accounting: Financial Accounting provides the basic historical data to the Management Accounting which analyses and interprets those data and provides necessary information to the management for its planning, controlling and decision-making. As Management Accounting does not maintain the basic financial records, the success of an effective and efficient Management Accounting System depends on the existence of an effective Financial Accounting System. Therefore, Management Accounting System can be introduced into an organization where there exists a well-designed Financial Accounting System. Management Accounting applies the principles and practices of Financial Accounting. ii. Cost Accounting: On the one hand, Cost Accounting provides cost-related basic data to the Management Accounting, which analyses and interprets those costing data and provides necessary information to the management for the purpose of its controlling and decision-making. On the other hand, most of the Cost Accounting techniques like Standard Costing, Budgetary Control, Marginal Costing, Cost–Volume–Profit (CVP) Analysis, Differential Cost Analysis and Inventory Controlling, are used by Management Accounting in its process of planning, controlling and decision-making. Management Accounting uses the principles and practices of Cost Accounting. iii. Forecasting and budgeting: Management Accounting exercises the tool of forecasting and budgeting in the process of planning, controlling and decision-making. Forecasting makes an estimate of the probable event with a set of given or assumed information. Budgeting prepares a number of plans for any future project by setting definite goals. Forecasting helps to prepare the budget and budgeting

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helps to exercise the budgetary control technique on future projects. Both these tools are frequently used in Management Accounting. Statistical tools: Various statistical tools like graphs, charts, diagrams, time series, sampling, index numbers and Regression Analysis are used in Management Accounting in the process of planning, controlling and decision-making. Operational research techniques: Various operational research techniques like Linear Programming, Transportation Theory, Games Theory and Simulation Method are used in Management Accounting to resolve various problems prevailing under the existing situation in the process of decision-making. Financial analysis and interpretation: Various financial analysis techniques such as Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, Comparative Financial Statement, Common-Size Statement and Trend Analysis are widely used in Management Accounting to analyse and interpret financial data to make them easily understandable and useable to the management. Successful application of Management Accounting depends a lot on these financial analysis and interpretation works. Tax accounting and tax planning: Determination of taxable income and tax liability of the enterprise fall within the purview of the Management Accounting. In the process of decision-making, the analysis of implication of tax provisions on future projects also falls within the purview of Management Accounting. On the other hand, the management accountant must have a vast knowledge of tax laws and their accounting procedures, and also tax planning, to minimize the tax burden of the enterprise. Management Information System (MIS): Management Information System (MIS) is a modern computerized information system, by which accurate processing and analysis of a large volume of data can be done within a very short time. This information system is used in Management Accounting to provide necessary and relevant information to the management in the process of its planning, controlling and decision-making. Internal control and internal audit: Management Accounting highly depends on internal control system existing in the organization, like internal check and internal audit, to appraise the targeted performance and to identify the weaker area of the organization. Office system: Management Accounting System should also be well conversant with the modern office management system like filing, indexing, copying, electronic data processing, information network system, and email and fax system. Legal provisions: Management Accounting System should also be well informed about relevant and necessary legal provisions like Companies Act, Foreign Exchange Act, Securities Act, and Direct and Indirect Tax Laws. In the process of decision-making, management accountants should restrict their plan and action within the periphery of such legal provisions. Other areas: Apart from the aforementioned areas, Management Accounting also includes various newly developed areas of accounting like Human Resource Accounting, Social Accounting, Environmental Accounting and Inflation Accounting, within the purview of its scope.

1.4 OBJECTIVES OF MANAGEMENT ACCOUNTING The prime objective of Management Accounting is to provide necessary information to the management for an effective and efficient execution of managerial functions. Various objectives of Management Accounting are enumerated as follows: i. Analysis and interpretation of financial statements: Management Accounting collects, analyses and interprets the necessary data from the results shown by the Financial and Cost Accounting System, and also provides necessary and relevant information to the management in a systematic and useful manner which are to be applied by the management in the process of its planning, controlling and decision-making. Various tools like Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, Comparative

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Financial Statement, Common-Size Statement and Trend Analysis are widely used in Management Accounting for analysing and interpreting those data so as to make them easily understandable and useable to the management. Planning and policy-making: Management Accounting provides necessary and relevant information to the management in the process of its planning and policy-making to achieve organizational goals. Various statistical forecasting techniques like Time-Series Analysis and Regression Analysis are used in Management Accounting to guide proper planning and policy-making. Decision-making: Management Accounting provides necessary and relevant information to the management in the process of its decision-making. The success of the management highly depends upon a perfect decision-making. Such decision-making broadly depends on the effectiveness of information network. Management Accounting provides the above information to the management by applying Marginal Costing Technique, Differential Costing Technique and Absorption Costing Technique, for an effective and accurate decision-making. Controlling: Management Accounting applies various useful techniques such as Standard Costing, Budgetary Control, Responsibility Accounting and Management Audit, to ensure an effective managerial control over the use of resources of the enterprise. Management control is a control system which assures that the resources of the enterprise are effectively and efficiently used for achieving its goals and objectives. Management Accounting plays a significant role to the management in ensuring the existence of a proper managerial control system. Communicating: Proper communication of the performance of various sections of an enterprise to different levels of management is essentially required for planning, controlling and decision-making. Management Accounting does such communication by preparing reports of performance of various sections of the enterprise with the help of management information system. Coordinating: Management Accounting helps in coordinating various business activities of an enterprise. Its techniques of planning make a very good coordination between various activities of a concern. A master budget of the concern for a given period is prepared through coordination between various business activities of the concern. Proper reporting of different business activities are also made through coordination between various sections of the enterprise. Tax planning: Determination of tax liability of the enterprise after availing various tax rebates and reliefs falls within the purview of Management Accounting System. Management Accounting helps the management in the process of tax planning by availing various tax rebates and reliefs and, thus, reduces the burden of tax of the enterprise, on the whole. Advisory Service: Management Accounting renders valuable advice to the management for resolving any financial or other problems of the enterprise. To overcome any existing financial and other problems, various Management Accounting techniques are applied according to the nature of the problem. Management Accounting also plays a very important role as an advisor to the management.

1.5 ROLE OR FUNCTIONS OF MANAGEMENT ACCOUNTING The function of Management Accounting is to assist the management to perform its functions of planning, organizing, directing, controlling and decision-making. The major functions of Management Accounting are as follows: i. Collection of data: Management Accounting does not maintain records of financial and cost data but it collects the basic financial data mainly from the records as maintained by financial and Cost Accounting for the purpose of preparing plans and actions of the management. ii. Supply of modified data: It modifies the collected raw data by classifying and compiling them for making them suitable for the purpose of their analysis and interpretation. It extracts the necessary and effective information from those basic data for the purpose of their analysis and interpretation.

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iii. Analysis and interpretation of data: It analyses and interprets those modified data and extracts the necessary and effective information for making them understandable and useable to the management in the process of its planning, controlling and decision-making. After analysing and interpreting all those data, it presents the results with necessary comments to the management. iv. Planning and forecasting: It formulates some definite plans for implementing policies of the management. It helps the management for formulating different short- and long-term policies by providing necessary and relevant information in relation thereto. In the process of formulating policies and for their proper execution, it makes the forecasting of some probable future happenings. v. Communication: It provides a means of communicating plans and actions of the management over all areas of activities of the organization. It provides necessary and relevant information to all levels of management. vi. Ensuring control: It ensures a control over the performance of different sections of an enterprise. It uses various techniques like Budgetary Control, Standard Costing and Responsibility Accounting, and to identify the weaker areas of performance of activity and suggests appropriate remedial measures to overcome the prevailing problems. vii. Helping in decision-making: It helps the management in the process of its effective decision-making by providing necessary and relevant information in the relation thereto. viii. Performance evaluation: It evaluates the performance of activities of different divisions as well as the business as a whole of an enterprise by using its various tools and techniques. ix. Preparation of reports: It prepares reports of performances of different activities of the enterprise and provides to the management on regular intervals. These managerial reports are prepared as per the requirement of the management. 1.6 UTILITY OF MANAGEMENT ACCOUNTING Management Accounting provides very valuable services to the management in the course of its functioning. Different utilities of Management Accounting are discussed as follows: i. Planning: It formulates policies and programmes by setting definite goals and prepares a systematic plan for achieving these goals. It makes such plans for achieving organizational goals and targets. ii. Controlling: It plays a most significant role in the process of controlling. Management Accounting, in the process of controlling, involves framing of budgets, comparison of actual results with budgeted estimates, ascertainment of any deviation of actual results from budgeted estimates by computation of variances and adoption of necessary remedial measures against such deviation. iii. Coordinating: It plays the most vital role in the process of coordinating of different divisions of an enterprise. Its techniques of planning make a very good coordination between the various activities of a concern. Proper reporting of different business activities are also made by Management Accounting through coordination between the various sections of the enterprise. iv. Performance Evaluation: It plays a very important role in the process of evaluation of performance of the different activities of an enterprise. It evaluates the performances of different divisions and employees of the organization by comparing the target estimates with the actual performances of the divisions and employees. v. Organizing: It plays an important role in the process of organizing of the different activities of an enterprise. It divides the whole organization into suitable cost or profit centres. A sound system of internal control and internal audit is assigned to each cost or profit centre for ensuring a planned organizing system. vi. Motivating: It helps the management in the process of motivating the employees by setting various targets to achieve the organizational goals.

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vii. Communicating: It communicates the performances of the various divisions and employees of the enterprise with the help of the management information system to the different levels of its management by preparing reports of performance of those sections and employees of the enterprise. Such communication is essentially required for planning, controlling and decision-making of the enterprise. viii. Decision-making: It plays the most important role in the process of decision-making of a concern. The success of the management highly depends upon the perfect decision-making and such decisionmaking broadly depends on the effectiveness of information network. It provides necessary and relevant information to the management for effective and accurate decision-making. 1.7 LIMITATIONS OF MANAGEMENT ACCOUNTING Despite the fact that Management Accounting acts as a very useful tool to the management in the process of performing its managerial functions, it suffers from the following limitations: i. Reliance on accounting data: Management Accounting collects the basic data mainly from the records as maintained by financial and Cost Accounting. Hence, it starts to work on the basis of the data as supplied by the other branches of accounting. If those basic data are incorrect, then the entire effort of the management accountant becomes useless. ii. Based on historical data: It guides the management in the process of decision-making for the future activities on the basis of the historical data as supplied by Financial Accounting and Cost Accounting. Therefore, Management Accounting uses historical data for making future decisions, which may not always result in a correct decision. iii. Wide scope: It covers a very vast area and also includes a number of related fields such as Financial Accounting, Cost Accounting, Statistics, Operational Research, Law and Economics, to become more effective to the management. It is really very difficult to develop such a Management Accounting System where all the related people are not well-equipped with full knowledge of all these related areas. iv. Highly expensive: The installation of a sound Management Accounting System in a concern is highly expensive as it essentially requires a wide network of management information system. Moreover, the operating expense of the Management Accounting department is also very high. As a result, small concerns generally cannot afford to install this system. v. Complicated application: It is such a system where a number of different tools and techniques are applied. It also uses a number of accounting and non-accounting subjects for analysis and interpretation of data. Accordingly, its proper application is really complicated when compared to other branches of accounting. A management accountant may try to avoid such a complicated approach of decision-making. vi. Lack of objectivity: It uses both quantitative as well as qualitative data for analysis and interpretation, and also prepares reports on the basis of such interpretation. The interpretation of information as provided by Management Accounting in the form of reports may be influenced by a personal bias of the interpreter, which may reduce the utility of Management Accounting. vii. Not a substitute of management: It merely provides necessary and relevant information to the management to perform their managerial functions of planning, controlling and decision-making in an effective and efficient manner, but certainly is not a substitute for the management itself. It acts only as a decision-making tool to assist the management, but cannot take the ultimate decision on its own. viii. Developing stage: It is still in its developing stage as it is relatively a recent area in the field of accounting. It follows some concepts and conventions which are not yet generally accepted. Many experiments have been still in progress on this area of accounting.

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1.8 TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING Management Accounting uses various tools and techniques for providing necessary and effective information to the management for performing its managerial functions. Various tools and techniques that are commonly used in Management Accounting are discussed as follows: i. Financial Statement Analysis: It is a methodical and systematic analysis and interpretation of the data as disclosed in the balance sheet and income statement with a view to extra