UNIT – 1

INTRODUCTION OF MANAGEMENT ACCOUNTING

KEY WORDS

Accounting framework includes generally accepted accounting principles (GAAP) or the basis of which accounting data is processed, analysed and reported.

Accounting theory is a set of inter-related principles and propositions which provide a general frame work for accounting practice and deal with new developments in the area.

Consistency concept envisages that accounting information should be prepared on a consistent basis form period of period, and within periods there should be consistent treatment of similar items.

Conservatism concept forbids the inclusion of unrealised gains but advocates provi-sion for possible losses.

Entity concept separates the business from owner(s), from the standpoint of accounting.

Going concern concept refers to the expectation that the organisation will have indefinite life. This assumption has an important bearing on how the assets are to be valued.

Materiality concept admonishes that events of relatively small importance need not be given a detailed or theoretically correct treatment. They may be ignored for separate recording.

Money measurement concept ignores intangibles like employee loyalty and customer satisfaction as they cannot be expressed in money terms. It also assumes records on the basis of a stable monetary unit.

Objectivity principle requires that only the information based on definite and verifi-able facts be recorded.

INTRODUCTION

Accounting denotes any and every accounting techniques which may be helpful to management

in discharging its functions, viz., planning, controlling, co-coordinating, decision making,

budgeting, etc.

Accounting Concept:

(1) Entity Concept: according this concept business is treated as a Separate Entity it is different from its owners, creditors, managers. Owners are also treated as creditors of the organization. (2) Dual Aspect Concept: Every Transaction has a two sides (a) Debit side(B) Credit side (3) Going Concern Concept: this concept assume that business will continue to exist for the long run. (4) Accounting Period Concept: Financial year

(5) Money Measurement Concept: In Management Accounting only those transaction & events are included which are capable of being expressed in the terms of money. (6) Cost Concept: value of assets is calculated on the basis of acquisition cost. (7) Matching Concept: the determination of profit of a particulars accounting period is essentially a process of matching the revenue recognised during the period and the cost to be allocated to the period to obtain the revenue. (8) Accrual Concept: this concept is concerned with the period in which the revenues and expenses are to be related. (9) Verifiable & objective: this concept means all the transaction that are recorded in the books of accounts should be proved true or genuine.

Accounting Rules

Personal Accounts: Related to individual, Firm, Company, or an institution.(Ram, Mohan ,Capital a/c, Debtors, creditors a/c)

(A) Natural personal a/c : means Accounts of human being (B) Artificial a/c: these do not have physical existence but they work as personal account. (C) Representative a/c : when account represent a particular person or group of person .

Real Account: These account related to those entire thing whose value can be measured in the terms of money and those are the properties of the business. These account also divided into the two parts (tangible) & (intangible) (Cash a/c, furniture account, goodwill a/c)

Nominal Account: These accounts related to income and expenses.( rent paid, salary paid , bad debts)

CREDIT RULES Account name Debit Credit Personal Account

receiver giver

Real Account What comes in What goes out Nominal Account The expenses& looses Incomes &gains

MANAGEMENT ACCOUNTING

Management accounting as defined by management Team of ANGLO-AMERICAN

COUNCIL ON PRODUCTIVITY “The presentation of accounting information in such a way as

to assist management in creation of policy and in day to day operation of an undertaking”.

“Management Accounting is the term used to describe the accounting methods, systems

and techniques which coupled with special knowledge and ability, assist management in the task

of maximizing profits or minimizing losses. Management Accounting is the blending together

into a coherent whole financial accounting, cost accounting and all aspects of financial

management”.

– J. Batty

Management Accounting may be defined as the application of accounting and statistical

techniques to the specific purpose of producing and interpreting information designed to assist

management in its functions of promoting maximum efficiency and in envisaging, formulating

and co-coordinating future plans and subsequently in measuring their execution”.

Association of Certified and corporate Accounts of U. K.

According to T. G. Rose - Management Accounting is the system of collecting

classifying, analyzing and interpreting of accounting information in such a way so as to assist the

management in its smooth functioning.

The nature and functions of management accounting are very clearly mentioned in al

above definitions. Management Accounting is a service functions which provides information for

managerial decisions and reviewing their implementation Management Accounting involves

application of special techniques and concepts. It does not only and management in formulating

plans and making decisions but also assist in setting of goals and in the evaluation of alternative

objectives.

Objectives of Management Accounting:

Management Accounting is not a new form of accounting but is a new approach to the

function of accounting.

(1) Making available statistical accounting and costing information and data for use in process of planning. Management Accountant collects, arranges, classifies analysis and interprets the data with a view to assist management in policy formulation and planning.

(2) This system prepares necessary reports to be helpful to management for long term policy formulation and decision making.

(3) With the use of various techniques like Budgetary control CVP analysis, Fund Flow Analysis, Ratio Analysis, Cash Flow Analysis, this system helps management for proper solution of problem.

(4) It analysis and interprets the data and prepares reports for different levels of management to give proper direction to each department/section to achieve its goal/objectives surely and smoothly.

(5) It also helps to evaluate the capital expenditure projects and to decide the best and most profitable project.

(6) Management Accounting aids to prepare various Budgets like production Budget, Purchase Budget, Sales Budget, Material Budget, Master Budget, etc. It provides necessary data and statistical information for preparing budget.

(7) It also helps in planning function by providing necessary information and data for long term and short term forecasting and for future activities.

(8) It also helps management in its control function by its various means. It aids to install integrated and effective structure of control of various activities at different levels.

Management Accountancy is in short a combination of Management and Accountancy functions. The function of traditional accountant was the post-mortem analysis of the past activity, whereas that of a management accountant is to provide tools for drawing the clear picture for future. The management accountant so presents the accounting data before management that it forms a base for policy decisions. In other words, the management accountant assists management in planning future course of action. The function of a traditional accountant is like drawing a log-chart of a ship showing the route over which the ship has traveled. The function of the management accountant resembles that of a navigating officer who charts out the route over which the ship would move in future.

The management accountant discharges his function by presenting the accounting data in the form of reports, on the basis of which the management can take corrective action without delay, if necessary.

Characteristics of Management Accountancy :From the above definitions, the characteristics of Management Accountancy can be stated

as follows :

(1) It is an accounting system which is helpful to the management in taking important business decisions.

(2) It is based on accounting information. It starts working only after the accounting work is over.

(3) It is concerned with analysis of all accounting information which may be useful to the management.

(4) It is concerned with preparation of budgets and budgetary control.(5) it presents accounting information in such a any where in the actual performance is compared

with standards as laid down in budgets.(6) It is concerned with presentation of accounting information at regular intervals in the form of

reports before the management.

Scope of Management Accounting :As we have seen, management accountancy is concerned with presenting accounting

information to the management in such a way that in becomes useful to management in taking important decisions. This prescribes the scope of management accountancy as follows :

(1) Financial Accounting : In fact, management accountancy is based on financial accounting, because, it is the presentation of information from financial accounting to the management. Thus without financial accounting, the management s not able to control the working of the business.

(2) Cost Accounting : Management accountancy makes use of modern costing systems such as standard costing, marginal costing, opportunity costs, differential cost, budgetary control etc. Without the use of these system the management accountancy is incomplete. It is due to these methods that management is able to control the performance of business enterprise.

(3) Budgetary Control : Budgetary control system is an integral part of management accountancy. It includes preparing various budgets, comparing actual performance with budgeted figures, compute the variances and control them or task necessary corrective steps.

(4) Inventory Control : to control business activities, it is very much necessary to control inventory. Hence, management accountancy includes inventory control.

(5) Replacement Accounts : In order to maintain capital of business in facts it is essential that account must be prepared on the basis of replacement value of assets, i.e. profit must be calculated keeping in view the replacement values.

(6) Interim Reports : Reporting is an integral part of management accounting. The accountant must present reports before the management at regular intervals which includes monthly, quarterly or six monthly financial statements, cash-flow and fund-flow statements etc.

(7) Statistical Methods : In the presentation of accounting information before the management, the statistical techniques of charts, graphs, pictorials, index numbers etc. are used on large scale, because that makes the accounting data more intelligible and more meaningful.

(8) Taxation : The taxation is more important in accounts than any other matter, because, the divisible profit depends on it. Hence, management accountancy covers in its scope the presentation of effects of taxation on accounts and profit, filing of tax return, payment of taxes etc.

(9) Office Services : Office services are essential for presenting accounting information’s before management. This includes collection of proper data, preparing information required by processing data, use of mechanical and electronic devices etc.

(10) Internal Audit : For self control of business internal audit is required so that it can be known whether the business activities are going on as planned and the malpractice or irregularities may be brought to the notice of management.

Functions of Management Accountancy :The management accountancy performs the following functions in a business enterprise :

(1) Formulating budgets : The budgets are the bases, which are used to control the business activities by the management. It is the job of management accountant to prepare various budgets. Preparing sales budget on the basis of past figures of sales and intelligent forecasting, preparing production budget on the basis of sales forecasts and production facilities available, formulating material, labour and overhead budgets, preparing cash budget, capital budget, etc. This requires determining business objectives, selecting proper strategy for achieving the objectives.

(2) Classification and arrangement of data : The accounting data has to be classified and properly arranged for presentation before the management. E.g. figures of purchase and sales product-wise, region-wise and period-wise have to be arranged in a proper form. The formats of regular reports must be prepared in advance, so that they may be presented regularly before management as per their requirements.

(3) Presentation and Interpretation of Accounting Data : The accounting data must be presented before the management in its proper perspective, so that it becomes meaningful. The interpretation of accounting data by means of accounting ratios, cash flow statements, charts, graphs etc. must be made so that he attention of management is drawn to those weak points which needs the attention of management. It leads to management by exception.

(4) Routine Reports and Special Reports : The management accountant is required to present two types of reports before the management : Routine reports and Special reports. When some important change is to be made in the business, the management accountant is called upon to present a special report on the effects of such change on profits and financial position. E.g. if a new machine costing Rs.50 lakhs is to be installed for replacing an old machine, then its effects on profit, cash flow, financial position, the source of getting finance etc. has to be calculated and a special report thereon has to be presented by the management accountant.

Secondly, weekly, monthly or quarterly routine reports are to be presented before various

levels of management e.g. daily report of consumption of material and labour cost prepared

by the foremen and to be presented before production management etc.

(5) Making management control effective : The top management can not pay attention to minute details of everything that is going on in the business. Hence, their attention must be drawn to these activities only which are not proceeding as planned. This is called ‘Management by exception, This will save a lot of time and tension of the top management. It is the responsibility of the management accountant to interpret the accounting data and draw the attention to only such activities.

(6) Assisting in Evaluation of Capital Projects : Capital projects like replacement of old machines by new machines, scheme for expansion of business, etc. involve considerably large amounts of capital expenditure. The management accountant is called upon to evaluate such projects in terms of profitability requirements of additional funds, the sources from which they can be obtained etc. Alternative projects are compared and evaluated and management accountant helps in selecting one project.

Difference between Management Accounting and Financial Accounting :The basis of management accountancy is still financial accounting which provides basic

data to he former. However, they differ in the fundamental objective. The financial accounting prepares Profit and Loss Account disclosing the results of year’s trading and a Balance Sheet exhibiting financial position of the business. The management accounting on the other hand, is concerned with analysis and interpretation of accounting data for the use of management. The former is meant for outsiders, whereas the latter is prepared for internal use. The major points of difference are summarised below :

Difference between Financial Accounting system and Management Accounting system:

PointsFinancial A/c system Management A/c system

(1) Objective: Main objective of this accounting is to provide information regarding Profit/Loss financial position of the company to shareholders, creditor Govt. etc.

Main objective of this accounting is to assist management in its function of policy formulation, decision making, planning, etc.

(2) Period of Time:

Presents financial accounts at the end of accounting year. Present accounting data for past year.

Presents accounting statements, Reports during the year as per requirement and indicates future trends.

(3) Presentation: Final accounts and audit reports are presented to shareholders in Annual General Meeting.

Various statements and reports are presented to Management, Board of directors.

(4) Accuracy: Financial Accounting always records and shows actual figures of income and expenditure.

Management Accounting reports and shows estimates indicating future trends.

(5) Audit necessary:

As per provision of Companies Act, 1956, audit of Financial Accounts is

Reports and statements prepared by this accounting have not to be audited. Audit

compulsory. is not a necessity.

(6) Utility: Useful for shareholders, Debenture holders, creditors Bankers, Investors, etc.

Useful to Management/Board of directors/ Top management officials.

(7) Subject Knowledge:

Requires knowledge of accountancy only.

Requires knowledge of accountancy, cost accountancy, Maths, Statistics, Economics.

(8) Main features:

Its main characteristics is to prepare and maintain proper account especially preparation of P & L A/c and Balance sheet.

Its main feature is to assist management in long term policy formulation and decision making process and for these purposes, reports and statements are prepared and presented.

(9) Scope: Scope of Financial A/c is limited. It only records the financial transaction done during the accounting period.

Scope of Management A/c is wider. Which not only records financial transactions but also consider non-financial transacting And from these data prepares reports to indicate future trends.

Difference between Cost Accounting & Management:Following differences are there between Cost accounting and Management accounting

system:

Points of difference

Cost Accounting System Management Accounting System

1.

Presentation of information

In these accounts only information regarding cost, cost audit, cost reduction etc. are produced.

In these accounts information regarding accounts, cost accounts, Human resources, Economic and business environment etc. are presented.

2. Scope Scope of this accounting system is limited because it deals with cost related matters only.

Scope of this accounting system is very wide in comparison with the scope of cost accounting.

3. Relation To ascertain cost, cost control and cost audit are main area related with cost A/c and cost records are kept for this purpose.

While management A/c system thinks for the policy formulation and planning matters. Management A/c is futuristic in its approach.

4. Use of information and data

Information provided by this accounting system becomes the basic information for Management A/c system.

With the help of information of cost accounts and other relevant information prepares reports and statement indicating future trends.

5. Place of Accountant

The place of cost accountant is lower cadre than Management A/c.

The place of Management accountant is in senior cadre than Cost Accountant.

6. Tax planning

Cost accounting does not include financial accounting and tax planning.

Management accounting includes both cost account and financial account and also tax planning.

7. Installation Cost accounting system can be installed without management accounting.

Management accounting system cannot be installed without a proper cost accounting system.

8. Planning factor

Cost accounting is more concerned with short term, planning and decisions.

Management accounting is concerned with short term as well as long term planning and decision.

9. Time element

Most probably cost records are prepared for related accounting period – i.e., for one year or one month, etc.

Reports and statements of Management A/c system are prepared whenever required. There is no definite period for it.

10. Function Cost accounting is concerned with assisting the management functions.

Management accounting system is concerned both with assisting managements in its function as well as evaluating the performance of management.

The 10 Worst Corporate Accounting Scandals of All Time

If there is one theme to rival terrorism for defining the last decade-and-a-half, it would have to be corporate greed and malfeasance. Many of the biggest corporate accounting scandals in history happened during that time. Here's a chronological look back at some of the worst examples.

Waste Management Scandal (1998)

Company: Houston-based publicly traded waste management company What happened: Reported $1.7 billion in fake earnings. Main players: Founder/CEO/Chairman Dean L. Buntrock and other top

executives; Arthur Andersen Company (auditors) How they did it: The company allegedly falsely increased the depreciation time

length for their property, plant and equipment on the balance sheets. How they got caught: A new CEO and management team went through the

books. Penalties: Settled a shareholder class-action suit for $457 million. SEC fined

ArthurAndersen $7 million. Fun fact: After the scandal, new CEO A. Maurice Meyers set up an anonymous

company hotline where employees could report dishonest or improper behavior.

Enron Scandal (2001)

Company: Houston-based commodities, energy and service corporation What happened: Shareholders lost $74 billion, thousands of employees and

investors lost their retirement accounts, and many employees lost their jobs. Main players: CEO Jeff Skilling and former CEO Ken Lay. How they did it: Kept huge debts off balance sheets. How they got caught: Turned in by internal whistleblower Sherron Watkins;

high stock prices fueled external suspicions. Penalties: Lay died before serving time; Skilling got 24 years in prison. The

company filed for bankruptcy. Arthur Andersen was found guilty of fudging Enron's accounts.

Fun fact: Fortune Magazine named Enron "America's Most Innovative Company" 6 years in a row prior to the scandal.

WorldCom Scandal (2002)

Company: Telecommunications company; now MCI, Inc. What happened: Inflated assets by as much as $11 billion, leading to 30,000

lost jobs and $180 billion in losses for investors. Main player: CEO Bernie Ebbers How he did it: Underreported line costs by capitalizing rather than expensing

and inflated revenues with fake accounting entries. How he got caught: WorldCom's internal auditing department uncovered $3.8

billion of fraud. Penalties: CFO was fired, controller resigned, and the company filed for

bankruptcy. Ebbers sentenced to 25 years for fraud, conspiracy and filing false documents with regulators.

Fun fact: Within weeks of the scandal, Congress passed the Sarbanes-Oxley Act, introducing the most sweeping set of new business regulations since the 1930s.

Tyco Scandal (2002)

Company: New Jersey-based blue-chip Swiss security systems. What happened: CEO and CFO stole $150 million and inflated company

income by $500 million. Main players: CEO Dennis Kozlowski and former CFO Mark Swartz. How they did it: Siphoned money through unapproved loans and fraudulent

stock sales. Money was smuggled out of company disguised as executive bonuses or benefits.

How they got caught: SEC and Manhattan D.A. investigations uncovered questionable accounting practices, including large loans made to Kozlowski that were then forgiven.

Penalties: Kozlowski and Swartz were sentenced to 8-25 years in prison. A class-action lawsuit forced Tyco to pay $2.92 billion to investors.

Fun fact: At the height of the scandal Kozlowski threw a $2 million birthday party for his wife on a Mediterranean island, complete with a Jimmy Buffet performance.

HealthSouth Scandal (2003)

Company: Largest publicly traded health care company in the U.S. What happened: Earnings numbers were allegedly inflated $1.4 billion to meet

stockholder expectations.

Main player: CEO Richard Scrushy. How he did it: Allegedly told underlings to make up numbers and transactions

from 1996-2003. How he got caught: Sold $75 million in stock a day before the company posted

a huge loss, triggering SEC suspicions. Penalties: Scrushy was acquitted of all 36 counts of accounting fraud, but

convicted of bribing the governor of Alabama, leading to a 7-year prison sentence.

Fun fact: Scrushy now works as a motivational speaker and maintains his innocence.

Freddie Mac (2003)

Company: Federally backed mortgage-financing giant. What happened: $5 billion in earnings were misstated. Main players: President/COO David Glenn, Chairman/CEO Leland Brendsel, ex-

CFO Vaughn Clarke, former senior VPs Robert Dean and Nazir Dossani. How they did it: Intentionally misstated and understated earnings on the

books. How they got caught: An SEC investigation. Penalties: $125 million in fines and the firing of Glenn, Clarke and Brendsel. Fun fact: 1 year later, the other federally backed mortgage financing company,

Fannie Mae, was caught in an equally stunning accounting scandal.

American International Group (AIG) Scandal (2005)

Company: Multinational insurance corporation. What happened: Massive accounting fraud to the tune of $3.9 billion was

alleged, along with bid-rigging and stock price manipulation. Main player: CEO Hank Greenberg. How he did it: Allegedly booked loans as revenue, steered clients to insurers

with whom AIG had payoff agreements, and told traders to inflate AIG stock price.

How he got caught: SEC regulator investigations, possibly tipped off by a whistleblower.

Penalties: Settled with the SEC for $10 million in 2003 and $1.64 billion in 2006, with a Louisiana pension fund for $115 million, and with 3 Ohio pension funds for $725 million. Greenberg was fired, but has faced no criminal charges.

Fun fact: After posting the largest quarterly corporate loss in history in 2008 ($61.7 billion) and getting bailed out with taxpayer dollars, AIG execs rewarded themselves with over $165 million in bonuses.

Lehman Brothers Scandal (2008)

Company: Global financial services firm. What happened: Hid over $50 billion in loans disguised as sales. Main players: Lehman executives and the company's auditors, Ernst & Young. How they did it: Allegedly sold toxic assets to Cayman Island banks with the

understanding that they would be bought back eventually. Created the impression Lehman had $50 billion more cash and $50 billion less in toxic assets than it really did.

How they got caught: Went bankrupt. Penalties: Forced into the largest bankruptcy in U.S. history. SEC didn't

prosecute due to lack of evidence. Fun fact: In 2007 Lehman Brothers was ranked the #1 "Most Admired

Securities Firm" by Fortune Magazine.

Bernie Madoff Scandal (2008)

Company: Bernard L. Madoff Investment Securities LLC was a Wall Street investment firm founded by Madoff.

What happened: Tricked investors out of $64.8 billion through the largest Ponzi scheme in history.

Main players: Bernie Madoff, his accountant, David Friehling, and Frank DiPascalli.

How they did it: Investors were paid returns out of their own money or that of other investors rather than from profits.

How they got caught: Madoff told his sons about his scheme and they reported him to the SEC. He was arrested the next day.

Penalties: 150 years in prison for Madoff + $170 billion restitution. Prison time for Friehling and DiPascalli.

Fun fact: Madoff's fraud was revealed just months after the 2008 U.S. financial collapse.

Satyam Scandal (2009)

Company: Indian IT services and back-office accounting firm. What happened: Falsely boosted revenue by $1.5 billion.

Main player: Founder/Chairman Ramalinga Raju. How he did it: Falsified revenues, margins and cash balances to the tune of 50

billion rupees. How he got caught: Admitted the fraud in a letter to the company's board of

directors. Penalties: Raju and his brother charged with breach of trust, conspiracy,

cheating and falsification of records. Released after the Central Bureau of Investigation failed to file charges on time.

Fun fact: In 2011 Ramalinga Raju's wife published a book of his existentialist, free-verse poetry