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BBA Management Accounting Introduction to Management

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BBA Management Accounting Introduction to Management : Page 1

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BBA Management Accounting Introduction to Management
BBA Management Accounting Introduction to Management

Introduction to Management Accounting

Learning objectives

After studying this Post, you are able to understand:

  • External And Internal Influences On Business Enterprise
  • Definition And Scope Of Management Accounting
  • Functions Of Management Accounting
  • Role Of Management Accountant
  • Management Accounting And Financial Accounting: Distinction

Bba Management Accounting Introduction to Management Accounting


During the last decade many changes have taken place in the world economy and especially in corporate environments. The business environment today is turbulent and laced with uncertainty which continuously changing and is full of opportunities and challenges. The companies are necessitated to change their manufacturing practices, technologies and identify the opportunities at the right time and face them with right strategy can only gain competitive advantage. The successful companies are no longer competing on single dimension, such as cost. Instead, companies must excel on two or more of the traditional strategic elements. They must not only focus on producing a low cost product but additionally maintain high quality and customer service levels. There is a shift in corporate strategy from ‘product driven’ to ‘market driven’ strategy. Customer satisfaction has become the corporate goal to succeed in this business environment. Especially the growing intensity of competition has forced many business enterprises to seek more innovative and communication skills and systems. In the current industrial to seek more innovative and communication skills and systems.  In the current industrial scenario it becomes difficult in the industry to sustain and survive unless the costs are correctly accounted for , controlled and reduced so as to sustain and remain in the industry. Advanced manufacturing technologies such as robotics, computer aided design and manufacture, flexible manufacturing systems, optimized production technology, just –in – time etc., are revolutionizing the design, revolutionizing of manufacturing at shop-floor, quality etc., creating areas for improved opportunities. They have dramatically changed the manufacturing cost behavior patterns. The direct cost component of product cost is decreasing while depreciation, engineering and information processing costs are increasing. These changes have resulted in higher overhead rates and a shrinking base of direct cost over which to allocate those costs.


Bba Management Accounting Introduction to Management Accounting

Definition of Management Accounting

The accounting activity can be classified into two parts, financial accounting and management accounting. Though both of them are inter-linked, management accounting is future oriented, dynamic and is made to be decisive and control relevant.

International federation of accountants (IFAC) defined management accounting process as “the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information both financial and operating used by management to plan, evaluate and control with an organization and to assure use of and accountability for its resources”.

ICWAI published glossary if management accounting terms defining management accounting as “a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision making”.

Official terminology of CIMA is defined management accounting as “the provision of information required by management for such purposes as:

  • Formulation of policies
  • Planning and controlling the activities of the enterprise
  • Decision taking on alternative course of action
  • Disclosure to those external to the entity (shareholders and others)
  • Disclosure to employees
  • Safeguarding assets

The above involves participation in management to ensure that there is effective:

  1. Formulation of plans to meet objectives (long-term planning)
  2. Formulation of short-term operation plans (budgeting/profit planning).

American accounting association defines management accounting as “the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives.”

Richard M.S. Wilson and Wai Fong Chua defines “managerial accounting encompasses techniques and processes that are intended to provide financial and non-financial information to people within an organization to make better decisions and thereby achieve organisational control and enhance organisational effectiveness.”

The management accounting is used by management to plan the activity, evaluate performance, ensure integrity of financial information and to implement the system of reporting that is linked to organisational responsibilities and contributes to the effective performance measurement. The definition of management accounting embraces all functions undertaken by accountants in an organisation. Management accounting needs to be dynamic and forward looking. It also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. The role of management accountant is not determined by an isolated concept. It is determined by the requirements of business as expressed in its structures.

Bba Management Accounting Introduction to Management Accounting

Scope of Management Accounting

Management accounting includes financial accounting and extends to the operation of a system of cost accounting and financial management. While meeting the legal and conventional requirements regarding the presentation of financial statements (profit and loss account, balance sheet and cash flow statements) it stresses upon the establishment and operation of internal controls. The scope of management accounting. Inter alia, includes:

  • Formation, installation and operation of accounting, cost accounting, tax accounting and information systems. Management accountant has to construct and re-construct these systems to meet the changing needs of management functions.
  • The compilation and preservation of vital data for management planning. The accounts and the document files are repository of vast quantities of details about the past progress of the enterprise, without which forecasts of the future is very difficult for the enterprise. The management accountant presents the past data in such a way as to reflect the trends of events to the management.
  • Providing means of communicating management plans to the various levels of organisation. This, on the one hand, ensures the co-ordination of various segments of the enterprise plans and on the other defines the role of individual segments in the whole plan and assists the management in directing their activities.
  • Providing and installing an effective system of feedback reports. This would enable the management in its controlling function. By pinpointing the significant deviations between actual and expected activities, and by adhering to the principles of selectivity and relevance, such reports help in the installation and operation of the system of ‘management by exception’. The management accountant is expected to analyse the deviations by reasons and responsibility and to suggest appropriate corrective measures in deserving cases.
  • Analyzing and interpreting accounting and other data to make it understandable and usable to the management. It is only through such analysis and clarification that the management is enabled to place the various data and figures in proper perspective in the performance of its functions. Such analysis assists management in the location of responsibilities and to effect necessary changes in the organisational set-up to achieve the objectives of the enterprise in a more efficient manner.
  • Assisting management in decision making by
  1. Providing relevant accounting and other data, and
  2. Analyzing the effect of alternative proposals on the profits and position of the enterprise.

Management accountant helps the management in proper understanding and analysis of the problem in hand and presentation of factual information obviously in financial terms.

  • Providing methods and techniques for evaluating the performance of the management in the light of the objectives of the enterprise, thus assisting in the implementation of the principle ‘management by objectives’.
  • Improving, modifying and sharpening the effectiveness of the existing techniques of analysis. The management accountant would always think of increasing the practicability of existing techniques. He should be on the look –out of the development of new techniques as well.

Thus, management accounting serves not only as a tool in the hands of management, but also provides for a technique evaluating the performance of the management itself. It operates as a double-edged sword assisting the management in proper performance of its functions of planning, decision making and control, and at the same time, enabling the owners and other interested parties to evaluate and appraise the management of the enterprise.

Bba Management Accounting Introduction to Management Accounting

Functions of Management Accounting

A management accountant is one of the best assets for management. His contribution has been growing with passage of time. He will continue to deliver the goods in a magnificent manner in future with varied experiences. Scope expanding and managements of various sectors are benefiting. Excerpts from the “preface to statements on international management accounting” issued by the international federation of accountants in February 1987 are reproduced below:

Plan – To gain an understanding to expected business transactions and other economic events and their impact on the organisation and to use this understanding as basis for a course of action to be followed by the organisation in the future;

Evaluate – To judge the implications of various past and/or future events;

Control – To ensure the integrity of financial information concerning an organisation’s   activities or it s resources;

Assure accountability – To implement the system of reporting that is closely aligned to organisational responsibilities and that contributes to the effective measurement of management performance”.

The functions of management accounting can be broadly classified into:

  1. Periodic internal accounting reports, and
  2. Ad hoc analysis of data for decision making.

It is increasingly felt that management accountants should involve themselves more and more in decision making and problem solving of organisation. The areas of decision making and problem solving are dealt in the following paras:

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