MANAGEMENT ACCOUNTING : NATURE & SCOPE
EVOLUTION OF MANAGEMENT ACCOUNTING
Management Accounting is comparatively a new philosophy. New things emerge as necessity is the mother of invention. With the growing complexities of business and everincreasing risk and uncertainty, people began to think of a tool which could come to the rescue of management—and it was there in the shape of "Management accounting".
The evolution of "Management Accounting' can be traced in 'Accounting'. Accounting originated from 'book-keeping'. Book-Keeping, by single entry, is as old as arithmetic itself or the use of the abacus. Arabic numericals replaced Roman ones—this was the first accounting improvement and this historic event happened in fifteenth century in Italy. It ushered an era of using double entry system of book-keeping. Venice was the place of origin and gradually it became part of business practice in Germany and Holland.
Accounting in the general sense can be said to be existing since the time man has kept a reckoning of money or value received and value paid out. From the process of recording and classifying transactions, called book-keeping, developmental needs led the business world to the area of systematic, logical and orderly classifications—an art of summarising, interpreting and presenting the information in a clear form was invented. The art is what we call accounting' Accounting is not simply the mechanical process of keeping records of financial transactions, but involves judgment as well as skill of the accountant. But financial accounting alone could not meet the requirements of business and hence a subject called management accounting developed over the years. Why a need for management accounting was felt will be self-explanatory, if we first understand the concept of financial accounting and the inherent limitations of the same.
Accounting' in the general sense had been developed as 'Financial Accounting'. It records business transactions taking place during the accounting period and it shows the result of the transactions in the form of final accounts at the end of the period. From this traditional form, the art developed and interpretations of results also became a part of accounting. "The process of classifying and recording transactions with the purpose of maintaining a permanent record of the firm's financial activities" is now regarded as book-keeping. Accounting is "the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events that are (in part at least) of a financial character and interpreting the results thereof." This definition is the most accepted definition of accounting and has been given by the Committee on Terminology of the American Institute of Certified Public Accountants. The characteristics of accounting, as laid down under this definition, have been explained there under :
(1) Art. Accounting has been labelled as an art. Though it has rules and principles, it is mainly a practice—how best the events and transactions of a financial nature are recorded to ascertain and interpret the financial results is its endeavour. Actually, accounting is a tool to be used to attain specific objectives.
(2) Recording. All business transactions of financial character are to be recorded in a systematic manner. The method of recording is adapted according to the size and nature of business and type of transactions. Different rules have been framed to record transactions of different nature—cash, credit, frequent, infrequent etc. The primary recording is in the book called journal or subsidiary books,
(3) Classifying. Classification means putting homogeneous items in one group and heterogeneous items in different groups. It is re-arrangement of items according to similarities and dissimilarities. Classification is done in a book called 'ledger'. For example, if, cash purchases have been recorded at several places in the 'journal', it will be posted at one place in the 'ledger'. Separate accounts are opened in the 'ledger' for the purpose.
(4) Summarising. The art of making the activities of the business as classified in the ledger understandable and useful to concerned persons is known as summarising. Under it, preparation of final accounts is involved which are basically two: (i) Trading and Profit and Loss Account; and (ii) Balance Sheet.
(5) Money. The recording is in terms of money and not in any other form. For example, the stock of goods may be in quantity i.e., kilograms, tons or other units but ii will have to be measured in terms of money for recording purposes. All assets and liabilities are recorded in terms of money and not in the form, like, I own one building and owe 10 bags of wheat. Money is an economic resource like materials and labour and financial accounting is mainly concerned with money as a factor.
(6) Financial character. Only that information which is capable of being expressed in terms of money is recorded, because the entire work is done in terms of money. Non monetary transactions are not recorded. Factors which are qualitative are not capable of quantitative measurement e.g., skill and knowledge of personnel. However, latest developments in the field of accounting are taking note of such factors also and even human resources and social factors are being attempted to be measured in terms of money.
(7) Interpreting. Mere presentation of data is not enough, its interpretation is the most significant aspect of accounting. As a matter of fact, it is this phenomenon of interpretation which has, of late, been developed at length and included under management accounting. What the total profit is—this is important but more important is—what the rate of profit is. Similarly, the assets exceed liabilities so as to have capital—this is significant, but whether the same has increased or decreased and to what extent—this is all the more crucial and relevant for the management.
LIMITATIONS OF FINANCIAL ACCOUNTING
Financial accounting suffers from serious limitations, which are as under:
(1) Historical information. Financial accounting provides only historical data. Management is mainly concerned with the future and financial accounting does not focus on it. The static picture drawn by financial accounting is of limited value to the management.
(2) Changes ignored. Whatever changes take place in conditions and the value of money are ignored under financial accounting. The effects of changes in prices of services, commodities and materials, whether to be purchased in the future or already acquired, are not taken into account.
(3) Overall results. Financial accounting portrays the overall results of operations. This is not enough for management. Management remains interested in finding out the costs of each cost centre/cost unit which the financial accounting does not provide.
(4) Out-of-date facts. Since the financial accounting presents a broad, overall picture of financial transactions which have already occurred during a given period, usually a year, the facts become out-of-date. Even if the presentation is more frequent, the information is available quite late.
(5) No information for decision-making. Management wants information on alternative courses of action for decision-making purposes which financial accounting fails to provide. What part of the plan is going wrong will not be thrown light upon by financial accounting.
(6) Only monetary measurement. The information which is not capable of being measured in terms of money can not be recorded under financial accounting. Certain important events happen in the business which are non-monetary in nature, but they won't find a place in financial accounting.
Thus, financial accounting furnishes only a post-mortem record of business transactions as completed events alone are the subject of accounting process. The management, with the growing complexities of business and its rapidly changing requirements, wants a helping hand from some one who can assist it in performing all its functions with greater ease. Management wants assistance in planning, organising, co-ordinating, controlling and decision-making. Financial accounting fails to fulfil these expectations of the management. Information is required for mainly planning and control purposes; futurisitic altitudes are missing under financial accounting. It does not satisfy the informational needs of different levels of management. All these short-comings of financial accounting led to the emergence of management accounting. It largely removes all the deficiencies of financial accounting.
MEANING OF MANAGEMENT ACCOUNTING
Management accounting is the application of accounting techniques to the provision of information designed to assist all levels of management in planning and controlling the activities of the firm.
Management accounting is concerned with the needs of management with making decisions about scarce resources in uncertain situations. Thus, it mainly focuses on the future by assisting in making available information of the right type, in the right quantity, and at the right time so that the management gets the solutions of various puzzles about functioning of a business, and it has not to grope in the dark and act in a vacuum.
Good information is like a sharp-edged blade, lesser effort is required in obtaining a better reward. A clear and deep insight into the problems leads to a course where fresh problems do not crop up at all—this is what management accounting docs.
To stress again, management accounting is concerned with "Management". It is concerned with management first, last and at all times. The management accountant always looks at the enterprise with eyes of a manager, conscious of management's problems, responsibilities, opportunities, limitations, hopes and fears. He is, therefore, a member of the management team. The basic objective of management is to use resources in the most efficient way possible in order to achieve some desired goal—the profit, in case of business. Management is the art of planning, directing and controlling an organisational activity. The planning and controlling of business activity involve the following steps:
1. Setting a general course of action. The path to be followed is to be decided.
2. implementating the necessary procedures. Responsibilities are assigned to the members of the team for fulfilment of the objectives. Duties must be welldefined; authorities and punitive actions must follow simultaneously.
3. Directing and controlling performance. During this process alternative courses of action should also be considered.
4 Appraising the results. The results should be compared with the objectives laid down to have a complete understanding of the project.
Accounting, besides providing financial information, checks on management's stewardship and assists in controlling business transactions.
The management operates upon the business after X-Raying through accounting; the result is the success. Management is just like a doctor and the accounting is the X-Ray machine and the business is the patient. By diagnosing through the various techniques of accounting, the management can cure an ill business too: of course, the disease must be a curable one. X-Ray machine will simply help in clearly locating and analysing the spheres of weaknesses.
The idea of management accounting is sometimes discarded by some practical managers as a theoretical and abstract idea since they feel they don't have time enough for it and they are already paddling so furiously just to keep their heads above water. I am reminded of the story of a scooter-driver whenever such an objection is raised. A man was driving a scooter at a speed of just 20 k.m. per hour with much of its roaring noise. A passer-by curiously wanted to ask him something but the scooterist was extremely busy with pushing his vehicle as fast as possible. After a short while, the vehicle suddenly stopped and the passer-by got an opportunity to converse with him. The stranger asked the vehicle-owner, 'Why don't you get it checked from the repair work-shop just nearby so as to have better speed with greater control." The gentlemen took a sigh and exclaimed, i don't have any time for that, since I have yet to cover 70 k.m. and I could cover only 5 kilometers because of the poor performance of this 'khatara'." The passer-by remained wondering whether the saving of time as envisaged by scooter-driver by not approaching the repairer could help him at all.