Comprehensive MBA Notes - Management Accounting (Unit 1 & 2)
Unit 1: Introduction to Management Accounting
1. Nature of Management Accounting:
- It integrates accounting with management to help internal users (managers) make informed decisions.
- Uses both financial and non-financial information for forecasting, planning, and controlling operations.
2. Scope of Management Accounting:
- Includes cost accounting, financial planning, budgeting, decision analysis, performance evaluation, and
risk management.
- It is future-oriented, unlike financial accounting which is historical.
3. Importance of Management Accounting:
- Provides relevant data for decision-making.
- Helps in strategic planning and control.
- Enhances efficiency and cost-effectiveness.
4. Difference between Financial and Management Accounting:
| Basis | Financial Accounting | Management Accounting |
|-------------------|--------------------------|-------------------------------|
| Users | External (investors) | Internal (management) |
| Time Focus | Past | Future |
| Format | Standardized (GAAP/IFRS) | Flexible |
| Reports | Financial statements | Budgets, forecasts, analysis |
Comprehensive MBA Notes - Management Accounting (Unit 1 & 2)
5. Difference between Cost and Management Accounting:
- Cost accounting focuses on cost ascertainment, while management accounting focuses on
decision-making.
- Cost accounting is a subset of management accounting.
6. Cost Control, Cost Reduction, and Cost Management:
- Cost Control: Monitoring costs to ensure they don't exceed the budget.
- Cost Reduction: Continuous process of reducing costs while maintaining quality.
- Cost Management: Broader term involving planning, controlling, and decision-making on cost efficiency.
Diagram 1: Comparison between Financial and Management Accounting
+---------------------+--------------------------+-------------------------------+
| Basis | Financial Accounting | Management Accounting |
+---------------------+--------------------------+-------------------------------+
| Users | External (Investors) | Internal (Managers) |
| Time Focus | Past | Future |
| Format | Standardized (GAAP) | Flexible |
| Objective | Financial Reporting | Decision-Making Support |
+---------------------+--------------------------+-------------------------------+
Unit 2: Budgeting and Budgetary Control
1. Concept of Budget and Budgetary Control:
- A budget is a quantitative plan for acquiring and using resources over a specific time period.
Comprehensive MBA Notes - Management Accounting (Unit 1 & 2)
- Budgetary Control is the process of comparing actual results with the budget, analyzing the variances,
and taking corrective actions.
2. Objectives:
- Planning for future operations.
- Coordinating the activities of different departments.
- Controlling operations and costs.
- Performance evaluation.
3. Merits:
- Promotes efficient resource allocation.
- Improves communication within the organization.
- Helps in performance evaluation and corrective actions.
4. Limitations:
- Rigid and may reduce innovation.
- Time-consuming process.
- Requires frequent revisions.
- May create conflicts between departments.
5. Types of Budgets:
- Fixed Budget: Remains constant irrespective of activity level.
- Flexible Budget: Changes with the level of activity.
- Zero-Based Budget: Every expense must be justified from scratch.
- Programme Budget: Based on different programmes or projects.
Comprehensive MBA Notes - Management Accounting (Unit 1 & 2)
- Performance Budget: Links expenditure with the results achieved.
Diagram 2: Types of Budgets
Types of Budgets:
-----------------
1. Fixed Budget -> Static, doesn't vary with activity.
2. Flexible Budget -> Adjusts based on actual activity level.
3. Zero-Based Budget -> Starts from zero; justify every expense.
4. Programme Budget -> Allocated to specific projects/programmes.
5. Performance Budget -> Links budget to outcomes/performance metrics.
