Welcome students, I am Dr. A. K. Sharma from the Department of Management Studies, IIT

Roorkee. My area of interest is finance and accounting and this time I am offering a course

management accounting, right. Management accounting, we will discuss everything in detail in this

course about the different techniques of accounting which are useful for the managerial use, for

the managerial decision making in the organisations, in the business organisations.

And I would like to say clarify the doubts and the differences between the three different

types of accounting that is the say financial accounting, cost accounting and management

accounting. When we talk about the accounting many people get confused about that we have

financial accounting, cost accounting and we have management accounting, right. So if

we have financial accounting what is a need of cost accounting?

If we have cost accounting and financial accounting, what is a need of management accounting? So

why these three disciplines of accounting are there or they have emerged over a period

of time, what was the use? What was the requirement? What was understanding behind developing the

three different sets of accounting or the courses of accounting or the areas of accounting

or disciplines of accounting so that is we are going to discuss here and we are going

to clarify. Earlier, I have offered a course that is financial

analysis and reporting. So that is the say earlier that was based upon financial accounting

if you have the basic idea of financial accounting if you know something about the cost accounting

or may be not the cost accounting but if you have some basic idea of the financial accounting,

if you have studied financial accounting some time earlier, then I think it would be very

easy for you to understand what is the management accounting.

And you would be able to clarify and differentiate also that what is the financial accounting?

And what is the management accounting? And why there is a need for management accounting?

What are issues involved in the management accounting? What are the managerial problems

we can solve with the help of management accounting? How the management accounting has evolved

over a period of time? And what are the different techniques of say

studying the subjects called as management accounting, right? So here we are to discuss

for the next say thirty hours (the), this this course is thirty hours course and we

will have 60 lectures of half an hour each. So I would try to cover almost each and every

aspect of management accounting and like to make it interesting with the help of some

say problems, cases and we will be solving it here we will be discussing here.

We will talk about the conceptual things with regards to different topics of management

accounting, how we can use those different techniques and the concepts of management

accounting in the managerial decision making quantitatively as well as qualitatively? And

finally where this say subject or area of learning takes us our organisations or our

firms and how it is useful, right? So, when we talk about the different branches

of accounting, you must have heard about you must have this much of background am sure

that, there are the three branches of accounting financial accounting, cost accounting and

management accounting. So, why there is need for three different branches of accounting

and what is the purpose, and what are the different purposes that these three branches

of accounting serve? We have first of all financial accounting,

then we developed the cost accounting, then we developed the management accounting. So,

it has happened over period of time, in a phased manner. This all has happened in a

phased manner, depending upon the requirement of business world, depending upon the need

necessities of the business world as the business say went on becoming complex or may be very

difficult to predict or to say go for decision making or any other kind of business issues.

When complexity of the business increased because of the increased competition, because

of the globalisation, because of the liberalisation of different economies, when the firms starting

moving from one economy to the another economy from home economy to the host economy then

they had the say plethora of issues that their different challenges different economies,

different markets, different people, different customers have different problems different

issues. How to resolve them? How to fulfil their requirements?

And even we have to find out that what are the expectations of market in the time to

come? How the market is going to behave in which the company or the companies are operating?

How those markets are going to behave? How those customers are going to behave? How the

demand with regard to one particular product of service is going to be?

How to go for pricing of the products in the competitive economy? Similarly, then, how

to say take decision about the say different aspects like the inventory then like say credentials

say serving different kind of needs of the customers spread over the diverse markets

all around the globe? You must be agreeing with me that for any effective business organisation

these days only one economy or the one market is not just sufficient or is not say, they

will not expand from one economy to other economy.

Means they are not satisfied with the one market. They are into the one market because

that market is not safe for many companies. If they are operating in one market and they

feel that they are safe in market, God knows that tomorrow some big multinational company

comes in that area and they have to lose the market. So, they have to look forward for

the alternative markets not within the country but outside the country also.

So there are different decisions which they have to take over a period of time. And accounting

is a discipline which helps managers and different stakeholders of the businesses to take very

relevant and useful decisions. For example, I am saying that say in India we have companies

like say in the electrical sector you talk about, we have the company very big name Anchor.

And Anchor was one of once upon time very big name, very effective company but tame

came when this market was liberalised, we accepted the globalisation.

Many American and the Japanese companies entered this market and finally Anchor found it very

difficult to survive in the market. And finally the company was taken over by the Panasonic.

So it means a big joint, a big company which was a leader in the Indian market once upon

a time and today it is acquired company, it is sold company. It means they could not sustain

the competition put forward by the multinationals. So it means we will have to take many decisions

over a period of time and here the data which is called as financial and accounting data

that helps us a lot. So accounting, without accounting you cannot think of doing any business.

Accounting is, if you talk about financial accounting it is helping us to reporting or

to knowing about the results of the business. You must be aware about or you must be knowing

it that under financial accounting we prepare the financial statements, we prepare profit

and loss account, we prepare the balance sheet, we prepare the cash flow statement, we prepare

the funds flow statement. All these statements what they are? They only

have the data. And that data helps us to go for the different management decisions. Now,

we talk about that we are say earning the profit whether the profit is sufficient or

not we are into the losses. So what is accident of losses? Are we expecting to convert that

loss into profit? Because ultimately end result of any business is maximisation of the wealth

and we keep on verifying over a period of say one year or twelve months that how the

business is doing in past twelve months? So, financial accounting helps us we prepare

financial statements means whatever you do all the business transactions they are converted

into the monitory transactions. May be all the transactions are the monitory transactions.

Monitory transactions are recorded in the books of account and finally they are taken

to the financial statements, profit and loss account, balance sheet, cash flow statement.

And with the help of that we come to know over a period of time how the business has

grown? How the business has done? How the business has performed? And if it is say acceptable

level of performance then fine but if something needs to be done then ultimately it is accounting

which is helping us. So financial accounting you cannot think of doing business without

financial accounting, right? Then we have cost accounting, so cost accounting

is branch or the area or the discipline of learning where, we learn about how to cost

the products and different type of products and the services? See, ultimately when we

are producing a product or generating a service that is only for the customers and it has

to go to the market. Now, when it has to go to the market, it has to be sold in the market.

And for selling any product or service in the market you need to have or need to fix

up a price. You must be knowing that if I am the producer

of the product, if any company is the producer of the product, if any company is generator

of any service, creator of any service then what is the cost of creating the service?

What is the cost of producing that product? Until and unless you know the real cost of

producing that product or generating that service, you cannot price product.

So costing is the basis of pricing. Pricing is not possible without costing. So you need

the cost accounting, full-fledged discipline called as cost accounting, which is only dealing

with the all different kind of issues with regard to the cost; cost of the product, cost

of the services. Until and unless you are you have the cost because cost is the basis

of pricing. So, we need the cost accounting because we are in a competitive world so you

cannot charge any price of your product whatever you wish to charge. We are in a competitive

economy which is called as economy controlled by the customers not by the sellers’.

Economies, today market today they are controlled by the buyers. It is the buyers’ market

now all around the world, all around the globe. It is not a sellers’ market. It is a buyers’

market and buyer has multiple options available. Buyer has multiple substitutes available.

Supply side has improved a lot. And if any company is not able to fulfil the customers’

requirement at a desired place, price and with the say desired properties of the product

they will shift to somebody else. They will soon become the former customer to existing

company and they will shift to other company. It is happening, for example, you have seen

in telecom sector. Once upon time talk about say 10 – 15 years back we had only one company

that is department of telecommunication that was converted to BSNL. But today you see how

many companies are there in the market providing you the telecom services. And if you are not

satisfied with the service of any company say Airtel you shift to Vodafone, if you are

not satisfied with the Vodafone you shift to Jio, if you are not satisfied with Jio

even sometime people shift to BSNL. So, depending upon the service, depending

upon the say, the way the service has been provided and foremost thing is the price at

which the service is available or the product is available. That is the one important, you

can call it is basis of the success or the failure of the products or services. What

is the reason? What is the say you can say the reason of the success of the Jio in short

span of time? Jio forced two large companies video this,

Vodafone and the idea to join hands, to form a joint venture because for them sustaining

the competition put forward by Jio in the market was not possible, Vodafone a UK base

company, a large multinational company which has millions of customers all around the globe,

they could not sustain the competition put forward by an Indian company.

A new Indian company entering the telecom sector because their services and their quality

of service was much-much cheaper as compared to the services of the existing companies.

Whether you call it is BSNL, you call it as Airtel, you call it as Vodafone, you call

it as idea. Whatever the price and the speed Jio has given to the market, existing company

could not do that. It means how the Jio could say serve the market and even serving today

at a price other cannot compete with because they know how to cost their service?

So it means, if you want to sell the product in the market in such a competitive market,

you have to price the product in such a way, that it is highly competitive; it is full

of all the properties and attributes. Still, it is highly competitive and people have the

reasons to accept it and it is not happening in one sector. Everywhere there is a huge

competition; you talk about manufacturing sector, you talk about electronics, you talk

about automobiles, and you talk about domestic that is the consumer products.

So, consumer products, consumer durables, automobiles mean the industrial products everywhere

there is competition. So, to fight the competition and to sustain in the competitive situation,

we will have to learn how to cost the products and not only to cost the products but too

minimise the cost of the product without compromising the quality. And if you have the basis of

the costing of your products that ultimately becomes what was the basis of the pricing

of the products? So, you need cost of accounting full-fledged branch of learning that what

the cost accounting is? And then we talk about the management accounting.

Management accounting is not at all a discipline in itself. It has no techniques of its own

like financial accounting. It has proper gap. Generally agreed accounting principles, then

it has its own ways and means to develop a full-fledged subjects and the basis of the

different techniques of the financial accounting. Under financial accounting, we prepare, we

have the transaction business transaction. We take those transactions to the journal

leisure trial balance and then we take them to the financial statements.

We prepare the cash flow statement and then we prepare the funds flow statement. So, they

all are created, all this information is created under techniques, financial accounting. It

is a full-fledged discipline its original discipline and it has its own base and its

own techniques and methods. Similarly, if you talk about the cost accounting, cost accounting,

it is also a very-very say you can call it as full-fledged fully developed subject. It

has its own techniques. It has different techniques for costing the products in different sectors.

It has the techniques for costing the products in manufacturing sector.

It has the cost techniques for costing the products in the consumer sector, in the consumer

durable sector, in the automobile sector even in the construction industries. We have different

costing techniques. So, it has different techniques, different methods and methodologies. So, it

is a full-fledged original real discipline of the learning. But, what is management accounting?

Like cost accounting and financial accounting, management accounting does not have its own

techniques, methods and its own systems. It borrows the techniques of the financial

accounting and the cost accounting. Partly it borrows the techniques and partly it borrows

the data, the information which is provided by the financial accounting and which is provided

by the cost accounting. It is fully dependent upon the first two branches of the accounting,

if there is no financial accounting data; if there is no cost accounting data you cannot

use management accounting as a discipline of decision making.

So, entire decision making under management accounting is based upon financial accounting

plus cost accounting. Management accounting has different techniques of decision making

not of generating any data or information. Data or information generated under the financial

accounting and the cost accounting but how to make use of that data for the relevant

management decision making? That is how means it can be learned under the techniques of

management accounting? It helps in the decision making not in the

generation of any data, any information or any different kind of the quantitative inflow.

It only is using the information which is available in the balance sheet and the profit

and loss account in the cost statements and with the help of different methods financial

accounting and the cost accounting whatever the information is generated that is being

used effectively in the management accounting So here we will learn about that how to make

proper use of the financial accounting information? How to make proper use of cost accounting

information? And how and in what way this information can be used in the day to day

management decision making? Because business is complex, it is not only to cost the product

we have to further learn about how to minimise the cost? We have to further learn about how

to price the product so minimising the cost pricing the product and using the different

type of the costing information about different products and services that we learn in the

management accounting. But without cost accounting management accounting

is not possible similarly what information is provided to us by the profit and loss accounts

balance sheet and other statements? Financial accounting only provides the historical information

that is the profit and loss accounts balance sheet, nothing else; it does not give you

anything else. Management accounting starts where the financial accounting ends. Management

accounting starts where the cost accounting ends.

So, we have to learn here that the generation of the information not sufficient in today’s

world. It was earlier but today’s world, it is just not possible. Whatever, the information

generated under the two sets of the accounting, two major branches of accounting, making the

proper rational and effective utilisation of that information, so that very effective

management can be facilitated that we will learn in management accounting. Now, what

is a need and how this discipline has evolved just in two minutes I will discuss with you.

That initially when we started doing business centuries ago, you must have heard about that

we had two accounting systems that is single entry accounting system and the double entry

accounting system. Under the single entry accounting system it was very simple accounting

system. That on the one side of the statements you are putting all the sources from where

the funds are coming in, where the funds are going out. And we are calculating the difference.

We are making only a one entry of anything is coming in business, only one entry if anything

is going out of the business, only one entry in the books of accounts. But that was suffering

from major limitations that when any transaction happens in the business, it does not have

only one or single effect. It has double effect. If material is coming the business cash is

going out in leave of that material because that material is not free. We have purchased

that so, why not to have double effect of every transaction?

So, after the single entry system we had the double entry system of accounting and todays

financial accounting is based upon the double entry accounting system which was developed

by the Fra Luca Pacioli. He was an Italian merchant and he developed in the 17th century.

He wrote a book on the double entry accounting system and after that the system was understood

by all around the world everybody all around the world. And it was accepted as full-fledged

discipline of accounting. I do not want to go in the detail of financial

accounting because you know it about. So, here the purpose is just to recall that today

whatever the financial accounting information be generate through the profit and loss accounts

balance sheet that is based upon the double entry accounting system. And when you enter

the transactions into the journal, ledger, trial balance, prepare the profit and loss

accounts balance sheet, cash flow statement, fund flow statement, financial accounting

ends there. Maximum is you can analyse that information

by calculating certain ratios or by preparing the cash flow statement and fund flow statement

but more than that you cannot make better use of the financial accounting. Another limitation

of the financial accounting is that it is historical in a nature. When you prepare the

profit and loss account may be at the end of year, at the end of three months, at the

end of six months; you come to know about the results business when the action has already

been taken or the results have already come, you cannot change those results.

If the business has earned the profit and that is not up to the mark, you cannot increase

the profit for the previous period. Yes, you can take the actions to improve the things

in future. If business has incurred loss and you come to know after twelve months, three

or six months you cannot convert that loss into profit. Yes, you can take the appropriate

or the corrective measures for the next remaining period of a time of year.

So, another limitation of the financial accounting is it generates very useful information but

that entire information is historical in nature. So, initially when the business was not very

(pop) a competitive may be in the 17th century, 18th century and in the till the beginning

of 19th century or it may be during the 19th century financial accounting serves the purpose.

We never thought of having any other say additional branch of accounting.

But over a period of time we started seeing and experiencing the complexities of the businesses

because businesses started becoming global over a period of time. Company started moving

from one market to another market; one economy to another economy. We had the concept of

multinational, international companies, multinational companies’ world companies, transnational

companies. So, it intensifies the competition. In India,

for example, till 1991 since we were not a globalised economy so only Indian companies

were operating into the market whether they were into government sector; public sector

private sector. But this market was only open for Indian companies. Very few foreign companies

were operating in the market but in a very restricted manner. But when we opened up this

economy for world conglomerates we accepted the globalisation, liberalisation and this

economy was made wide open for any multinational company coming to India.

So, it intensified the competition. When it intensified the competition so, it means any

product or service which was available to us at any price before opening up of the economy

and that service or that product was being provided by the Indian companies, the price

they were charging before the globalisation before 1991, they were not able to charge

the same price after 1991. Because some efficient and the better player came up in the market.

And that player started providing the very efficient, useful products at every lesser

and effective price. So, why people should keep on buying the product

from the existing company if it is not able to serve the needs of the people and when

efficient product is available at half of the price or more efficient product is available

at the same price so people started shifting from the domestic or Indian companies’ products

and services to the multinational companies. Today, you see in every sector there are the

multinational companies operating in India. You have automobiles, you have electronics,

you have consumer durables, you have other consumer durables I mean to say, then you

have the consumer sector. Everywhere you are finding the products from the multinational

companies and Indian companies are going out of the market. Why? Because they were not

able to serve the customers’ needs. The price, they charge the quality of the product

that they provided, they were not able to serve the needs of the customers.

And when the multinationals came and then the customers of the multinational products,

then certainly there was reason to customers shift to the new country multinational. So,

it means what happened? Here we realise that the costing system of Indian companies was

defective. Similarly, this defective costing system or challenges in that accounting and

costing system are not only faced within at the one economy level but even the globally.

You must have heard about the Global recession of 1930s.

What is that Global recession of 1930s? What was the impact of that Global recession of

1930 and it how it necessitated the say development of the another discipline of accounting which

was later on named as cost accounting that I will discuss with you. So, it means initially

we had financial accounting business was not very-very competitive and easy to do the business

all around the say same market wherever the companies operating. So, financial accounting

serves the need. But when business became competitive and sometime,

because of the world recession purchasing power of the people was affected. Then, it

was thought by the businesses all around the globe that the new disciplined should be developed

which, helps us to guide how to calculate the cost and minimise cost and that resulted

into the development of the second branch of accounting, cost accounting. More about

the cost accounting and its development and further movement from the financial accounting

to cost accounting and Management Accounting and I will discuss with you in the class.

Thank you very much.