UNIT 1: CONCEPT OF MANAGEMENT AND FUNCTION OF THE CONTROLLER

Contents
1.1 Introduction
1.2 The management concept
1.3 Planning and control responsibilities of middle and operating management levels
1.4 The controller’s participation in planning and control
1.5 The cost department and the role of cost accounting
1.5.1 The cost department
1.5.2 The objectives and functions /role/ of cost accounting
1.5.2.1 Objectives of cost accounting
1.5.2.2 Functions /role/ of cost accounting
1.6 Relationship and difference between cost accounting, management accounting and financial
accounting
1.6.1 Cost accounting and management accounting
1.6.2 Cost accounting and Financial accounting

1.1 INTRODUCTION

The management of a business enterprise is based up on a structure of individuals who belong to one of the
three groups.
1. The operating management group consisting of foremen and supervisors they are concerned
with short-term decision and are responsible to coordinate work at a grass root levels.
2. The middle management group represented by department head division managers and branch
managers concerned with medium range plans and
3. The executive management consisting of the president, the executive vice presidents and the
executives in charge of the various functions of marketing, purchasing, engineering,
manufacturing, finance and accounting. They are concerned with long range plans.
The existence of these three levels suggests that management consists basically of people whose activities
must be planned and controlled through top level directives decisions and instructions. Plans and directives
should be considered under the all-inclusive term “planning” and the continuous of the plans under the term
“control”. Planning refers to the construction of an operating program comprehensive enough to cover all
phases of operations and detailed enough so that specific attention may be given to the program’s
fulfillment in controllable segments. Control is that force which guides management in achieving
objectives by comparing performance with policies and decisions’ planning is basically on executive
management responsibility control however requires participation of all levels of the management team.
1.1 THE MANAGEMENT CONCEPT
A comprehensive explanation of the concept “management” poses innumerable difficulties invariably it
leads to descriptive phrases such as
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  Making decision
 Giving orders
 Establishing policies
 Providing work and rewards and
 Hiring people to carry out policies
Management sets certain objectives which it tries to accomplish through the effort of the people it directs.
In this sense it looks toward a final goal through a series of steps and processes. To be successful
management requires the integration of its own knowledge, skills, and practices with the knowhow and
experience of those who are entrusted with the task of carrying out the objectives. These objectives can be
achieved by management together with the effort of all employees through performance of the two basic
management functions- planning and controlling.

Planning
Planning is fundamental to the management process. It is a process of sensitizing on organization to
external opportunities and threats, determining desirable and possible objectives, and deploying resources
to match the objectives without planning there is no basis for controlling for planning provides the
foundation up on which the control function operates planning is looking ahead preparing for the future it
involves a choice of several possible alternatives a matter of making a decision planning must precede the
doing.

One kind of plan among several is the budget. The budget is not only the most important plan of an
enterprise but also the basic link of cost accounting with management. The use of budgets, particularly in
connection with the control phase of management, has been termed “budgetary control.” Closely allied
with proper planning are the determination and establishment of company objectives. An objective is a
target, an end result. Corporate planning includes such areas of investigation as the nature of the company’s
business, its objectives and major policies, the timing of major steps in the plan, and other factors related to
long range plans.

Controlling
Management control is the systematic effort by business management to compare performance to plans.
The control function is of prime importance in the accomplishment of objectives. The need for control
increases with the size and complexity of the organization. Continuous supervision of an activity, task, or
job is required to keep it with previously defined boundaries. These boundaries, termed “budgets” and/or
“standards” are set up for manufacturing, marketing, finance, and all other activities. Actual results are
measured against plans; and if significant differences are noted, remedial actions are taken.

1.2 Planning and control responsibilities of middle and operating management levels

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In a small company, planning and controlling activities often tend to be performed by one person; by the
owner or the general manager of the small company. In fact, the large the business organization, the
problem of planning, and the more involved the process of controlling the activities of individual units
scattered through the united states and foreign countries. For this reason, many firms have initiated the
decentralization of certain planning and control functions in order to place the reports and necessary
corrective actions closer to the scene of activity.

Overall responsibility for control rest with executive management or, in the final analysis, with the
president of the company. Because the president cannot attend to every aspect of the control program,
authority, and responsibilities must be assigned to middle and operating echelons of management in order
to assure the success and control of management’s plans.

Authority is the key to the managerial job and the basis for responsibility. Authority is the force that binds
the organization together and the power to command others to perform or not to perform certain activities.
Authority originates with executive management which delegates it to the various managerial levels.
Delegation of authority is essential to the existence of an organizational structure. By mean of delegation,
the chief executive extends the area of operations, but must always retain the overall authority for the
assigned functions, since delegation does not mean a permanent release from obligations.

Responsibility closely related to authority. The essence of responsibility is obligation. It arises particularly
in the superior- subordinate relationship due to the fact that the superior has the authority to require
specified work or services from other people. As these other people accept the obligation to perform the
work they create their own responsibility. However, since responsibility cannot be delegated, the superior is
in the last analysis; responsible for performance or non-performance by the individual.

1.3 The controller’s participation in planning and control

The controller is the executive manager responsible for a company’s accounting function. Their primary
function is to coordinate management’s participation in the planning & control phages of attaining
objectives in determining the effectiveness of policies & in creating organizational structure and procedure.
Effective cost control depends up on the proper common of accounting to management External users,
including, stock holders, future investors, government agencies, must also receive information by which
managements effectiveness may be judged.
1.4 The cost department and the role of cost accounting
1.4.1 The cost department
Under the direction of the controller is responsible for keeping records of a company’s management
marketing and administration. It issues significant control reports and other decision making data. In

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addition to cost and other accounting departments, a company may have one or more of the following
departments: manufacturing, personnel, treasury, marketing, public relation and legal departments.
1.4.2 The objectives and functions/role of cost accounting
1.4.2.1 Objectives of cost accounting
The main objectives of cost accounting are as follows:
1) Ascertainment of cost. This is the primary objective of cost accounting. For cost ascertainment
different techniques and systems of costing are used under different circumstances.
2) Control of cost. Cost control aim at improving efficiency by controlling and reducing costs. This
objective is becoming increasingly important because of growing competition.
3) Determination of selling price. Cost accounting provides cost information on the basis of which
selling prices of products or services may be fixed. In periods of depression, cost accounting guides
in deciding the extent to which the selling prices may be reduced to meet the situation.
4) Guide to business policy. Cost accounting aim at serving the needs of management in conducting
the business with utmost efficiency. Cost data provide guidelines for various managerial decisions
like make or buy, selling below cost, utilization of idle plant capacity, introduction of a new product,
etc.
1.4.2.2 Functions/role/ of cost accounting
Cost accounting furnish management with the necessary accounting tools for planning and controlling
activities especially the collection presentation and analysis of cost data should help management to
accomplish the following tasks:
i. Creating and executing plans and budgets for operating under expected competitive and economic
conditions
ii. Establishing costing method and procedures that permit control
iii. Determining company costs and profit for an annual accounting period
iv. Creating inventory values for costing and periling purposes
v. Choosing from/among two or more alternative which might increase revenues or decrease costs

Budgeting
The budget is the written expression of management plan interims of money for the future. A workable
realistic budget will not only help to promote coordination of people clarification of polices and
crystallization of plans but will also create greater internal harmony and unanimity purpose among
managers and workers. Cost accounting and budgeting play an important role in influencing individual and
group behavior at all stages of the management process including:
 Setting goals
 Informing individuals about what they must do to achieve the goals
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  Motivating desirable performance
 Evaluating performance
 Suggesting when corrective action should be taken

1.5 Relationship and difference between cost, management, and financial accounting
Cost accounting is the process of accounting for costs from the point at which expenditure is incurred to
the establishment of its ultimate relationship with cost centers and cost unit.

Costing is simply determining costs by using any method like arithmetic process, memorandum statements,
etc. cost accounting denotes the formal accounting mechanism by means of which costs are ascertained by
recording in the books of accounts.

Management accounting is applied to the provision of accounting information management activities such
as decision making; planning, controlling, etc. management accounting consists of four essential tasks.
Namely: Cost determination, Cost control reasonableness, Performance evaluation- when assets are used,
supplying information for planning & decision making.
1.5.1 Cost accounting & management accounting comparison
These two types of accounting do not have clear cut territorial boundaries. However, distinction between
the two may be made on the following points:
Basis Cost Accounting Management Accounting
1. Scope Is limited to providing cost information Scope of management accounting is
for managerial uses broader than cost accounting it provides
cost accounting as well as Financial
accounting for managerial uses.
2. Emphasis Mainly emphasis on cost ascertainment & Mainly emphasis on planning, controlling
control to ensure maximum profit. and decision making to maximum profit.
3. Evaluation Evaluation of cost accounting is mainly Evaluation of management accounting is
due to the limitation of financial due to the limitation of cost accounting.
accounting In fact, management accounting is an
extension of the managerial aspect of cost
accounting.
4. Techniques Various techniques used by cost Management accounting also uses all
employed accounting include standard costing and these techniques used in cost accounting
variance analysis, marginal costing and but in addition it also uses techniques like
cost-volume profit analysis, budgetary ratio analysis, funds flow statement,
control, uniform costing and inter-firm operation research and certain techniques
comparison, etc. from various branches of knowledge like
mathematics which so ever can help
management in its tasks.
1.5.2 Cost Accounting and Financial Accounting Comparison
Both cost accounting and financial accounting are concerned with systematic recording and presentation of
financial data. The two systems rest upon the same principles concerning debit and credit and have the
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same sources of recording the transactions. But cost accounting is much more detailed than financial
accounting. This is because in financial accounting profit or loss is ascertained for the business as a whole
whereas in cost accounting detailed cost and profit data for various parts of business like departments,
product, etc.
Differences between cost accounting and financial accounting are explained below:

Basis Financial Accounting Cost Accounting

1. Purpose The main purpose of financial accounting The main purpose of cost accounting is to
is to prepare profit & loss, balance sheet provide detailed cost information to
for reporting to owners or shareholders management, i.e., internal users.
and other outside agencies i.e., external
users.
2. Statutory These accounts have to be prepared Maintenance of these accounts is
requirements according to the legal requirements of voluntary except in certain industries
companies Act and Income Tax Act. where it has been made obligatory to
keep cost records under the companies
Act.
3. Analysis of Financial accounts reveal the profit or loss Cost account show the detailed cost and
cost and of the business as a whole for a particular profit data for each product line,
profit period. It does not show the figures of department, process, etc.
cost and profit for individual product,
departments and processes.
4. Control of It lays emphasis on the recording of It provides for a detailed system of
aspect financial transactions and does not attach control with the help of certain special
any importance to control aspect. techniques like standard costing &
budgetary control.
5. Historical It is concerned almost exclusively with It is concerned not only with historical
and historical records. The historical nature of cost but also with predetermined costs.
predetermined financial accounting can be easily This is because cost accounting does not
costs understood in the context of the purpose end with what has happened in the past. It
for which it was designed extends to plans & policies to improve
performance in the future.
6. Types of Financial accounting records only Cost accounting not only records external
transaction external transactions like sales, purchases, transactions but also internal or inter-
recorded receipts, etc., with outside parties. departmental transactions like issue of
materials by store keeper to production
departments.
7. periodicity of Financial reports (profit and loss Account Cost reporting is a continuous process
reporting and Balance sheet) are prepared and may be daily, weekly, monthly, etc.
periodically, usually on an annual basis.
Similarities
 Both are concerned with systematic recording and presentation of financial data
 The two system rest on the same principles concerning debit and credit

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 Have the same sources of recording the transactions but cost accounting is much more detailed than
financial accounting

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