What is management accounting?
Management accounting is a method of accounting that creates statements, reports, and documents that help management make better decisions related to their business performance. The term ‘Management Accounting’ consists of two words ‘Management’ and ‘Accounting’, which is used to describe the modern concept of accounting as a tool of management in contrast to the conventional accounts prepared to show the financial position of a concern. It is the study of managerial aspects of accounting. It shows how accounting functions can be reoriented to fit within the framework of management activity.
In other words, Management accounting is concerned with providing information to managers, that is, people inside an organization who direct and control its operation. It is that accounting provides necessary information to the management for discharging its function i.e. planning, organizing, directing, and controlling. It provides the required information for effective and efficient performance of these functions.
According to T. Lucey, “Management accounting is primarily concerned with the data gathering analysis, processing, interpreting, and communicating the resulting information for use within the organization so that management can more effectively plan, make decisions and control operations.”
In the words of J, Batty, “Management accounting is the term used to describe accounting methods, systems, and techniques which coupled with special knowledge and ability, assists management in its task of maximizing profits or minimizing losses.”
From the above definitions, it is clear that management accounting is concerned with assisting the management in carrying out its activities. It relies on cost and financial accounting for necessary information.
Objectives and Importance/Advantages of Management Accounting
To help in formulating plans:
Management accounting assists management in planning the activities of the business. Planning is deciding in advance what is to be done, when it is to be done, how is to be done, and by whom it is to be done. Planning is based on facts. Facts are provided by past accounts on which a forecast of future transactions is made.
To help in the interpretation of financial information:
Management accountants present the accounting information intelligently and simply. this will help the management in interpreting the financial data, evaluating the alternative course of action available, and guiding it in making decisions to have the most desired financial results.
To help in controlling performance:
Under management accounting, the actual performance is compared with the targets, plans, standards, and deviations are analyzed. Thus, management accounting helps in controlling the performance and taking suitable actions to correct the adverse deviation by revising the budget if needed.
Help in organizing:
The management accountant recommends the use of budgeting, responsibility accounting, cost control techniques, and internal financial control. These all need the intensive study of the organization structure. In turn, it helps to rationalize the organizational structure.
Helps in solving business problems:
Management accounting provides accounting data to the management like whether labor should be replaced by machinery or not, whether the selling price should be reduced or not along with a recommendation as to choose which alternative will be the best. For such decisions, the management accountant takes the help of marginal costing, cost volume profit analysis, standard costing, capital budgeting, etc.
Helps in motivating employees:
Management accounting helps to increase the effectiveness of the organization and motivates the members of the organization. This is done by setting goals, planning the best and most economical course of action, and measuring the performance.
Communicating up-to-date information:
Management needs information for making decisions and for evaluating the performance of the business. Such information can be made available to the different levels of management using reports, which are an integral part of management accounting. This helps in taking suitable action for control.
Scope of Management Accounting
Financial accounting:
It records all business transactions and a profit and loss account is made to show the results of the business operations and balance sheet to show the financial position. This in turn forms the basis for analysis and interpretation for providing meaningful data to the management. Thus, financial accounting comes under the scope of management accounting.
Cost accounting:
Cost accounting refers to the classification, recording, and allocation of expenditures for the determination of the cost of products or services and ensuring the management’s control over the same. This includes the determination of the cost of every order, job, contact, process, or unit as required Such information plays an important role for the management in carrying out its activities.
Forecasting and budgeting:
This refers to the formulation of budgets and forecasts with the help of operating and order determinants of a business concern. The ultimate success of any budgeting depends on the proper setting of target figures in the budgets and the actual realization of the same in practice.
Cost control techniques:
These serve as effective tools for comparing the actual results with the predetermined figures determined in budgets. They greatly help in bringing the budgets into operating plans.
Statistical data:
It is concerned with the supply of necessary statistical data and particulars needed by various departments of the business concern. This includes as stated earlier, a statistical compilation of case studies, engineering records, minutes of meetings, special surveys, and many other business documents.
Taxation:
This necessitates the computation of profits following the provisions of the Income Tax Act and also prompt filing of returns periodically and payment of tax.
Office service:
This mainly relates to the maintenance of data processing and other office management services, stenciling and duplicating, dealing with inward and outward mail, etc.
Limitations of Management Accounting
Continuance of intuitive decision-making:
Management accounting is supposed to eliminate the intuitive decision-making process of management and replace it with scientific decision-making. Unfortunately, many management are prone to take the easy and simple path of intuitive decision-making rather than the difficult but reliable scientific decision-making process in day-to-day management.
Broad-based scope:
The scope of management accounting is wide and broad-based and this creates many difficulties in the implementation process. It is easy to record, analyze, and interpret a historical event converted into monetary terms most objectively. However, it will be difficult to perform the same functions concerning future and unquantifiable situations in the light of the records.
Based on other accounting:
Management accounting is based on financial accounting and cost accounting. The effectiveness of management accounting largely depends on the effectiveness of these accountings.
Costly installation:
For the installation of a system of management accounting in a business concern, an elaborate organization and a large number of manuals are essential. This in turn increases the cost due to which only large-scale organizations can afford to install it.
No, an alternative to the management:
Management accounting is not an alternative to the management. It just helps the management to carry out its activities. This is not an end, but rather a means only.
Evolutionary stage:
Management accounting is a new discipline and a growing subject too. It is still in the infancy stage and undergrowing evolutionary process. Naturally, it faces certain obstacles before achieving perfection and finality. This necessitates the sharpening of the analytical tools and improving techniques for removing the air of doubt as regards uncertainty in their applications.