What is Management Accounting?
Management accounting is the accounting system for making decisions of the business enterprise. Management accounting furnishes the necessary information to assist the business enterprise to make rational decisions through the development of policies and procedures in order to meet the day to day commitments of the enterprise.
Table of Contents
- 1 What is Management Accounting?
- 2 Management Accounting Definition
- 3 Objectives of Management Accounting
- 4 Scope of Management Accounting
- 5 Nature of Management Accounting
- 5.1 Related with Future
- 5.2 Selective Nature
- 5.3 Established financial accounting rules are not followed
- 5.4 Furnishes facts and not decisions
- 5.5 Special emphasis is laid on cause & effect
- 5.6 Emphasis is on Study and Analysis of the Nature of Elements of Cost
- 5.7 Service Function
- 5.8 Integrated System
- 5.9 Developing Subject
- 5.10 Potentiality of Development as a Profession
- 6 Advantages of Management Accounting
- 6.1 Helpful in Planning
- 6.2 Helpful in Organising
- 6.3 Helpful in Co-ordination
- 6.4 Helpful in Communication
- 6.5 Helpful in Controlling
- 6.6 Helpful in Motivating Employees
- 6.7 Helpful in Analysis and Interpreting the Financial Information
- 6.8 Helpful in Decision-Making
- 6.9 Helpful in Reporting
- 6.10 Helpful in Fixing Responsibility
- 7 Limitations of Management Accounting
- 7.1 Based on Financial and Cost Accounting
- 7.2 Wide Scope
- 7.3 Lack of Continuity in Efforts
- 7.4 Effect of Human Factor
- 7.5 Lack of Thorough Knowledge
- 7.6 Not an Alternative of Administration
- 7.7 Effect of Time Factor
- 7.8 Top Heavy Structure
- 7.9 Evolutionary Stage
- 7.10 Use of Alternative Techniques
- 7.11 Psychological Resistance
Management Accounting Definition
Definitions of Management Accounting: It had been defined differently by various scholars of the field. Some of the famous and broadly accepted defections of Management Accounting are as under:
Management Accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management” – T. G. Rose
“Management Accounting is concerned with accounting information, that is useful to management” – Robert N. Anthony
“Management Accountancy is the presentation of accounting information in such a way as to assist management in the action of policy and in day-to-day operation of undertakings – Anglo-American Council of Productivity
“Any form of accounting which enables a business to be conducted mode efficiently can be regarded as management accountancy’’. – Institute of Chartered Accountants, England
“Management Accounting is the term used to describe the accounting methods, systems and techniques, which coupled with special knowledge and ability, assist management in its task of maximising profits or minimizing losses”- J. Batty
“Management accounting can be defined as the art of presenting to management such figures, whether in terms of money or other units, as will assist management to do its job.” -Bostock
Objectives of Management Accounting
- To assist the management in promoting efficiency. Efficiency includes best possible services to the customers, investors and employees.
- To prepare budget covering all functions of a business (i.e. production, sales, research and finance).
- To analysis monetary and non-monetary transactions.
- To compare the actual performance with plan for identifying deviations and their causes.
- To interpret financial statements to enable the management to formulate future policies.
- To submit to the management at frequent intervals operating statements and shortterm financial statements.
- To arrange for the systematic allocation of responsibilities.
- To provide a suitable organization for discharging the responsibilities.
Scope of Management Accounting
- Financial Accounting
- Cost Accounting
- Budgeting and Forecasting
- Inventory Control
- Statistical Analysis
- Analysis of Data
- Internal Audit
- Tax Accounting
- Methods and Procedures
Financial Accounting deals with financial aspects by preparation of Profit and Loss Account and Balance Sheet. Management accounting rearranges and uses the financial statements.
Therefore management accounting does not exclusively maintain factual data for itself. It is closely related and connected with financial accounting. thus, management accounting is dependent on financial accounting which limits its scope.
Cost accounting is an essential part of management accounting. Cost accounting, through its various techniques, reveals efficiency of various divisions, departments and products.
It also provides information regarding cost of products process and jobs through different methods of costing. Management accounting makes use of all this data by focusing it towards managerial decisions.
Budgeting and Forecasting
Budgeting is setting targets by estimating expenditure and revenue for a given period. Forecasting is prediction of what will happen as a result of a given set of circumstances.
Targets are fixed for various departments and responsibility is pinpointed for achieving the targets. Actual results are compared with preset targets and performance is evaluated.
This includes, planning, coordinating and control of inventory from the time of acquisition to the stage of disposal. This is done through various techniques of inventory control like stock levels, ABC and VED analysis physical stock verification, etc.
In order to make the information more useful statistical tools are applied. These tools include charts, graphs, diagrams index numbers, etc. For the purpose of forecasting, other tools such as time series regression analysis and sampling techniques are used.
Analysis of Data
Financial statements are analysed and compared with past statements, compared with those of other firms and with standards set. The analysis and interpretation results in drawing reports and presentation to the management.
Internal audit helps the management in fixing individual responsibility for internal control.
Tax liability is ascertained from income statements. Tax planning in done by following the various tax incentives offered by the Central and State Governments. Knowledge of tax provisions helps the management in meeting the tax liabilities and complying with other legislations like Sales tax, Companies Act and MRTP Act.
Methods and Procedures
In includes keeping of efficient system for data processing and effective reporting of required data in time.
Nature of Management Accounting
Following are the nature of management accounting:
- Related with Future
- Selective Nature
- Established financial accounting rules are not followed
- Furnishes facts and not decisions
- Special emphasis is laid on cause & effect
- Emphasis on study and analysis of Nature of Elements of Cost
- Service Function
- Integrated System
- Developing Subject
- Potentiality of Development as a Profession
In management accounting, the forecasts about the future are prepared. The actual results are compared with these forecasts. This helps the management in effective controlling. It include budgetary control, standard costing etc in management accountancy.
In all these methods facts relating to future are studied, thus we say management accounting is related with future.
In management accounting the most profitable and best alternative is chosen after analysis and comparative study of various alternatives. In the same way, only selected information is presented to the management.
Thus at every stage it requires selection and presentation of necessary information to the management, therefore management accounting is selective in nature
Established financial accounting rules are not followed
The work of management accountant is, to increase the efficiency. For this purpose, he can frame his own rules different from that of set rules on the basis of his logic, knowledge, experience and imagination and creates an information system which can serve the cause.
Therefore it is more appropriate to say that there are no set of rules for management accounting.
Furnishes facts and not decisions
The management accountant only collects and analyses the data and presents it to the management. He does not take any decision over it. Decision-making is in the preview of management and he helps in decision making.
Special emphasis is laid on cause & effect
In management accounting not only the results are seen but also attempt is made to understand that the result is affected with what factors and how it can be improved.
For Example, in financial accounting only profit is calculated but in management accounting it is studied that why the profit remains at certain level and what will be its effect on the health of the enterprise and how it can be increased.
Emphasis is on Study and Analysis of the Nature of Elements of Cost
The study of cost elements is of great importance in management accounting. Total cost can be distributed in various parts such as variable cost, fixed cost and semi-variable cost. In management accounting this classification has an important place. For taking managerial decisions, marginal costing, cost volume-profit analysis, variance analysis etc. are used, which are based on this classification
Management accounting is a service function through which, the information necessary for deciding policies of the organisation and taking decisions is provided on time These information can be related to cost, price, income and profits etc.
Management accounting is an integrated system of various systems, methods and techniques. In this we include cost accounts, budgetary control, financial accounts along with economics, psychology, statistics and other related subjects.
Management accounting had developed in less than 50 years and till today it has not developed fully. Its tools, methods, and systems are constantly progressing because of which it is getting more refined.
Potentiality of Development as a Profession
It has not evolved as a profession in India, as yet. But some institutions are trying to establish it in that way. Among them the main are Institute of Chartered Accountants of India and Institute of Cost & Work Accounts of India.
Advantages of Management Accounting
- Helpful in Planning
- Helpful in Organising
- Helpful in Co-ordination
- Helpful in Communication
- Helpful in Controlling
- Helpful in Communication
- Helpful in Controlling
- Helpful in Motivating Employees
- Helpful in Analysis and Interpreting the Financial Information
- Helpful in Decision-Making
- Helpful in Reporting
- Helpful in Fixing Responsibility
Helpful in Planning
For the set on future goals that should be done, is called planning. For achieving the desired goals of business it is necessary for management to prepare plan of action. Management accounting gives an ample help in this cause of management.
The forecast of production, sale, purchase, capital, investment and cash etc. helps the management in framing a profitable plan for future. The best alternative is chosen by the managers with the help of management accounting.
Helpful in Organising
Every management tries to unite its organization and departments in the best possible way. The distribution of authorities and responsibilities of carrying out the plans comes under the organizing. Management accounting helps into this by emphasizing more on the budget and cost centres.
Helpful in Co-ordination
Every manager tries to establish co-ordination between the activities carried out under him so that organization can prove to be more profitable and efficient. Management accounting helps the management in this work.
For example, there should be a co-ordination between production and sale, according to estimated production the raw material, finance and labour should be available. This co-ordination is facilitated by budgetary control system.
Helpful in Communication
By communication, we mean the transfer of information between the employees of the organization (Managers and Labourers) and among the organization and external Institutions like customers, creditors, suppliers, government etc. For correct and immediate communication the management should have up to date information. Through management accounting the daily reports can be presented in form of reports.
The yearly performance can be presented in the form of final accounts and yearly reports. Through the cost accountancy, the cost of production operations and processes can be known and it can be presented to management in the form of details. For keeping the employees informed memos, circulars and notices can be prepared.
For taking any solid decision, information remains the base. For this proper explanation and interpretation of information is required and management accounting helps in the smooth flow of this.
Helpful in Controlling
Controlling means the comparison of actual and expected results and taking the corrective action wherever the intolerable deviations are found. In managerial tasks, controlling comes on front seat. Various techniques are employed by management accountant to have a better control mechanism.
Through standard and overhead costs and budgetary control, control is kept on various activities and departments.
Helpful in Motivating Employees
Every manager tries to make his subordinates: a loyal employee. For this a good leadership is required, and good leadership is possible only if correct information are available.
This is taken care of by the management accounting and the management accountant keeps on increasing the knowledge of management by providing adequate and timely information. This keeps the self-confidence of the managers at high levels and they lead better.
Helpful in Analysis and Interpreting the Financial Information
This is again one of the main objectives of management accounting. Accounting is a technical subject. Management is not expected to understand the minute details of it.
Thus it is the responsibility of management accountant to interpret this information and present it in most new technical form so that it could be understood by each and every one. For this, graphs and diagrams etc. are used.
Helpful in Decision-Making
The most important part of management is decision-making. Decision means choosing the best out of the rest. Management has to take various decisions in business.
For taking decision on complex matters, It is the responsibility of management accountant to present the data and information various possible alternatives. Various tools and techniques are available for this purpose.
Helpful in Reporting
The most important work of management accountant is to provide data and contents to the management for tacking important decisions. This work is done through reports.
Various departmental heads pass on the operation reports of their departments to the top management. In this job, management accounting plays a major role.
Helpful in Fixing Responsibility
With the help of management accounting techniques the responsibility centres are formed in the undertaking, which fixes responsibility of particular person for a particular work.
Limitations of Management Accounting
- Based on Financial and Cost Accounting
- Wide Scope
- Lack of Continuity in Efforts
- Effect of Human Factor
- Lack of Thorough Knowledge
- Not an Alternative of Administration
- Effect of Time Factor
- Top Heavy Structure
- Evolutionary Stage
- Use of Alternative Techniques
- Psychological Resistance
Based on Financial and Cost Accounting
Most of the information presented by management accounting are based on the financial and cost accounting. Thus the conclusions drawn by the management accountant are affected, by the limitations of the financial and cost accounting to a great extent. The information in their statements are generally based on historical figures, which make the information of management accounting less useful.
Management accountant tries to provide forecasts, analysis and reports for all the areas of management, which has a very wide scope thus making it very hard for him to generate such information.
Lack of Continuity in Efforts
The conclusions derived by management accountant are of no use till they are constantly and cautiously used by the management. For this it is essential that information provided by him should be used at each level of management and treated as the part of management process.
Effect of Human Factor
The information whatsoever is collected in the management accounting is affected by the “personal biases” and human factor. From the collection to the analysis of the information there comes some part of effect because of the character, intentions, and behavior of the person doing it. These decisions are affected by personal influence and the self knowledge to a great extent. That’s why the conclusions drawn from them are also affected.
Lack of Thorough Knowledge
The right conclusions, from the information collected in management accounting, can be drawn only if the person is having in-depth knowledge of accountancy, statistics, economics, auditing, principles of management and engineering etc. Management accountant and managers both don’t have this much knowledge, which ultimately affects the quality of decisions.
Not an Alternative of Administration
Management accounting is just a tool in the hands of management and it cannot replace the administration and management. Management accountant just supplies some information to the management, taking decision and activating them are not in his peripheral. Thus, management accounting provides basis for decision-making and not the decision.
Effect of Time Factor
Most of the information gathered by management accountant is of historical nature. When any forecast is made regarding a project at that time if this information is used, then it can pose some problems, which puts management in awkward situations. Sometimes quick decisions are needed regarding the project and at such time management accountant cannot reproduce effective information, which is a failure.
Top Heavy Structure
For the establishment of management accounting system there is a requirement of a broad organization and employees, which makes it a costly affair, therefore it can be adopted only by large organisations.
The tools of management accounting has not developed fully as yet, there is a constant change in it from time to time, which makes them instable for use.
Use of Alternative Techniques
In management accounting various techniques can be used for solving a problem. Different conclusions will be drawn for the same problem on using different tools.
Managers generally resist the information of management accounting because it can change the basis of the whole established management system and it can be used as a tool against manager. Therefore, managers oppose it from the beginning itself.