Advantages and Disadvantages of Management Accounting

Meaning of Management Accounting

Management accounting is a specialized branch of accounting which helps management in decision making by supplying relevant accounting information. This is an accounting branch that records various financial and statistical data and presents this data in the form of reports to the internal management for better decision making.

Management accounting serves the needs of the management team by providing all financial and non-financial information about the organization from time to time. Data collected and information acquired in management accounting is meant only for internal management use and not for outsiders.

Management accounting affects the efficiency of the business as management takes decisions on the basis of information provided by it. Sharing of any false information will lead to wrong decisions by managers which will have adverse effects. There is no statutory compliance to practice management accounting nor there are any governing rules and principles regarding it. The outcome of management accounting is financial reports which are prepared and presented periodically to management.

Advantages of Management Accounting

Better Decision Making

Management accounting helps in effective decision making for an organization. It supplies all required information in the form of charts, tables, and forecasts to the management team. All this information enables managers in performing detailed analysis and taking correct decisions.

Increase Business Efficiency

It aims at increasing the overall efficiency of the business. Management accounting using scientific techniques evaluates the performance of the business and detects deviations and problems. It takes corrective measures accordingly to remove defects that enhance business productivity.

Simplify Financial Statements

This accounting branch simplifies the information contained in financial statements. Management accountant properly studies financial statements and presents all data to managers in the forms of simplified tables or charts for better understanding.

Raises profitability

Management accounting assists in increasing business profitability. It enables in cutting the extra expenditure involved in business activities using capital budgeting and budgetary control. Companies are able to reduce the cost of their products and earn better profits on them.

Motivates Employees

Management accounting serves as a tool for motivating employees. It prepares and presents periodic reports regarding operations of the business to the management team. Managers are easily able to evaluate the performance of employees and takes decision regarding promoting or demoting them accordingly.

Cost Transparency

Transparency of cost is another important role played by management accounting. It properly monitors all cash inflows and outflows of business and ensures that there is no misuse of money. Management accounting works closely with the IT department to ensure that all expenses are within budget.

Reliability

The information provides by management accounting is reliable as it uses proper scientific tools for analysis purposes. Accurate and genuine information available to managers enables them to the effective management of business affairs.

Disadvantages of Management Accounting

Lack of Specific Procedure

Management accounting does not have any specific rules and principles to follow. In the absence of any guideline, this branch of accounting may provide inaccurate data.

Costly

The installation of a management accounting system requires huge expenses as they need to hire a management accountant. Such high costs cannot be bear by small business organizations.

Dependency

Management accounting is dependent upon financial and cost accounting for various data. The authenticity of the information provided by management accounting completely depends upon the accuracy of records maintained by cost and financial accounting.

Personal Bias

This accounting branch is subject to personal bias and prejudices by management. The effectiveness of management accounting may be affected by the interpretation and analysis capability of individuals.

Uncertain

Management accounting is related to the future as it provides data for management and planning of future activities. However, the future is uncertain and management accounting may not provide effective results.

Provides Only Data

It only supplies data to management but does not provide any plan of action or decision. Management accounting cannot substitute the role of management and can only help them in their role by providing the required data.