What is Management Accounting
Management accounting is a specialised branch of accounting which helps management in decision making by supplying relevant accounting information. This is an accounting branch which records various financial and statistical data and presents this data in the form of reports to 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 organisation from time to time. The data collected and information gathered from collected data using different techniques and professional knowledge in management accounting is meant for only 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 decision 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. The reports generally contain details like cash available with business, its sales revenues and account payable and account receivables current state. Objectives of Management accounting can be well understood from the following points:
Objectives of Management Accounting
Better Decision Making
Assisting in better decision making is the primary objective of Management accounting. It supports the decision-making process of the management team by informing them about all affairs of business from time to time. Right decisions taken at the right time can improve the efficiency of the business. Management accounting helps in understanding the business problems in a better way using techniques from different fields like costing, statistics, economics etc. Therefore, proper understanding helps to take better decisions timely.
Proper Planning and Formulation of Policies
Management accounting helps the managers in making better plan and policies for the organisation. It provides management for the financial reports containing all financial and statistical data about the organisation. Information from various financial sources like cash flow statement, fund flow statement, capital budgeting, marginal and standard costing is presented in these financial reports. This all collectively helps managers in proper analysis and formulating of appropriate policies.
Controls Management Performance
Managerial control is one of another important objective of management accounting. Whole organisation is divided into different responsibility centres and each responsibility centre is allotted some goals to be achieved. Management accountant monitors and evaluates the performance of these responsibility centres from time to time. He is responsible to check whether operations are going as per plans and standards. In case of any deviations he will inform management thereby helping in taking corrective measures timely.
Interprets Financial Information
Management accounting interprets the financial information in a way which is well understood by management. Information collection through accounting is somehow technical and cannot be well understood easily until you have proper knowledge of accounting subject. Management accounting derives information from various financial statements and present it in form of reports which contains information in non-technical and intelligible manner. This way it management in clearly understanding the accounting information by managers.
Motivation of employees is must for the achievement of organisation goals timely. Management accountant sets goals and policies to be followed for each employees and department in organisation. It keeps a full check on activities of employees and measures their effectiveness from time to time. In addition to measuring their performance, he also guides and supports them in improving their efficiency. These activities are undertaken in a long way continuously and thereby motivates employees to great extent towards established goals.
Communicates Up-to-date Information
Management accounting is served as the communication link between the management team and the organisation. It communicates all financial facts and figures to internal management team regularly on periodic basis. All details are shared in the form of financial reports which are the outcome of management accounting and contain modified data well understood by internal stakeholders. It communicates all meaningful information to all management executives and helps them in taking right action at right time.
Evaluates policies effectiveness
Measuring and evaluating the effectiveness of various management policies is another important role played by management accounting. It assists and lay emphasis on Management audit. Management accounting reviews the performance and effectiveness of management policies in various departments. It finds out the deviations and communicates the same to the management team. Management accounting helps in ensuring that all designed policies are efficiently implemented and followed in the organisation.
Importance of Management Accounting
Importance of Management accounting can be well-understood as given below:-
- Helps in making plans: Management accounting assists organization in making better plans for future activities. It supplies all financial and non-financial data to management on a regular basis. Managers through the availability of all these information are able to perform better analysis and forecasting which enables them in framing proper plans.
- Assist in decision making: Efficient decision making is a major role played by management accounting. It collects and analyses all financial information available within organization and present them in simplified charts, tables or graphs. Management gets better understanding regarding organization affairs and is able to take correct decisions at right time.
- Measures the performance: Management accounting monitors and measures the overall performance of organization. It uses various tools like variance analysis which measures the company performance with pre-established standards for finding out the deviations. Managers by identifying all variations in performance of company are able to take corrective measures accordingly for removing them.
- Increases the efficiency: This accounting branch aims at raising the overall efficiency of business organizations. Management accounting sets target for each division in advance and checks whether they fulfill all targets. It ensures that all resources are fully utilized which helps in improving the efficiency.
- Better service to customers: Management accounting focuses on better service to customers by providing them quality goods at fair prices. It helps in controlling the prices of products by employing cost control devices. In addition to that, it sets various quality standards to be met by organization for producing their goods.
- Raises the profitability: It has an efficient role in enhancing the profitability of organizations. It makes companies cost conscious and assist in avoiding all extra expenditures. Management accounting uses techniques such as budgetary control and capital budgeting for reducing the expenses which helps in earning better profits.
- Provides reliability: Management accounting adds reliability to management decisions by providing them genuine information. It uses proper scientific tools and techniques for analysis purposes which helps managers in proper management of business operations.
Limitations of Management Accounting
Various limitations of management account are as given in points:-
- Dependent on cost and financial accounting: Management accounting uses information from cost and financial accounting for analysis or forecasting purposes. Effectiveness of decisions taken by management accountant is based on the genuineness of past financial records used.
- Expensive: Management accounting system requires huge expenditure to be incurred on the part of organizations. Companies need to make large investments for implementing this accounting system as it requires a wide network of rule and regulations to be followed.
- Management Accounting is only a Tool: Management accounting cannot be treated as a substitute of good administration and management system. It is a tool of management which supplies all data to them for effective decision making. Management accounting does not provide any decision but supplies only the required information.
- Lack of objectivity: Another major drawback is that objectivity of management accounting decisions is influenced by personal bias and prejudices. There is a possibility of manipulation from collection of data till its interpretation in financial records. It influences the overall validity of management accounting.
- Evolutionary stage: Management accounting is till now at its developing stage. The tools and methods used by this accounting system provide varying results. Also, this branch does not have any defined rules and regulations to be followed.