Management accounting is an important decision-making tool used internally by the management. Tools like budgeting, variance analysis, cost-volume-profit analysis, BEP are some of the prominent tools used in management accounting.
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Management Accounting Definitions
Management accounting is a tool to assist management in achieving better planning and control over the organization. It is relevant for all kinds of an organization including a not-for-profit organization, government or sole proprietorships. It has a significant place in the businesses and widely used by management to achieving better control and quality decision making.
Management accounting is not a layman’s job but educated professionals are required to do this kind of accounting. There are institutions that produce qualified management accountants. The most prestigious ones include Chartered Institute of Management Accountants (CIMA), United Kingdom (UK), Institute of Certified Management Accountant (ICMA), Australia, Institute of Cost and Works Accountants of India (ICWAI), India. Let us look at how CIMA defines management accounting. According to the CIMA,
“Management accounting is the practical science of value creation within organizations in both the private and public sectors. It combines accounting, finance and management with the leading edge techniques needed to drive successful businesses.”
In Simple terms, management accounting is the accounting of resources of an organization to ensure optimum utilization. It provides top management with the proper insight to their business operations so that they can optimize utilization of resources and streamline operations.
Financial accounting and management accounting are significantly different from each other. Like financial accounting, the purpose of management accounting is not ‘Disclosure’ to the stakeholders. Financial accounting is meant for the stakeholders for their information about the company whereas management accounting is meant for the management to take informed decisions about the business. Reports of management accounting are a secret of the company and hence they are not disclosed to anyone except the core management team who are responsible for taking decision.
Management Accounting Aim
The aims behind management accounting are as follows:
- Taking important strategic decisions about the business
- Planning for the future business activities
- Evaluation and monitoring of performance
- Assisting in decision-making
- Proper utilization of resources
- Make the basis for financial reports
- Asset safeguarding
There are many management accounting tools. Some important ones are discussed below:
Budgeting and Variance Analysis
In the organizations, budgets are prepared for every year. They are based on the long-term planning of the organizations and hence assist in achieving long-term goals of an organization. Variance analysis is the comparison of standard budgets and actual outputs. This comparison enables managers to know about the deviations from the plans. The deviations can be good or bad. Positive deviations are called favorable variance and negative deviations are called unfavorable variance.
CVP analysis assists managers in finding out the level of output at which cost and revenue are equal. It is a ‘no profit – no loss’ situation also known as the breakeven point.
Most of the cost accounting techniques are used by management accountants. Other important techniques are incremental analysis, cost behavior analysis, economic order quantity (EOQ) and economic batch quantity (EBQ), return on investment analysis, safety stock, lead time, segment reporting etc.