Management Accounting

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.

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 proprietorship. It has a significant place in the businesses and widely used by management to achieving better control and quality decision-making.

Definition of Management Accounting According to American Accounting Association

It includes, methods and concepts necessary for effective planning for choosing among the  alternative business actions and for control through the evaluation and interpretation of performances.

This is not a layman’s job but educated professionals can  do this kind of accounting. There are institutions that produce qualified management accountants. Management AccountingThe 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 useful for the stakeholders for their information about the company whereas management accounting is useful for the management to take informed decisions about the business. Reports of management accounting are a secret of the company and hence management does not disclose it to anyone except the core management team who are responsible for taking decision.

Management Accounting

Management Accounting Aim

The aims behind management accounting are as follows

Taking important strategic decisions about the business

Based on the information presented in management accounting, the management can take decisions about continuing a product or modifying the sale strategy. Since management accounting is not regulated by any law,  the management can decide the areas that require more analysis, investigation and accordingly draw up strategies.
Planning for the future business activities
 Managers can do analysis and plan the activities of the organization. For example, if the recent data shows a dip in the sales for a certain region, then the sales manager can advise his team and plan some action to rectify the situation.
Evaluation and monitoring of performance
Monitoring and Evaluation (M&E) is a process that helps improve performance and achieve results. Its goal is to improve current and future management of outputs, outcomes and impact.
Assisting in decision-making
It supplies necessary information to the management which may
be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various
decisions are also taken into account.
Proper utilization of resources
 Management utilizes all the physical & human resources productively. This leads to efficacy in management. It provides maximum utilization of scarce resources by selecting its best possible alternate use in industry from out of various uses.
Make the basis for financial reports
Management accounting provides various periodical reports, which the basis for the financial reports to achieve the goal of the organization.
Asset safeguarding
It provides reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.”

Scope of Management Accounting

Strategic Management

It involves formulation and implementation of the major goals and initiatives which , top management of an organization takes on behalf of owners.

Performance management

It focuses on the performance of  an organization, a department, an employee, or the processes in place to manage particular task.

Risk Management

It contributes to frameworks and practices of identifying, measuring and reporting risks to the organization.

Cause and Effect Analysis

It discusses the cause and effect relationship. The reason for loss are probed and factors directly influencing profitability are studied. Profits are compared to sales, different expenditures, current assets, interest payable, share capital, etc.

Forecasting
It helps the organization in planning and forecasting the future course of action on the basis of historical information.

There are many management accounting tools. Some important ones are discussed below:

Budgeting and Variance Analysis

Organizations prepares budgets 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.

Cost-Volume-Profit Analysis

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 which is  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.

Limitations

Data based on financial accounting

Decisions  taken by management team are based on the data provided by financial accounting, cost accounting and other records. The limitation of this records can become limitation.

Less knowledge

Management might have insufficient knowledge of economics, statistics, etc which becomes limitation.

Expensive

To set up management accounting team the organization requires the lot of investment.

Outdated data

Management receives historical data. But, when there is change in situation data might not be useful for decision-making.

Broad Based Scope

The scope of management accounting is wide. This creates difficulties in implementation process. It leads to in-exactness and subjectivity in conclusions obtained through it.

Provides Only Data

It only provides data and not decisions. It only informs not prescribes. This limitation should also kept in mind, while using the techniques of management accounting.

Last updated on : July 31st, 2019
What’s your view on this? Share it in comments below.

Leave a Reply