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. 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 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 Aim
The aims behind management accounting are as follows
Taking important strategic decisions about the business
Scope of Management Accounting
It involves formulation and implementation of the major goals and initiatives which , top management of an organization takes on behalf of owners.
It focuses on the performance of an organization, a department, an employee, or the processes in place to manage particular task.
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.
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.
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.
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.
Management might have insufficient knowledge of economics, statistics, etc which becomes limitation.
To set up management accounting team the organization requires the lot of investment.
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.