What is Management Accounting? Definition, Functions, Objectives

What is Management Accounting?

Management Accounting is that field of accounting which deals with providing information including financial accounting, information to managers for their use in planning, decision making, performance evaluation, control,management of cost and cost determination for financial reporting. Managerial Accounting contains reports prepared to fulfill the needs of managements.

Management Accounting was not known to the business world until 1950. The term was first formally described in a report entitled ‘Management Accounting’ in 1950. The report was published by the Anglo-American Council of Productivity Management Accounting Team after its visit to United States during April, Mayand June 1950.

The team in its report defines Management Accounting as :

“the presentation of accounting information in such a way as to assist management in the creation of policy and in the day-to-day operation of an undertaking”.

Management Accounting Definition

Some important management accounting definition given by the professional Institutes and renowned Authors are as follows :

Characteristics of Management Accounting

The above definitions clearly indicate the following characteristics of management accounting:

• It is the application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formation of policies and in the planning and control of the operations of the undertaking.
  
  
• Management Accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives in the making of rational decisions with a view towards achieving the objectives.
  
  
• Management Accounting rearranges for management control to a great extent the accounting information provided by financial accounting. It, therefore, lies between the following two activities:
  
  • Completing the accounting results on the one hand, and
  • Controlling the business by the management, on the other.
    
    
• Management accounting actually covers all rearrangement, combination or adjustment of the orthodox accounting figures which may be required to provide the Chief Executive with the information from which he can control the business.
  
  
• It comprises accounting methods, systems and techniques which coupled with special knowledge and ability, assist management in its task of maximizing profits or minimizing losses.
  
  
• Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.
  
  
• Management accounting is concerned with accounting information that is useful to the management. The efficiency of the various phases of management is, as a matter of fact, the common thread which underlies all these definitions. However, it should be clearly understood that it does not supplant financial accounting but rather it supplements it in order to serve diverse requirements of modern management.
  
  
• The functions of the management are planning, organizing, directing and controlling. Management accounting helps in the performance of each of these functions in a meaningful way.
  
  
• Management accounting serves as a vital source of data for management planning. The accounts and documents are a repository of a vast quantity of data about the past progress of the enterprise which are a must for making forecasts for the future.

Importance of Management Accounting

The following points highlight the need and importance of management accounting:

• Management accounting includes all those accounting services by means of which assistance is rendered to the management in their managerial functions i.e decision making, profit planning, control, etc. It also helps management with the execution of their plans and measurement of performance.
  
  
• Financial accounting in its traditional form cannot apply the information necessary to the management for functioning efficiently and effectively. Management Accounting is the accounting that provides in non-technical language, cost, profits and other information necessary to the management for discharging their functions.
  
  
• Management accounting is the presentation of accounting information in such a way as to assist management in the creation of policy in the day to day operation of undertakings.
  
  
• Management accounting goes beyond the figures provided by financial accounting which are mute in nature and make them self-explanatory.
  
  
• Management accounting is an extension of the managerial aspects of cost accounting. It utilizes the principles and practices of both Cost Accounting and Financial Accounting.
  
  
• The term accounting is used in a more broad scene in Management Accounting that the scope of management is very wide and the term comprises every activity of a business.
  
  
• Management Accounting, focussing on internal user, measures and report financial and other information that assist managers in fulfilling the goals of the organization. This furnishes the necessary information to the management frequently i.e as and when required and also it points out that what should happen.

Objectives of Management Accounting

The following are the major objective of management accounting.

• Providing managers with information (data) for decision making and planning aims at modifying the data to suit to the requirements of the decision.
  
  
• With the help of the tools of financial analysis to analysis and interpret the data and present the results with necessary comments, conclusion etc. to the management.
  
  
• Assisting Management (managerial personnel) in directing and controlling operations with the help of standard costing, budgetary control and responsibility accounting.
  
  
• Motivating managers and other employees towards the organization’s goals.
  
  
• Measuring the performance of subunits, managers and other employees within the organisation6.To submit comprehensive reports which includes both the quantitative and the qualitative information.

Scope of Management Accounting

Scope of Management Accounting are given below

1. Financial Accounting
2. Cost Accounting
3. Financial Statement Analysis
4. Forecasting and Budgeting
5. Cost Control Techniques
6. Inflation Accounting
7. Management Reporting
8. Quantitative Techniques
9. Taxation
10. Internal Audit
11. Office Services

Financial Accounting

Management Accounting is an essential prerequisite of any discussion of management accounting. Financial statements contain enough information that is used by management of decision-making. Management Accounting contains only tool and techniques and it gets the data for interpretation and analysis mainly from financial accounting. Thus, without efficient financial accounting system, management accounting cannot operate.

Cost Accounting

Business executives depend heavily on accounting information in general and on cost information in particular because any activity of an organisation can be described by its cost. They make use of various cost data in managing organisations effectively. Cost Accounting is considered as backbone of management accounting as it provides the analytical tools such as budgetary control, standard costing, marginal costing, inventory control, operating costing etc. which are used by management to discharge its reproducibilities efficiently.

Financial Statement Analysis

Frequently, the various users of financial statements may need access to information that can be obtained only by selecting individual numbers from the statements and by developing certain trends and ratios. Any attempt in this direction is referred to as financial statement analysis. A person can gain meaningful insights and conclusions about the firm with the help of analysis and interpretation of the information contained in financial statements. Numerous techniques have been developed which can be used for proper interpretation and analysis of financial statements.

Forecasting and Budgeting

This refers to the formulation of budgets and forecasts, using standards norms in co-operation with operating and other departments of a business concern. This ultimate success of any budgeting depends on the proper setting to target figures in the budgets and the actual realization of the same in practice, without even a slight deviation due to external reasons beyond the control of the management.

Cost Control Techniques

These serves as effective tool for comparing the actual result with the predetermined figures as laid down in budgets. They greatly help in translating the budgets into operating plans.

Inflation Accounting

Inflation accounting attempts to identify certain characteristics that tend to distort the reporting of financial results during periods of rapidly changing prices. It devises and implements appropriate methods to analyses and interpret the impact of inflation on the financial Information.

Management Reporting

Clear, informative, timely reports are essential management tools in machine decisions that make the best use of acompany’s resources. Thus, one of the basic responsibility of management accounting is to keep the management well informed about the operations of the business. To discharge this responsibility efficiently, he has to prepare quarterly, half-yearly and other interim reports and submit the same to the management.

Quantitative Techniques

Modern managers believe that the financial and economic data available for managerial decisions can be more useful when analysed with more sophisticated and evaluation techniques. Quantitative analysis methods allow mangers to develop information from their financial database that is not otherwise available. The techniques such as time series, regression analysis and sampling techniques are commonly used for this purpose. Further, mangers also use techniques such as linear programming, game theory, queuing theory etc. in their decision-making process.

Taxation

Taxation plays an important role in the profitability of a commercial concern. Therefore, it is essential for a management accountant to have complete knowledge of business taxation. The business profit and the tax thereon is to be ascertained as per the provision of taxation. The filing of tax returns and the payment of tax in due time is exclusively the responsibility of management accountant.

Internal Audit

The internal audit as a discipline of management accounting makes arrangements performance appraisal of the company’s various departments. Thus, a management accountant must possess knowledge about the fixation of responsibilities and measurement of results.

Office Services

To discharge the responsibilities efficiently, a management accountant has to deal with data processing, filing, copying, duplicating. His area of responsibilities also includes the evaluation and reporting about the utility of different office procedures and machines.

Functions of Management Accounting

1. Planning and Forecasting
2. Furnishes Information as per Requirements
3. Not Confine merely Financial Data
4. Analysis and Interpretation
5. Co-ordinating
6. Communication
7. Establishes Standards of Performance
8. Undertakes various Special Studies
9. Tax Administration
10. Controlling

Planning and Forecasting

Planning is an activity of the management that requires an efficient system of decision-making. In any type of enterprise, plans should be made to guide future operations of the business of the major functions of the management accountant is to help management in the selection of company goals and in the formulation of policies and strategies to allocate resources to achieve these goals.

Different accounting techniques are used by the management to discharge the function of planning efficiently. The important among them are financial statement analysis, budgeting, direct costing, capital budgeting, and standard costing.

Furnishes Information as per Requirements

Management accounting furnishes statistical information according to the varying requirements of the different levels of management at periodic intervals. The three-tier management which is in vogue in the recent times requires information of various types at different intervals e.g. the top level management requires information in a capsule form covering all aspects of the business at relatively long intervals whilst detailed analysis relating to a particular aspect of the business at short intervals will suffice the persons in the lower rungs of the management ladder.

Not Confine merely Financial Data

Management accounting does not confine itself merely to financial data to assist the management in the decision-making process but frequently draws upon various sources other than accounting for qualitative information which cannot be converted into monetary terms. For this purpose, engineering records. Case studies, minutes of meetings, productivity reports, special surveys and other business documents are greatly relied upon.

Analysis and Interpretation

The economic and financial data collected from various statements do not have much management utility unless it is properly analyzed in the light of the nature of the decisions. In fact process of analysis and interpretation puts life in available data to speak about future trends. The management accountant has to present the data with his comments and recommendations to the management. Thus, the analysis and interpretations of data are considered as the back-bone ofManagement Accounting.

Co-ordinating

The techniques such as budgeting, financial reporting and analysis and interpretation are commonly used by management accountants to co-ordinate efficiently the various activities of the business. The efficient control contributes to the efficiency or organisation which in turn increases the profitability of a concern.

Communication

The management accountant spends his maximum time in communicating to the management. He has to prepare various reports required by the management from time to time to meet the challenges of the business. The publication of company’s annual report is also an important task of a management accountant.

Establishes Standards of Performance

Management accounting establishes standards of performance in the different realms of activities such that any deviation therefrom can be easily measured leading to further investigation of the causes and institution of prompt remedial measures for rectifying the same. This is made possible through budgetary control and standard costing which are essential adjuncts of management accounting.

Undertakes various Special Studies

Modern business is operating under such dynamic conditions where even a minor change in business can have a significant impact on the business results. Therefore, managements is always interested to know the areas of business which can contribute to the stability and profitability of the concern. To meet this objective,management accountant undertakes various special studies such as sales analysis, economic forecasts, price spread analysis etc.

Tax Administration

In modern business organizations, the responsibilities of a management accountant also include, the tax administration. This task involves submission of necessary documents and return to the tax authorities and supervision of all matters relating to tax administration.

Controlling

Management Accounting helps in the controlling by providing performance reports and control reports which highlight variances between expected and actual performances. Such reports serves as a basis for taking necessary corrective action to control operations.

Limitations Of Management Accounting

Following are the important limitations of Management Accounting :

1. Psychological Resistance
2. Expensive Installation
3. Continuance of Intuitive Decision-making
4. Broad-based Scope
5. Comprehensive Coverage
6. Evolutionary Stage
7. Persistent Efforts
8. Basic Records
9. Principle of Objectivity not Followed
10. No Substitute for Management

Psychological Resistance

The management accounting system spells a radical change in the management approach towards solving day-to-day problems confronted by it. This calls for a reorganisation of personnel as well as the reorientation of their activities.

This is bound to attract opposition especially from the labour force misconstruing it as a tool meant for their exploitation. Constant education about the benefits of such new techniques alone will allay the fears of the labour force by and large. Management accounting, as a new discipline, is no exception to this rule and it encountered psychological resistance at least in the initial stages.

Expensive Installation

For the installation of a system of management accounting in a business concern, an elaborate organisation and a large number of manuals are very essential. This in turn escalates the establishment charges such that only large-scale organisations can afford to install it.

Continuance of Intuitive Decision-making

Management accounting eliminates the intuitive decision-making process of management and replaces it with scientific decision-making. Unfortunately, many managements are prone to take the easy and simple path of intuitive decision-making rather than the difficult but reliable scientific decision-making process in day-to-day management.

Broad-based Scope

The Scope of management accounting is wide and broad-based and this creates many difficulties in the implementation process. It is easy to record, analyse, and interpret a historical event converted into monetary terms in a most objective manner. But it will be difficult to perform the same functions in respect of future and unqualifiable situations in the light of the past records.

Comprehensive Coverage

The fusion of a number of subjects like financial accounting, statistics, engineering, economics, taxation has culminated in the emergence of management accounting. Under the circumstances, should be the emergence of management accounting. Under the circumstances, more of these subjects will have its impact on the fixation of standards as well as solutions to the problems connected with the management performance.

Evolutionary Stage

management Accounting is a new discipline and a growing subject too. It is still in the infancy stage and undergoing an evolutionary process. Naturally, it faces certain obstacles and impediments before achieving perfection and finality. This necessitates sharpening of the analytical tool and improving to techniques for removing the air of doubt as regards uncertainty in their applications.

Persistent Efforts

the conclusion drawn by the management accountant may not be readily and willingly implemented. For this purpose, the management accountant has to strive to convince the staff members.

Basic Records

Management accounting collects the data from various sources like Financial Accounting, Cost Accounting, Statistics, and other operational records. If such data or information is incorrect or partial the decisions arrived at on the basis of such data may be incorrect and misleading.

Principle of Objectivity not Followed

The principle of objectivity is not followed in its real spirit in management accounting. The collection and analysis is considerably influenced by the personal bias of the management accountant.

No Substitute for Management

In fact, Management Accounting is a means to an end, the end being the successful business operations for achievements of business objectives. It cannot replace management as itis simply a tool or a technique in the hands of management and ultimate success in business depends upon the will and dedication of management

Advantages Of Management Accounting

Management Accounting offers the following benefits to the enterprise:

• It increases the efficiency in the activities of the business.
  
  
• It ensures efficient regulation of business activities by establishing an efficient system of planning and budgeting.
  
  
• It makes possible the efficient utilization of the available resources and thereby increases the return on capital employed.
  
  
• It ensures effective control by comparing actual results with the standards.
  
  
• It maintains a good public relation by providing quality customers of the business
  
  
• It provides mens to motivate the employees of the organization.
  
  
• It keeps management informed about the going operations enabling it to suggest remedial measures in case of deviations.
  
  
• It helps in evaluating the efficiency and effectiveness of the company’s business policies with the incorporation of management audit.
  
  
• It is one of the “diagnostic techniques” available to the managers and executives for improving economic performance by realisation of the accounting system in use.
  
  
• It helps in the development of realistic data in respect of future transactions.
  
  
• It provides a technique for useful interpretation of accounting information

Tools And Techniques Of Management Accounting

1. Financial Planning
2. Statistical AnalysisStatistical Analysis
3. Cost Accounting
4. Standard Costing
5. Marginal Costing
6. Budgetary Control
7. Fund Flow Analysis
8. Management Reporting
9. Analysis of Financial Statement

Financial Planning

Planning is necessary not only for efficient utilization of available resources but also for better and progressive business results. It is more significant for finance function because finance plays a deciding role in managerial decision. Financial planning is the process of deciding in advance the financial objective by employing financial planning. In the short term, it can help a concern in meeting its obligations by balancing flow of funds. At the same time, its proper application can ensure efficient utilization of available financial resources in a long period.

Statistical Analysis

Accountants frequently confront masses of data from which they would like to draw systematic and logical conclusions. Statistical analysis and in particular, statistical sampling theory provides scientific method for drawing reliable and valid conclusions about the properties of an entire population when only a properly chosen sample of the population has been studied in detail.

Cost Accounting

Cost accounting is a vital part of the total management accounting system. It includes the recording, classifying, analysis and reporting of all cost aspects of company performance. The cost accounting and procedures have to be designed with great care keeping in view the nature and requirement of the firm and the data required at the different levels of management for effective cost control and cost reduction.

Standard Costing

Another major technique for operating control through management accounting is standard costing. Under this arrangement, standard costs are used to control the major activities of the business. Standard costs are predetermined targets against which actual results are evaluated. This is the basis for a system of management control, for which proper monitoring of performance is a key factor. The variances between standard and actual costs are computed and reported to managements.

Marginal Costing

Marginal costing is a managerial technique that considers only variable costs in the additional output decisions. It is reporting system that values inventory and cost of sales at its manufacturing variable cost. It is frequently used as an internal management reporting system.

Budgetary Control

Budgetary Control refers to a system of business control that uses budgets to control the major activities of the business. The budgets for all major activities of the business are prepared in advance. Generally, the budget is prepared by updating the previous year’s figures in the light of some forward projections.

Fund Flow Analysis

Funds Flow Analysis attempts to highlight the causesof change in the financial condition of a business enterprise between twodates. Any statement prepared for this purpose refers to a funds flow statement. A funds flow statement helps management in the efficient planning and control of cash.

Management Reporting

Management reporting is considered essential component of a well-designed planning and control system. Decision-makers frequently require information on various aspects of the business. Thus it is the responsibility of the management accountant to communicate right information to the management at the right time and in a right manner.

Analysis of Financial Statement

Financial statement analysis is a growing and ever-changing set of systems and procedures designed to provide decision-makers with relevant information derived from the basic sources of data, such as company financial statements and government and industry publications. Over the years a number of techniques have been devised to analyses financial statements e.g. comparative financial statements, common-size statements, ratio analysis, trend analysis, and fund flow statements.

Key Terms

Analysis of Financial Statement: It is a process of evaluating the relationship between component parts of financial statement to obtain a better understanding of the firm’s position and performance.

Horizontal: financial statements for a certain number of years are examined and analysed the analysis is called horizontal analysis.

Vertical Analysis: This refers to analysis of ratios developed for one date for according period. This is also known as Static Analysis.