MANAGEMENT
Meaning and Definition of Management Accounting
The term of
Management accounting consist of two words ‘management and accounting’ which is
used to describe the modern concept of accounting as a tool of management in
contrast to the conventional accounts prepaid to show the financial position of
concern. It is the study of managerial aspect of accounting. It shows how
accounting function can be reoriented so as a fit within the framework of
management activities. In other words, management accounting is concern with
providing information to managers-i.e. people inside in organization who direct
control it is operation. It provides necessary information to the management
for discharging its function i.e. planning, organizing, directing and
controlling. It also provide the required information for effective and
efficient performance of this function.
This above figure
shows how accounting provides information to the management. The sources of information for management accounting are cost data and
reports as well as financial statement and information as supplied by cost and
financial accounting. The information provides by management accounting are
used by management for carrying out its different activities like planning,
organizing, decision-making, coordinating and controlling.
T. Lucey defines “management
accounting is primarily concern with the data gathering analysis, processing,
interpreting, and communicating the resulting information for use within the
organization so that management can more effectively plan, make decision and
control operation.”
According to American accounting association “management accounting is the application of
the appropriate technique and concept of processing historical and projected
economic data of an entity to assist management in establishing plans for
reasonable economic objective and in the making of rational decision whit a
view to achieve this objective.”
In other words of J Batty, “Management accounting is the term used to describe accounting methods,
system and technique which coupled with special knowledge and ability, assist
management in its task of maximizing profits or minimizing loss es.”
From the definition,
it is clear that management accounting is concerned with assiting the
management to carry out its activities. It relies on cost and financial
accounting for necessary information.
Objective /Importance /Advantage of Management Accounting
The main objective/importance/advantage
of management accounting are summarized as under:
1.
To help in
information plans: management accounting assist management in planning the activities of the
business. Planning is deciding in advance what to be done, when it is to be
done, how it is to be done and by whom it is to be done. Planning is based on
facts. Facts are provided by past accounts on which forecast future transaction is made
2.
To help in the
interpretation of financial information: Management accounting
presents the accounting information in an intelligent and simple manner. This
will help the management in interpreting the financial data, evaluating
alternative course of action of action available and guiding it in taking
decision to have the most desire financial results.
3.
To help in
controlling performance: Under management accounting, the actual
performance is compared with the targets, plans, standards and deviation are
analyzed. Thus, management accounting helps in controlling the performance and
take suitable actions in order to correct the adverse deviations by revising
the budgets if needed.
4.
To help in
organizing: The management accountant recommends the use of budgeting, responsibility
accounting, cost control technique and internal financial control. These all
need the intensive study of the organization structure. In turn, it helps to
rationalize the organizational structure.
5.
To help in solving
business problems: Management accounting provides accounting data to the management like
whether labor should be replaced by machinery or not, whether selling price
should be reduce or not along with recommendation as to choose which
alternative will be the best. For such decisions, the management accountant
takes the help of marginal costing, cost volume profit analysis, standard
costing, and capital budgeting, etc.
6.
To help in
coordinating operations: Management accounting helps the management in
coordinating the activities of the concern by preparing functional budgets at
first and coordinating the whole activities of the concern by integrating all
functional budgets into one known as master budget. Thus, management accounting
is a useful tool in coordinating the various operations of the business.
7.
To help in
motivating employees: Management accounting helps to increase the
effectiveness of the organization and motivates the members of the
organization. This is done by setting goals, planning the best and economical
course of action and measuring the performance.
8.
To communicate up-to
–date information: Management needs information for taking decisions
and for evaluating performance of the business. Such information can be made
available to the different level of management by means of reports, which are
an integral part of the management accounting. This helps taking suitable
action for the purpose of control.
Scope of Management
Accounting
The scope of management accounting is very wide and broad based as it includes a variety of aspects of business operations. The following are some of the areas of specialization included within the scope of management accounting.
- Financial accounting: it records all business transactions and
profit and losses account is made to show the results of the business
operations and balance sheet to shows the meaningful data to the
management. Thus, financial accounting comes under the scope of management
accounting.
- Cost accounting: cost accounting refers to the classification,
recording, and allocation of expenditure for the determination of the cost
of productions or service and ensuring the management to control over the
same. This includes the determination plays an important role for the
management in carrying out its activities.
- Forecasting and budgeting: this refers to the formulation of
budgets and forecasts with the help of operating and other department of a
business concern. The ultimate sources of any budgeting depends on the
proper setting of target figures in the budgets and the actual realization
of the same in practice.
- Cost control technique: these serves effective tools for
comparing the actual results with the predetermined figures determined in
budgets. They greatly help in bringing the budgets into operating plans.
- Statistical data: It is concerned with the supply of necessary
statistical data and particulars needed by various departments of the
business concern. This includes as stated earlier, statistical compilation
of case studies, engineering records, minutes of meetings, special surveys
and many other business documents.
- Taxation: This necessitates the computation of profits in accordance
with the provisions of the income tax act and also prompt filing of
returns periodically and payment of taxes.
- Office service: This mainly relates to the maintenance of data
processing and other office management services, stenciling and
duplicating, dealing of inward and out ward mails, etc.
Limitation of
management accounting
Management accounting, any other branch of knowledge, is not free from limitation. Though the emergency of management. Accounting has greatly improved the managerial performance, yet it has to face certain challenges and constraints conditioned mostly by the external factors. These factors that restrict the effectiveness of management accounting are discussed below:
- Continuance of intuitive decision –making: Management accounting is supposed to eliminate the intuitive decision-making process of management and replace it which scientific decision-making. Unfortunately, much management is prone to take the easy and simple path of intuitive decision- making rather than the difficult but reliable scientific decision-making process in the 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 records,
analyze, and interpret an historical event convert into monetary terms in
a most objective manner. But it will be difficult to perform the same
function in respect of future and unquantifiable situation in the light of
the past records.
- Mainly based on accounting: management accounting is mainly
based on financial accounting and cost accounting, therefore, the
effectiveness of management accounting largely depends on the
effectiveness of these accounting.
- Evolutionary stage: management accounting is a new discipline
and a growing subject too. It is still in the infancy stage and
- Not an alternative to the management: management accounting is
not an alternative to the management. It just helps the management to
carry out its activities. This is not an end, rather a means only.
- Costly installation: for installation of a system of
management accounting in a business concern, an elaborate organization and
a large number of manuals are essential. This in turn increase the cost
due to which only large-scale organization can afford to install.
SIMILARITIES
BETWEEN COST AND MANAGEMENT ACCOUNTING
There are many similarities between cost and management accounting as given below.
- Both the cost and management accounting provide information to the management for planning and decision making.
- Both of them focus on improving business performance.
- Both of them use similar accounting procedures and technique.
- Cost accounting is a part of management accounting. The concept of cost accounting are based on managerial perspectives.
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