In this article we will cover about: 1. Importance of Management Accounting 2. Type of Management Accounting 3. Characteristics 4. Objectives and Functions 5. Tools and Techniques 6. Installation of the Management Accounting System 7. Organization 8. Benefits/Merits/Use 9. Restrictions.
Management Accounting: Importance, Nature, Characteristics, Objectives, Instruments, Benefits and Limitations
- Meaning of Managerial Accounting
- Accounting Art des Management
- characteristics of managerial accounting
- Objectives and tasks of management accounting.
- Management accounting tools and techniques.
- Installation of Management Accounting Systems
- Organization for Management Accounting
- Benefits/Merits/Use of Management Accounting
- Management Accounting Limitations
1. Importance ofBusiness accounting:
The term management accounting is made up of two words "management" and "accounting." It is the study of the business aspects of accounting. It is a tool in the hands of management to make decisions. The focus of managerial accounting is to transform accounting in ways that help management shape policy and control its execution.
Managerial accounting is of recent origin. The term was first used in 1950 by a team of accountants who visited the United States under the auspices of the Anglo-American Productivity Council. Cost accounting terminology did not refer to the word “management accounting” prior to this study group's visit. Intense competition, mass production, dynamic developments in technology, and the complexity of modern business led to the development of management accounting to solve many of the problems.
"Management accounting is the presentation of accounting information in a way that assists management in policy development and the day-to-day operations of an organization." I.C.M.A. – the definition recently added to the terminology.
Management accounting provides management with the information it uses as the basis for decision making.
J. Batty defines management accounting as "the term used to describe accounting methods, systems, and techniques that, combined with specialized knowledge and skills, assist management in its task of maximizing profits or minimizing losses."
Batty's definition describes management accounting as a combination of different accounting systems and techniques designed to meet the needs of management.
2. Art des Management Accounting:
Although management accounting is the newest branch of accounting, it can be viewed as part science and part art. It is the science of "quantifying and summarizing" and the art of "interpreting" accounting data.
Contas de Gestão draws its conclusions through the collection, treatment and objective analysis of data that is quantified in numbers. Therefore, it is about “objectifying and quantifying progress and problems”. From this point of view, management accounting can be considered a science.
However, management accounting also involves human judgements, impulses, whims and biases, which are evidenced in the interpretation of data, conclusions and analysis conclusions. "Subjectivity" is inevitable in "getting meaning from data." Derivations cannot be scientifically accurate. The management accountant's personal judgment can significantly affect interpretations and deductions. From this point of view, management accounting can be considered an art.
In conclusion, like all other social sciences, management accounting is part science and part art.
3. Characteristics of managerial accounting:
The goal of management accounting is to collect, analyze, and present financial data to management in a form that is useful and useful for the systematic and effective planning and management of business processes.
The main characteristics of managerial accounting are:
(1) Provision of financial information:
Managerial accounting focuses on providing financial information to management. The information is adequately provided for the different levels of management to review the policies and make decisions.
(2) Cause and effect analysis:
Financial accounting is limited to the presentation of the income statement and balance sheet. Managerial accounting looks at the cause and effect of facts and figures about it. If there are losses, the causes of the losses are investigated. If there is gain, the variables that influence the gain are also analyzed. The profit figure is compared with expenses, sales, capital employed, etc., in order to draw the appropriate conclusions about the impact of these items on the results.
(3) Use of special techniques and concepts:
Managerial accounting uses special techniques like standard costs, budget control, marginal costs, cash flow, cash flow, ratio analysis, liability, etc. to make accounting data more useful and helpful to management. Each of these techniques or concepts is a useful tool for specific purposes of data analysis and interpretation, establishment of control over operations, etc.
(4) Decision making:
The main objective of managerial accounting is to provide management with information relevant to making various important decisions. Historical information provides a basis for predicting future impacts, developing alternatives, and making decisions to select the most beneficial course of action.
(5) Without fixed conventions:
Financial accounting has several established principles and rules when it comes to preparing financial accounts. Managerial accounting has no such fixed rules. The tools or techniques employed by management accounting are the same, but the application of these techniques varies from concern to concern and situation to situation.
The interpretation of the analyzed data depends on who uses it. The conclusions derived from the application of a technique depend on the intelligence and experience of the account manager. The presentation of the information depends on the requirements of the company. Each company has its own way of applying the techniques according to its needs.
(6) Achievement of the goal:
Managerial accounting is helpful in achieving corporate goals. The objectives are defined based on historical information and with adjustments for anticipated future changes. Actual performance is recorded. The actual results are compared to the specified results. If the actual values deviate from the expected results, corrective action is taken and the intended goals are achieved. This is possible with the help of standard calculation management accounting techniques and budget control.
(7) Efficiency improvement:
The purpose of accounting is to provide information to increase efficiency. The efficiency of departments and areas can be improved by setting goals or objectives for a certain period of time. Actual performance is compared to the target. Positive deviations are checked. Negative deviations are examined to determine the causes. The ways and means of combating the causes are analyzed and the objectives are achieved. The process of setting and achieving goals leads to a gradual improvement in overall efficiency.
Managerial accounting deals with decisions for future implementation. This involves predicting and predicting the future. It is useful for planning and setting goals.
(9) Provision of information and not decisions:
Managerial accounting provides financial information and not decisions. For this reason, managerial accounting is said to depend on management's efficiency in using information and making effective decisions.
4. Objectives and tasks of management accounting:
The main objective of managerial accounting is to support management in the efficient fulfillment of its tasks. The main functions of the administration are planning, organizing, directing and controlling. Managerial accounting helps management to perform these functions effectively.
(1) Presentation of data:
The traditional income statement and balance sheet are not analysis for decision making. Management accounting modifies and reorganizes data according to the needs of decision making through various techniques.
(2) Planning and forecasting help:
Managerial accounting is useful for management in the planning process through budget control and standard costing techniques. Forecasts are widely used in budgeting and standard setting.
(3) Help with organization:
Organizing is building relationships between different people in the organization. It includes the delegation of authority and the definition of responsibilities. Managerial accounting aims to help management organize by establishing cost centers, profit centers, responsibility centers, budget, etc. These activities are helpful in creating an effective organizational structure.
(4) Decision making:
Management accounting provides comparative data for analysis and interpretation for effective decision making and policy formulation.
(5) Report to management at various levels:
One of the main objectives of management accounting is to keep management informed about the performance, the fulfillment of plans and the progress of the various areas of the organization.
Senior management needs feedback on how to implement its plans, policies, and programs. Middle managers and even junior executives need data to make daily operational decisions. The Management Accountant prepares regular and frequent reports and submits them in a timely manner to meet the needs of all levels of management.
(6) Communication of Management Policies:
Managerial accounting transfers policies from management to staff to ensure proper implementation.
(7) Effective control:
Standard calculation and budget control are an integral part of managerial accounting. These techniques establish objectives, compare actual data with standards and budgets to evaluate performance and control variances.
(8) Inclusion of non-financial information:
Managerial accounting considers both financial and non-financial information to develop alternative courses of action that lead to effective and accurate decisions.
The objectives of the various departments are communicated to them and their performance is reported to management from time to time. This continuous report helps management coordinate various activities to improve overall performance.
(10) Motivate employees:
Employees must put budgets, standards, and other schedules into action. An essential goal of management accounting is to define goals in the form of budgets, standards, and schedules so that employees are motivated to achieve them. This is usually done by making the goals achievable and by providing appropriate monetary and non-monetary incentives to achieve them.
5. Management Accounting Tools and Techniques:
The tools and techniques used in managerial accounting are explained below:
(1) Financial policy and accounting:
Every business has a plan for its funding sources. The fund can be obtained from various sources. The use of a specific source depends on the cost of maintaining the source, the repayment terms of the loan, etc. The amount of raised share capital and legal redemption obligations must be taken into account. For an optimal capital structure, the capital mix must be decided, that is, the relationship between own capital and third-party capital. Managerial accounting provides capital budgeting techniques for financial planning.
(2) Analysis of financial statements:
Financial statement analysis is a means of classifying and presenting data in a form that is useful to management. The importance of the information provided is explained in non-technical language in the form of ratio analysis, cash flow and cash flow techniques.
(3) Calculation of acquisition cost:
Costs are recorded as they are incurred against predetermined targets to assess performance.
(4) Budget control:
Budgets serve as a planning and control tool. Expenses and income are specified. Actual amounts are compared to budgeted amounts to reveal deviations and those responsible. Corrective measures are initiated to eliminate negative deviations in the future.
(5) Standard calculation:
Standard costing is an important cost control technique. With the standard calculation, costs are determined in advance through systematic analysis. Actual costs are compared to standards. Deviations are analyzed to find the causes and actions are taken to eliminate them in order to increase efficiency.
In general, standard cost accounting is used in conjunction with budget control for effective control of operations.
(6) marginal cost:
In marginal costing, product costs are divided into fixed and variable components. While variable costs are used for decision making, fixed costs are treated as periodic costs charged on the profit and loss statement. Marginal costing is useful for management to make various important decisions, etc.
(7) Other management accounting tools are:
(a) Calculation of the decision:
Here the selection alternatives are evaluated in the decision-making situation.
(b) Revaluation Accounting:
This is used as a substitute for tangible assets, the prices of which increase from time to time. Here, the impact of inflation on fastener capacity is addressed.
(c) Control calculation:
Internal audit, internal audit and final audit are used in the control calculation.
(8) Management Information System:
Reporting is an important function of management accounting. This function has improved with the development of electronic data processing systems. In modern companies, the process of providing information to management is integrated and computerized, known as the Management Information System (MIS).
6. Installation of Management Accounting Systems:
The installation of the management accounting system includes the following steps:
(1) Organization manual:
The first step is to create an organizational manual. The manual will clearly define the duties and responsibilities of each management level and the horizontal and vertical relationship between key personnel.
(2) Create various forms and reports:
The second step in the installation process is to design the various reports that will be run. The goal should be to minimize their deficiencies and simplify them to avoid "red tape".
(3) Personnel Required:
Recruit and train the necessary personnel to implement the system.
(4) Account Classification:
Financial and cost accounting should be classified, limited, and integrated as much as possible to meet the needs of management accounting.
(5) Creation of cost centers:
Investment centers, profit centers, cost centers, and budget centers need to be clearly structured so that information can be collected and evaluated.
(6) Introduction to Managerial Accounting Techniques:
Depending on the needs and feasibility of the business, different management accounting techniques should be introduced.
(7) Provision of Use of Operational Research Techniques (O.R):
New challenges are faced every day as businesses operate in an ever-changing economic, political, and social environment. Operational Research Techniques will be essential to deal with emerging problems.
7. Organization for Management Accounting:
The organization of the management accounting system depends on the scale of business activity, the type of business, the type of organization, etc. In a small business, the management accountant reports directly to the owner. In a large corporation, managerial accounting may be assigned to the financial controller.
A group with a divisional structure will have a different administrative organization. Anderson and Schmidt emphasized the role of the management accountant because management accounting will specifically address the problem of working in concert with everyone else, there is no other functional element in the entire organization that has necessary relationships with so many different entities.
The management account deals with different levels of managers, supervisors and operators in all areas of business operations.
Below is an organizational chart of a large corporation:
In the organizational chart, the Finance Director is placed above the Chief Accountant. Functions such as budgeting, auditing, O&M, credit control, etc., all report to the Chief Accounting Manager.
8. Benefits/Merits/Use of Management Accounting:
Management accounting has immense value and benefit for the management of any business and is considered essential, especially in large organizations where the management task is complex.
The following benefits or uses of managerial accounting can be listed:
(1) Higher efficiency:
Management accounting makes a significant contribution to increasing the efficiency of a company's operating business. Budgets, standards, reports, etc. generally increase the level of performance.
(2) Effective planning:
Policy making and operations planning are made more effective with the "decision data" provided by management accounting.
(3) Performance rating:
The evaluation of the performance of employees, departments, etc. It is facilitated by managerial accounting through the analysis of deviations, control indicators, etc.
(4) Profit maximization:
Managerial accounting is useful in profit planning to make decisions that can optimize profits.
The tools used by management accounting tend to make the data provided to management accurate and reliable.
(6) Avoid waste:
Standard costs, budgets, cost control techniques, etc. help eliminate waste, produce errors, etc.
(7) Effective communication:
Regular and systematic reports ensure a continuous flow of information on business activities to the various levels of management.
(8) Employee morale:
Employee morale can be created and maintained through achievable standards, practical budgets, and incentive schemes.
(9) Control and coordination:
Cost control and coordination of efforts of different segments of an organization can be achieved through performance reporting, variance tracking and analysis, etc.
The greatest benefit of management accounting is its advisory function, which pushes management to make the best possible decisions on routine matters as well as important day-to-day political questions.
9. Limitations of management accounting:
Like any other discipline, management accounting has its own limitations. Although it is considered an indispensable tool in managerial decision-making, its recent origin and various external factors limit its effectiveness.
These factors are explained below:
(1) Dependency for basic data sets:
Managerial accounting rarely keeps basic and primary records of operations, expenses and income. You get all your primary data from general ledgers, cost accounting, and other relevant records. Thus, the accuracy and reliability of the conclusions derived from management accounting are limited by the reliability of its data sources, so it suffers from many of the limitations of financial and expense accounts.
(2) Personal bias:
The analysis and interpretation of financial information depends on the skills of the analyst and interpreter. Personal judgment and discretion are required in many areas of management accounting. Personal "bias" and the "bias" of individuals can affect the objectivity and effectiveness of conclusions and recommendations.
(3) Managerial accounting is just a tool:
Managerial accounting cannot be considered an alternative or substitute for management. The management accountant acts as a consultant and facilitator for managerial decision making. Effective decisions, their implementation and monitoring are the prerogatives of senior management.
(4) Managerial accounting only provides data:
The main function of management accounting is to provide management data in the form of "alternatives". It is up to management to make an appropriate choice among the alternatives, or even rule them all out. Therefore, the control can “only inform and not prescribe”.
(5) Wide range:
The scope of managerial accounting is very broad and comprehensive. It uses information from various disciplines such as financial accounting, economics, statistics, cost accounting, engineering, etc. It takes into account the monetary and non-monetary transactions of the company. The limitations of the management accountant's knowledge and experience in such diverse areas can make the data unreliable and unreliable.
(6) Resistance to change:
The installation of management accounting involves fundamental changes in the organizational structure and traditional accounting practices. Affected personnel may object to such a change unless they are confident and convinced of the need for such changes.
(7) Expensive to install:
The installation of management accounting is associated with a great effort due to the complexity of the organization and the large number of changes in procedures, forms and rules. Therefore, small businesses may not be able to afford the costs. Only large organizations can afford to run managerial accounting as a department or administrative support.
(8) Evolution level:
The managerial emphasis is a discipline of recent origin and still in the development phase. Therefore, concepts are fluid, techniques evolve, and analysis tools are imperfect. There are several experts who are skeptical about the usefulness of management accounting due to such an important limitation.
Most of the above limitations can be overcome with a determined effort on the part of management and an experienced management accountant.