In this article we will discuss about:- 1. Meaning of Management Accounting 2. Nature of Management Accounting 3. Characteristics 4. Objectives and Functions 5. Tools and Techniques 6. Installation of Management Accounting System 7. Organisation 8. Advantages/ Merits/ Uses 9. Limitations.
Management Accounting: Meaning, Nature, Characteristics, Objectives, Tools, Advantages and Limitations
- Meaning of Management Accounting
- Nature of Management Accounting
- Characteristics of Management Accounting
- Objectives and Functions of Management Accounting
- Tools and Techniques of Management Accounting
- Installation of Management Accounting System
- Organisation for Management Accounting
- Advantages/ Merits/ Uses of Management Accounting
- Limitations of Management Accounting
1. Meaning of Management Accounting:
The term Management Accounting consists of two words “Management” and “Accounting”. It is the study of managerial aspects of accounting. It is a tool in the hands of management to exercise decision making. The emphasis of management accounting is to redesign accounting in a manner which is helpful to the management in framing the policies and control of their execution.
Management accounting is of recent origin. The term was first used in 1950 by a team of accountants visiting U.S.A. under the auspices of Anglo-American Council on productivity. The terminology of cost accounting had no reference to the word ‘management accountancy’ before the visit by this study group. Intensive competitions, large scale production, dynamic developments in technology, and complexities of modern business have led to the development of management accounting-to solve many of the problems.
“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”. I.C.M.A. – the definition recently incorporated into the terminology.
Management accounting provides information to the management to use it as a base for decision making.
J. Batty defines Management Accounting as “the term used to describe the accounting methods, systems and techniques which, coupled with special knowledge and ability, assist management in its task of maximising profits or minimising losses”.
Batty’s definition describes Management Accounting as a combination of various accounting systems and techniques which are designed to meet the needs of the management.
2. Nature of Management Accounting:
Though Management Accounting is the latest branch in the accounting arena, it may be regarded partly as a Science and partly as an Art. It is the science of ‘Quantifying and summarising’ and Art of ‘Interpreting’ accounting data.
Management Accounts derives its conclusions through collection, processing and objective analysis of data Quantified in figures. Thus it depends upon “Objectivisation and Quantification of progress and problems”. From this point of view Management accounting may be regarded as a Science.
However Management Accounting also involves human judgement, impulses, whims and prejudices as evidenced in interpretation of data, deductions and conclusions drawn from analysis. ‘Subjectivity’ is inevitable in ‘deriving the meaning of data’. Deductions cannot be scientific with precision. Personal judgement of Management accountant may influence the interpretations and deductions significantly. From this point of view, Management Accounting may be regarded as an Art.
We may conclude by saying that like all other social sciences, Management Accounting is partly a Science and Partly an Art.
3. Characteristics of Management Accounting:
The objective of Management accounting is to record, analyse and present financial data to the Management in such a way that it becomes useful and helpful in planning and running business operations systematically and effectively.
The following are the main characteristics of management accounting:
(1) Providing Financial Information:
The main emphasis of management accounting is to provide financial information to management. The information is provided in a manner suitable to various levels of management for reviewing policies and decision making.
(2) Cause and Effect Analysis:
Financial accounting confines itself to presentation of P&L account and Balance Sheet. Management accounting analyses the cause and effect of the facts and figures thereon. If there is loss causes for the losses are investigated. If there is profit the variable affecting the profit are also analysed. The amount of profit is compared with expenditure, sales, capital employed, etc., to draw appropriate conclusions relating to the effect of those items on profit.
(3) Use of Special Techniques and Concepts:
Management accounting employs special techniques like standard costing, budgetary control, marginal costing, fund flow, cash flow, ratio analysis, responsibility accounting, etc. to make accounting data more useful and helpful to the management. Each of these techniques or concepts is a useful tool for specific purpose in analysis and interpretation of data, establishing control over operations, etc.
(4) Decision Making:
Main objective of management accounting is to provide relevant information-to management to take various important decisions. Historical information provides a base on which the future impact is predicted, alternatives are developed and decisions are made to select to select the most beneficial course of action.
(5) No Fixed Conventions:
Financial accounting has various established principles and rules in preparing the financial accounts. Management accounting has no such fixed rules. The tools or techniques applied by the management accounting are same but application of these techniques various from concern to concern and situation to situation.
Interpretation of analysed data depends on the person using it. The conclusions derived from application of a technique depend on the intelligence and experience of the management account. The presentation of information depends on the requirements of the concern. Every concern has its own was of application of the techniques to suit its needs.
(6) Achievement of Objectives:
Management accounting is helpful in realising the enterprise objectives. Based on the historical information and with adjustments for predicate future changes, objectives are laid down. Actual performance is recorded. Comparison of actual with predetermined results is made. If there are deviations of actuals from the predetermined results, corrective action is taken and predicted objectives are achieved. This becomes possible with the help of management accounting techniques of standard costing and budgetary control.
(7) Improving Efficiency:
The purpose of accounting is to provide information to increase efficiency. The efficiency of departments, and divisions can be improved by fixation of targets or goals for a specific period. The actual performance is compared with that of targets. Positive deviations are reviewed. The negative deviations are probed to ascertain the causes. The ways and means to tackle the causes are analysed and targets are achieved. The process of fixing and achieving the targets leads to gradual improvement in overall efficiency.
Management accounting is concerned with taking decisions for future implementation. This involves prediction and forecasting of future. It is helpful in planning and laying down of objectives.
(9) Providing of Information and not Decisions:
Management accounting provides financial information and not the decisions. That is why it is said that management accounting depends on the efficiency of the management in using information and taking effective decisions.
4. Objectives and Functions of Management Accounting:
Main objective of management accounting is to help the management in performing its functions efficiently. The major functions of management are planning, organising, directing and controlling. Management accounting helps the management in performing these functions effectively.
(1) Presentation of Data:
Traditional Profit and Loss Account and the Balance Sheet are not analytical for decision making. Management accounting modifies and rearranges data as per the requirements for decision making through various techniques.
(2) Aid of Planning and Forecasting:
Management accounting is helpful to the management in the process of planning through the techniques of budgetary control and standard costing. Forecasting is extensively used in preparing budgets and setting standards.
(3) Help in Organising:
Organising is concerned with establishment of relationships among different individuals in the firm. It includes delegation of authority and fixing responsibility. Management Accounting aims at aiding the Management in organising through establishment of cost centres, profit centres, responsibility centres, Budget preparation etc. AH these activities are helpful in setting up an effective organisational frame work.
(4) Decision Making:
Management accounting provides comparative data for analysis and interpretation for effective decision making and policy formulation.
(5) Reporting to Management of Different levels:
One of the Major objectives of Management accounting is to keep the Management informed about the performance, adherence to plans and progress of various sections of the organisation.
Top Management needs feed-back about implementation of its plans policies and programmes. Middle level Management and even junior executives need data for day to day operating decisions. Periodical and frequent reports are prepared and sent in time by Management Accountant to cater to the needs of all the levels of Management.
(6) Communication of Management Policies:
Management accounting conveys the policies of the management downward to the personal effectively for proper implementation.
(7) Effective Control:
Standard costing and budgetary control are integral part of management accounting. These techniques lay-down targets, compare actuals will standards and budgets to evaluate the performance and control the deviations.
(8) Incorporation of Non-Financial Information:
Management accounting considers both financial and non-financial information for developing alternative courses of action which leads to effective and accurate decisions.
The targets of different departments are communicated to them and their performance is reported to the management from time to time. This continual reporting helps the management in coordinating various activities to improve the overall performance.
(10) Motivating Employees:
Budgets, standards and other programmers are to be implemented in practice by the employees. A major objective of Management accounting is to determine the targets in the form of budgets, standards and programmer in such a way that the employees feel motivated to achieve them. This is usually accomplished by making the targets practicable and offering suitable monetary and Non-Monetary incentives to achieve them.
5. Tools and Techniques of Management Accounting:
The tools and techniques used in management accounting are explained below:
(1) Financial Policy and Accounting:
Every business concern ha sot plan for its sources of funds. The fund can be raised out of different sources. Utilising a particular source depends on cost of servicing the source, terms of repayment in case of borrowings, etc. The amount of share capital raised, the statutory obligations for repayment are to be considered. The capital mix, i.e., the proportion of share capital and borrowing has to be decided to have an optimum capital structure. Management accounting provides capital budgeting techniques for financial planning.
(2) Analysis of Financial Statement:
Analysis of financial statements is means to classify and present the data in a manner useful to the management. The significance of information provided is explained in a nontechnical language in the form of ratio analysis, funds flow and cash flow techniques.
(3) Historical Cost Accounting:
Costs are recorded after being incurred for comparison with predetermined targets to evaluate performance.
(4) Budgetary Control:
Budgets are used as a tool for planning and control. The expenditure and revenue are predetermined. The actuals are compared with budgets to reveal deviations and individuals responsible for the same. Corrective actions are initiated to eliminate the negative deviations in future.
(5) Standard Costing:
Standard costing is an important technique of cost control. In Standard costing the costs are determined in advance by systematic analysis. The actual costs are compared with standards. The variances are analysed to find the causes and action is taken for removal of the same to increase efficiency.
Generally, standard costing is used along with budgetary control for effective control of operations.
(6) Marginal Costing:
Under marginal costing, the cost of products is divided into fixed and variable portions. While the variable costs are taken for decision making, fixed costs are treated as period costs to be charged to costing Profit and Loss account. Marginal costing is helpful to management in taking various important decisions etc.
(7) Other Tools of Management Accounting are:
(a) Decision Accounting:
Here alternatives are evaluated for selection in decision situation.
(b) Revaluation Accounting:
This is applied in replacement of fixed assets whose prices go up from period. The effect of inflation on the fixer assets is tackled here.
(c) Control Accounting:
In control accounting, internal check, internal audit and statutory audit are used.
(8) Management Information System:
An important function of management accounting is reporting. This function has improved consider off with the developing of electronic data processing systems. In the modern firms, the process of making information available for management is integrated and computer based, known as ‘Management Information System'(MIS).
6. Installation of Management Accounting System:
Installation of Management accounting system involves the following steps:
(1) Organisation Manual:
The first step is to prepare an organisational manual. The manual will clearly pin point the duties and responsibilities of each level of management and the horizontal and vertical relationship among the key personnel.
(2) Preparation of Various Forms and Reports:
The second step in the installation process is designing the perform of various and reports. The objective should be to minimise their under and simplify them to avoid ‘Bureaucratisation’.
(3) Requisite Staffing:
The staff required for implementing the system is to be recruited and trained.
(4) Classification of Accounts:
Financial and cost accounts should be classified, confined and integrated to the extent possible to suit the requirement of management accounting.
(5) Setting Up of Cost Centres:
Investment centres, profit centres, cost centres and budget centres are to be clearly set up so that information can be collected and analysed in relation to each of them.
(6) Introducing Management Accounting Techniques:
Various techniques of management accounting are to be introduced, based on the needs of the firm, and practicability.
(7) Providing for Usage of ‘Operations Research’ (O.R) Techniques:
Everyday new challenges are faced because business is operated under changing economic, political and social environment. ‘Operations Research Techniques’ will be essential to cope up with the emerging problems.
7. Organisation for Management Accounting:
The organisation for management accounting system will depend on the scale of operations, nature of business, nature of organisation, etc. In a small concern, management accountant is directly under the owner. In a big concern management accounting may be assigned to financial controller.
A concern with a divisional set up will have a different management organisation. The role of management accountant has been emphasised by Anderson and Schmidt r management accounting will be specifically concerned, about the problem of cooperation with all other is no other functional element in the whole organisation that has necessary relations with so many different units.
Management account is concerned with various levels of managers, supervisors and operators in all sections of business operations.
An organisational chart for a large scale concern is given below:
In the organisation chart, director finance is placed above chief management accountant. The functions like budgeting, auditing, O & M, credit control etc., are all placed under Chief Management Accountant.
8. Advantages/ Merits/ Uses of Management Accounting:
Management Accounting is of immense value and utility for the management of any firm and it has been considered as indispensable, particularly in large organisations where the task of Management is complex.
The following can be listed as the benefits or uses of Management Accounting:
(1) Increase in Efficiency:
Management accounting contributes significantly towards increasing efficiency in operations of a firm. Budgets, standards, reports etc., usually elevate the level of performance.
(2) Effective Planning:
Policy formulation and planning of operations become more effective through the ‘decision data’ provided by Management Accounting.
(3) Performance Evaluation:
Evaluating performance of employees, departments, etc., is facilitated by Management accounting through Variance Analysis, control ratios etc.
(4) Profit Maximisation:
Management accounting is helpful in profit planning to pursue decisions which can optimise profits.
The Tools used by Management accounting usually make the data supplied to Management accurate and reliable.
(6) Elimination of Wastages:
Standard costs, Budgets, cost control techniques, etc., contribute towards elimination of wastages, production of defectives etc.
(7) Effective Communication:
Regular and systematic reporting ensures constant flow of information about operations to various levels of Management.
(8) Employee Morale:
Morale of employees can be created and sustained through attainable standards, practical budgets and incentive schemes.
(9) Control and Co-ordination:
Control on costs and coordination in the efforts of different segments of an organisation can be achieved through performance reporting, variance analysis and follow up action etc.
The greatest benefit of Management accounting is its advisory role in making the Management to take the best possible decisions on a day-to-day basis on routine matters and also vital policy matters.
9. Limitations of Management Accounting:
Like any other discipline Management Accounting has its own Limitations. Though it is considered as an indispensable tool for Managerial decision making, its recent origin and several external factors limit its effectiveness.
These factors are explained below:
(1) Dependence for Basic Records:
Management Accounting rarely maintains basic and primary records of operations, expenses and revenues. It derives all of its Primary data from Financial Accounting, cost Accounting and other relevant records. So, the accuracy .and reliability of the conclusions derived by Management Accounting is limited to the reliability of its sources of data, so, it suffers from several of the limitations of Finance Accounts and cost Accounts.
(2) Personal Bias:
Analysis and interpretation of financial information depends upon the capability of the analyst and interpreter. Personal Judgement and usage of discretion become necessary in several areas of Management accounting. Personal ‘Prejudices’ and ‘Bias’ of individuals can affect the objectivity and effectiveness of the conclusions and recommendations.
(3) Management Accounting is only a Tool:
Management accounting cannot be considered as an alternative or substitute to Management. Management accountant acts as an adviser and facilitator for decision making by management. The actual decisions, their implementation and follow up action are the prerogative of the Management.
(4) Management Accounting provides only Data:
The Main function of Management Accounting is to provide data in the form of ‘Alternatives’ to the Management. It is for Management to make suitable choice among the alternatives or even discard all of them. So, Management Accounting can ‘only Inform and not prescribe’.
(5) Broad Based Scope:
The scope of Management accounting is very wide and broad based. It uses information from varied disciplines like Financial Accounting, economics, Statistics, Cost Accounts, engineering etc. It considers Monetary and Non-Monetary Transaction of the firm. Limitations of the knowledge and experience of the Management Accountant in such diverse fields can make the data unreliable and undependable.
(6) Resistance to Change:
Installation of Management accounting involves basic changes in the organisational set up and Traditional accounting practices. The personnel concerned may resist such change unless they are taken into confidence and convinced of the need for such changes.
(7) Costly to Install:
Installation of Management Accounting involves huge expenditure because of the elaborate organisation needed and the large number of changes in procedures, forms and rules. So, small firms may not be able to afford the cost. Only big organisations can afford to Maintain Management accounting as a department or aid to management.
(8) Evolutionary Stage:
Management accenting is of-recent-origin, as a discipline and it is still in development stage. So, its concepts are fluid, Techniques are still evolving and analytical tools imperfect. There are several experts who are skeptical of the utility of Management accounting because of such an important limitation.
Most of above limitations can be overcome with determined efforts on the part of the Management and a skilled Management Accountant.