Management Accounting

INTRODUCTION

Management accounting can be viewed as Management-oriented Accounting. Basically it is the study of managerial aspect of financial accounting, ”accounting in relation to management function”. It shows how the accounting function can be re-oriented so as to fit it within the framework of management activity. The primary task of management accounting is, therefore, to redesign the entire accounting system so that it may serve the operational needs of the firm. If furnishes definite accounting information, past, present or future, which may be used as a basis for management action. The financial data are so devised and systematically development that they become a unique tool for management decision.

 

DEFINITIONS OF MANAGEMENT ACCOUNTING

The term “Management Accounting”, observe, Broad and Carmichael, covers all those services by which the accounting department can assist the top management and other departments in the formation of policy, control of execution and appreciation of effectiveness. This definition points out that management is entrusted with the primary task of planning, execution and control of the operating activities of an enterprise.

It constantly needs accounting information on which to base its decision. A decision based on data is usually correct and the risk of erring is minimized. The position of the management in respect of its functions can be compared to that of an army general who wants to wage a successful battle. A general can hardly fight successfully unless he gets full information about the surrounding situation and the extent of effectiveness of each of his battalions and, to the extend possible, even the enemy’s intentions.

Like a general a successful management too strives to outstrip other competitors in the field by streamlining its operating efficiency. It needs a thorough knowledge of the situation and the circumstances in which the firm operates. Such knowledge can only be gained through the processed financial data rendered by the accounting department on the basis of which it can take policy decision regarding execution, control, etc. It is here that the role of management accounting comes in. It supplies all sorts of accounting information in the form of such statements as may be needed by the management. Therefore, management accounting is concerned with the accumulation, classification and interpretation of information that assists individual executives to fulfill organizational objectives.

The Report of the Anglo-American Council of Productivity (1950) has also given a definition of management accounting, which has been widely accepted. According to it, “Management accounting is the presentation of accounting information in such a way as to assist the management in creation of policy and the day to day operation of an undertaking”. The reasoning added to this statement was, “the technique of accounting is of extreme importance because it works in the most nearly universal medium available for the expression of facts, so that facts of great diversity can be represented in the same picture. It is not the production of these pictures that is a function of management but the use of them.

” An analysis of the above definition shows that management needs information for better decision-making and effectiveness. The collection and presentation of such information come within the area of management accounting. Thus, accounting information should be recorded and presented in the form of reports at such frequent intervals, as the management may want. These reports present a systematic review of past events as well as an analytical survey of current economic trends.

Such reports are mainly suggestive in approach and the data contained in them are quite up to date. The accounting data so supplied thus provide the informational basis of action. The quality of information so supplied depends upon its usefulness to management in decision-making.

The usual approach is that, first of all, a thorough analysis of the whole managerial process is made, then the information required for each area is explored, and finally, all the information, after analysis in terms of alternatives, is taken into consideration before arriving at a management decision. It is to be understood here that the accounting information has no end in itself; it is a means to an end. As its basic idea is to serve the management, its form and frequency are all decided by managerial needs. Therefore, accounting aids the management by providing quantitative information on the economic well being of the enterprise.

It would be appropriate if we called management accounting an Enterprise Economics. Its scope extends to the use of certain modern sophisticated managerial techniques in analyzing and interpreting operative data and to the establishment of a communication network for financial reporting at all managerial levels of an organization.

 

Meaning

It deals with the processing of data sentenced in financial accounting and cost accounting for managerial decision making. It also deals with application of managerial economic concepts for decision making for the efficient running of the business and thus in maximizing profits.

 

OBJECTS OF MANAGEMENT ACCOUNTING

The basic function of management accounting is to assist the management in performing its functions effectively. The functions of the management are planning, organizing, directing and controlling. Management accounting helps in the performance of each of these functions in the following ways:

(i) Provides data: 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.

(ii) Modifies data: The accounting data required for managerial decisions is properly compiled and classified. For example, purchase figures for different months may be classified to know total purchases made during each period product-wise, supplier-wise and territory-wise.

(iii) Analyses and interprets data: The accounting data is analyzed meaningfully for effective planning and decision-making. For this purpose the data is presented in a comparative form. Ratios are calculated and likely trends are projected.

(iv) Serves as a means of communicating: Management accounting provides a means of communicating management plans upward, downward and outward through the organization. Initially, it means identifying the feasibility and consistency of the various segments of the plan. At later stages it keeps all parties informed about the plans that have been agreed upon and their roles in these plans.

(v) Facilitates control: Management accounting helps in translating given objectives and strategy into specified goals for attainment by a specified time and secures effective accomplishment of these goals in an efficient manner. All this is made possible through budgetary control and standard costing which is an integral part of management accounting.

(vi) Uses also qualitative information: Management accounting does not restrict itself to financial data for helping the management in decision making but also uses such information which may not be capable of being measured in monetary terms. Such information may be collected form special surveys, statistical compilations, engineering records, etc.

 

ADVANTAGES OF MANAGEMENT ACCOUNTANT

It is the duty of the management accountant to keep all levels of management informed of their real position.

(i) Planning: He has to establish, coordinate and administer as an integral part of management, an adequate plan for the control of the operations. Such a plan would include profit planning, programmes of capital investment and financing, sales forecasts, expenses budgets and cost standards.

(ii) Controlling: He has to compare actual performance with operating plans and standards and to report and interpret the results of operations to all levels of management and the owners of the business. This id done through the compilation of appropriate accounting and statistical records and reports.

(iii) Coordinating: He consults all segments of management responsible for policy or action. Such consultation might concern any phase of the operation of the business having to do with attainment of objectives and the effectiveness of the organizational structures and policies.

 

Other advantages

He administers tax policies and procedures.

He supervises and coordinated the preparation of reports to governmental agencies.

He ensures fiscal protection for the assets of the business through adequate internal control and proper insurance coverage.

He carries out continuous appraisal economic and social forces and the government influences, and interprets their effect on the business.

He administers tax policies and procedures.

He supervises and coordinated the preparation of reports to governmental agencies.

He ensures fiscal protection for the assets of the business through adequate internal control and proper insurance coverage.

He carries out continuous appraisal economic and social forces and the government influences, and interprets their effect on the business.

 

Importance tools and techniques  of management accounting

 

(i) Financial Accounting: Management accounting is mainly concerned with the rearrangement of the information provided by financial accounting. Hence, management cannot obtain full control and coordination of operations without a properly designed financial accounting system.

(ii) Cost Accounting: Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost techniques play a useful role in operation and control of the business undertaking.

(iii) Revaluation Accounting: This is concerned with ensuring that capital is maintained intact in real terms and profit is calculated with this fact in mind.

(iv) Budgetary Control: This includes framing of budgets, comparison of actual performance with the budgeted performance, computation of variances, finding of their causes, etc.

(v) Inventory Control: It includes control over inventory from the time it is acquired till its final disposal.

(vi) Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other statistical methods make the information more impressive and intelligible.

(vii) Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income statements and the related reports, cash flow and funds flow statements, scrap reports, etc.

(viii) Taxation: This includes computation of income in accordance with the tax laws, filing of returns and making tax payments.

(ix) Office Services: This includes maintenance of proper data processing and other office management services, reporting on best use of mechanical and electronic devices.

(x) Internal Audit: Development of a suitable internal audit system for internal control.

 

 

 

 

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