Management accounting and its application to organizational planning, control and decision making
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The part of accounting that helps managers in making decisions providing accounting information is called management accounting. Management accounting is a special branch of accounting. It is a modern and scientific innovation of accounting. Management accounting is accounting for effective management. Meaning and Definition of Management AccountingManagement accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that assists executives in fulfilling organizational objectives. It helps the management to perform all its functions, including planning, organizing, staffing, direction, and control. In other words, the field of accounting that provides economic and financial information for managers and other internal users is called management accounting. Some beautiful definitions of management accounting are mentioned below: The Institute of Chartered Accountants of England and Wales defines, “Management Accouaung is that form of accounting which enables a business to be conducted more efficiently.” According to R. N. Anthony, “Management Accounting is concerned with accounting information that is useful to management.” Professor J Batty defines, “It is the term used to describe the accounting methods, systems, and techniques, which, coupled with special knowledge and ability, assist management in its task of maximizing profits or minimizing losses.” The Institute of Cost and Management Accountants London has defined, “Management Accounting as the application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and the planning control of the operation of the undertakings.” Similarly, according to the American Accounting Association, “It includes the methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances. From the above definitions, we can say that the part of accounting that provides information to the managers for use in planning, controlling operations, and decision making is called management accounting. Characteristics/Nature of Management AccountingThe nature/characteristics of management accounting may be summarized as under:
Functions of Management AccountingThe 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 is a part of accounting. It has developed out of the need for making more use of accounting for making managerial decisions. Management accounting helps in the performance of each of these functions in the following ways:
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 is a must for making forecasts for the future.
Management accounting modifies the available accounting data rearranging in such a way that it becomes useful for management. The modification of data in similar groups makes the data more useful and understandable. The accounting data required for management decisions is properly compiled and classifies. 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.
Management accounting is an important medium of communication. Different levels of management (top, middle, and lower) need different types of information. The top management needs concise information at relatively long intervals, middle management needs information regularly, and lower management is interested in detailed information at short-intervals. Management accounting establishes communication within the organization and with the outside world.
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.
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. The later stages it keeps all parties informed about the plans they have been agreed upon and their roles in these plans.
Management accounting helps in translating given objectives and strategy into specified goals for attainment t by a specified time and secures the effective accomplishment of these goals efficiently. All this is made possible through budgetary control and standard costing, which is an integral part of management accounting.
Management accounting does not restrict itself to financial data for helping the management in decision making but also uses such information that may be capable of being measured in monetary terms. Such information may be collected from special surveys, statistical compilations, engineering records, etc.
Management Accounting assists the management in planning as well as to formulate policies by making forecasts about the production, selling the inflow and outflow of cash, etc. Not only that, but it may also forecast how much may be needed from alternative courses of action or the expected rate of return from that place and at the same time decides upon the programmed of activities to be undertaken.
By preparing budgets and ascertaining specific cost centers, it delivers the resources to each center and delegates the respective responsibilities to ensure their proper utilization. As a result, an interrelationship grows among the different parts of the enterprise.
Management accounting furnishes accounting data and statistical information required for the decision-making process, which vitally affects the survival and the success of the business. Management accounting supplies analytical information regarding various alternatives, and the choice of management is made easy.
By setting goals, planning the best and economic courses of action, and also by measuring the performances of the employees, it tries to increase their efficiency and, ultimately, motivate the organization as a whole.
It helps the management in coordination the whole activities of the enterprise, firstly by preparing the functional budgets, then co-coordinating the whole activities of the enterprise, firstly, by preparing the functional budgets, then co-coordinating the whole activities by integrating all functional budgets into one which goes by the name of ‘Master Budget.’ In this way, it helps the management by con-coordinating the different parts of the enterprise. Besides, overall coordination is not at all possible without budgetary control.’
The actual work done can be compared with ‘Standards’ to enable the management to control the performances effectively. Purpose and Objectives of Management AccountingThe primary objective of Management Accounting is to enable the management to maximize profits or minimize losses. The fundamental objective of management accounting provides information to the managers for use in planning, controlling operations, and decision making. Main purpose and objectives of management accounting may be summarized as under:
The primary functions of management are the uses of information. It presents accounting information in a form that enables the management, investors, and creditors to analyze the financial statements.
Planning is deciding in advance what is to be done. It helps the management of ineffective planning. It provides costing and statistical data to be utilized in setting goals and formulating future policies.
All management work is accomplished by decision making. Decision making is defined as the selection of a course of action from among alternatives. It helps the management in decision-making. It uses accounting data to solve various management problems. Management accounting techniques like cost-volume-profit analysis, standard costing, budgetary control, capital budgeting, funds flow analysis, etc. Assist the management in arriving at the correct decision.
Motivation means individuals need, desires, and concepts that cause him or her to act in a particular manner. Delegation serves as a motivation device because it increases the job satisfaction of employees and encourages them to look forward. By setting goals, planning the best and economic courses of action, and also by measuring the performances of the employees, it tries to increase their efficiency and, ultimately, motivate the organization as a whole.
Management accounting helps management in controlling the performance of the organization. Actual performance is compared with operating plans, standards, and budgets, and deviations are reported to the management so that corrective measures may be taken.
It helps the management in controlling the performance of the organization. Actual performance is compared with operating plans, standards, and budgets, and deviations are reported to the management so that corrective measures may be taken.
One of the primary objectives of management accounting is to keep the management fully informed about the latest positions of the concern. The facilitates management to take proper and timely decisions. The object of management accounting is to provide data. It presents the different alternative plans before the management in a comparative manner. The performance of various departments is also regularly communicated to the top management.
Organizing is the process of allocating and arranging human and nonhuman resources so that plans can be carried out successfully. Tools or Techniques of Management AccountingManagement Accountant applies many of the financial and cost accounting systems, as techniques, to assist the management. Management accounting is concerned with accounting information that is useful to management. Management accounting, like accounting, as an accounting service to management through its .various functions, has to employ several tools, techniques, and methods. Now one technique can satisfy managerial needs. These are placed here in brief to have some idea about those.
A business requires finance. Financial planning involves determining both long-term and short-term financing objectives of the firm. Every firm has to decide on the sources of raising funds. The funds can be raised either through the issue of share capital or through raising loans. Again a decision is to be taken about the type of capital, equity share capital, or preference share capital. When it decides to raise funds through loans, management is to decide the extent of borrowing, long-term, or short term. All these decisions are important for financing planning.
There are a number of the device which help in controlling. The most widely used device for management control is “Budget.” Budgetary control is a system that resorts to budget as a means of planning and controlling and coordinating different types of activities, like the production and distribution of goods and services as designed.
Marginal costing is helpful for the measurement of profitability of different lines of production. This technique helps in identifying the nature of costs like marginal costs (variable) and fixed costs. This is a method of costing which is concerned with changes in costs resulting from changes in the volume of production.
The statement of actual costs after they have been incurred is called Historical cost accounting. Historical cost accounting is a system of accounting that records all transactions at costs incurred as soon as they take place or on a date immediately after their occurrence.
One of the most important functions of top management is to make decisions. Decision making involves a choice from several alternatives. The decision is taken after studying the alternative data in terms of costs, prices, and profits furnished by management accounting and exercising the best choice after considering other non-financial factors. The objective is to maximize profit through the use of the best alternative method. The management accounting uses Marginal Costing techniques, Capital Expenditure Budget, and separation of production costs to achieve this end.
Standard costing is an important tool of cost control, which is one of the main objectives of management accounting. Standard costing techniques compare the standard costs of materials, labor, and expenses incidental to production, which is predetermined, with the actual costs that have occurred in the course of carrying out production. It is the most effective technique available for controlling performances and costs.
The technique of financial analysis includes comparative financial statements, ratios, fund flow statements, Cash flow statements, and comparative financial statement analysis tools to management for decision making. The financial statements reveal the past performances of business in respect of dividend-paying capacity, nature of debts services, profit-earning capacity, and solvency position. Based on these past events, the future course of action is projected.
This is an important tool for management accounting. Revaluation or Replacement accounting revere to the maintenance of capital in real terms. This term is used to denote the methods employed for overcoming the problems connect with fixed asset replacement in a period of rising prices. It is a fact that a problem arises in connection with the replacement of fixed assets in terms of rising prices. It ensures the maintenance of the capital of the firm.
It is not a separate accounting system. It consists of techniques of standard costing, budgetary control, control reports and statement, internal check, internal audit, and reports. It is in this field that the management has scope to display ingenuity in the’ analysis, interpretation, and presentation of information at all levels of management.
It has already been stated that the management accounting of an enterprise is to provide management and other operations as a basis of protective and constructive to management. The management accountant provides all these data and information relevant to the enterprise for the purpose. With the development of electronic devices for recording and classifying data, reporting to management has considerably improved. Feed-back of information can be used as control techniques.
There is a large number of statistical and graphical techniques that are used in management accounting. Some common examples are the master chart, chart of sales and earnings, investment chart, etc.
Ratio accounting signifies the technique and methodology of analysis and interpretation of financial statements using accounting ratios derived from such statements. Ratio accounting included trend analysis, comparative financial statements, ratio analysis, fund flow statements, etc. Limitations of Management AccountingThough management accounting in helpful too to the management as it provides information for planning, controlling, and decision making. Still, its effectiveness is limited by several reasons. Management Accounting is a recent discipline, and therefore, it is in the process of development. Hence, it suffers from all the limitations of a new discipline. Some of the limitations of management accounting follow:
Management accounting should never be considered as an alternative or substitute for management. The tools and techniques of management accounting provide only information and not decisions. Decisions are to be taken by management, and implementation of decisions is also done by management.
Management accounting is still in its initial stage. Management accounting is only in a developmental stage that has not reached the final stage. The techniques and tools used by this system give varying and deferring results.
Management accounting is mainly concerned with the rearrangement or modification of data. It derives its information from financing accounting, cost accounting, and other records. The correctness of management accounting depends upon the correctness of these basic records: that is, their limitations are also the; limitations of a management accountant.
The use of management accounting requires knowledge of several related subjects. Deficiency in knowledge in related subjects like accounting principles statistics, economics, principles of management, etc. will limit the use of management accounting.
The conclusions and decisions drawn by the management accountant are not executed automatically. Thus, there is a need for continuous and coordinated efforts of each management level to execute these decisions. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.
Decision making based on management accounting that provides scientific analysis of various situations will be a time-consuming one. As such, management may avoid systematic procedures for making a decision and arrive at a decision using intuitive and intuitive limits the usefulness of management accounting.
It is very costly. The installation of a management accounting system needs a very elaborate organization and numerous rules and regulations. This results in heavy investment, which only bill concerns can afford.
The interpretation of financial information depends on the capacity of an interpreter as one has to make a personal judgment, personal prejudices and bias affect the objectivity of decisions.
The installation of management accounting involves a basic change in an organizational setup. New rules and regulations are also required to be framed, which affects many personal, and hence there is a possibility of resistance from some quarters or the other.
The installation of a management accounting system requires high costs on account of an elaborate organization and numerous rules and regulations. It can, therefore, be adopted only by big concerns.
The main function of management accounting is to provide data and not decisions. It can only inform, not prescribe.
Management accounting has a very wide scope incorporating many disciplines. Management requires information from both accounting as w£fl as nonaccounting sources. This creates many problems and brings a degree of inexactness and subjectivity in conclusion obtained through it.
Management accounting is a tool of management, not an alternative to management. It cannot replace the management or administration.
Management accounting demands a break away from traditional accounting practices. It calls for a rearrangement of the personal and their activities, which is generally not like by the people involved. Importance or Roles of Management Accounting in the Decision-Making Process in a Business Organization.The objective of decision making is to maximize profit through the use of the best alternative method. Management accounting helps management in deciding financial affairs. It uses accounting data to solve various management problems. Every organization has to decide at the right time. Management accounting played a vital role in the decision-making process in a business organization. The importance/role of management accounting can be stated as follows:
Management accounting plays a vital role in taking an efficient plan providing necessary information. Through the capital budget, sales budget, Cost-volume-profit analysis, management accountants provide information for making plans.
Management accounting also plays an important role in increasing efficiency in business operations through budgeting, ratio analysis, variance analysis, standard costing, etc.
Management accounting takes pan inefficient control through JIT philosophy and total quality control system.
Management accounting helps to increase labor efficiency through standard labor costing, linking bonus with productivity and budgeting.
Management accounting contributes a lot to increase the management efficiency of the organization providing managers with the correct information.
We know that the main functions of management are planning, organizing, leading, and controlling management accounting helps management personnel to perform the functions properly, providing necessary accounting information.
For performing the functions efficiently and effectively, managers need to communicate with the various parties and parts of the organization. Management accounting helps in this respect preparing various reports. Last of all, we can say that the activities of management accounting are occurred only to perform a vital role in the decision-making process in an organization. Scope of Management AccountingThe main aim is to help management in its functions of planning, directing, and controlling. The scope of management accounting is so wide broad-based that it includes within its fold an analysis of all the aspects of modern accounting, which emphasis the common denominator of the functions of both management and accounting the making of an effective decision based on appropriate information. The following are some of the areas of specialization included within the ambit of management accounting:
Financial accounting is the general accounting which accounting relates to the recording of business transactions in the books of prime entry, posting them into respective ledger accounts, balancing them preparing a trial balance. Accounting for revenues, expenses, assets, liabilities, and net worth, together with the production of summary financial reports. Hence management accounting can not obtain full control and coordination of operations without a well designed financial accounting system.
Costing is a branch of accounting. Accounting for current, standard and prospective costs; analysis and communication of cost data at all levels of management with the organization. It is the process and technique of ascertaining cost. Planning, decision-making, and control are the basic managerial functions. The cost accounting system provides the necessary tools such as standard costing, budgetary control, inventory control, marginal costing, etc. for carrying out such functions efficiently.
Budgeting means expressing the plans, policies, and goals of the enterprise for a definite period in the future. Assembly and consolidation of budget; assistance to management personnel in translating operating plans into financial budgets; reporting and analysis of budget variances. Forecasting, on the other hand, is a prediction of what happened as a result of a given set of circumstances. Targets are set for different departments, and responsibility is fixed for achieving these targets.
Recording accounting data, performing repetitive operations with these data, and preparing reports to form recoded data.
Review and appraisal of accounting procedures and records to ascertain their reliability, conformity to prescribed practices, and adequacy to protect against loss of assets by fraud, waste, and other causes. Internal audit helps the management in fixing the responsibility of different individuals.
This necessitates the computation of income by the Income Tax Act, preparing return statements and making payment of taxes when due Income statements are prepared, and tax liabilities are calculated. The management is informed about the tax burden from the central Government, State Government, and Local Authorities. This includes the computation of taxable income as per tax law, filing of returns, etc.
Interpretation of accounting reports, analysis in financial terms of proposed projects, plans, and procedures; assistance to the management in interpretation and evaluation of financial data of all types.
It includes control over inventory from the time it is acquired until its final disposal.
This is concerned with ensuring that capital is maintained intact in real terms, and profit is calculated with this fact in mind.
Graphs, charts, pictorial presentations, index numbers, and other statistical methods make the information more impressive and intelligible. Other tools, such as time series, regression analysis, sampling technique, etc. are highly useful for planning and forecasting.
This includes the computation of income following the tax laws, filing of returns, and making tax payments.
This includes maintenance of proper data processing and other office management services, reporting on the best use of mechanical and electronic devices. It provides statistical data to the various departments and undertakes special cost studies, cost estimations, reports on cost-volume-profit relationships, under the changing conditions of the organization.
This includes the preparation of monthly, quarterly, half-yearly income statements and the related reports, cash flow and funds flow statements, scrap reports, etc.
This includes maintenance of proper data processing and other data processing and other office management services, reporting on the best use of mechanical and electronic devices.
This includes maintenance of proper data processing and other office management services, reporting on the best use of mechanical and electronic devices. Ethical Responsibilities of Management AccountantsManagement accountants should behave ethically. They must follow the highest standards of ethical responsibility and maintain a good professional image. The Institute of Management Accountants (IMA) has developed the following four standards of ethical conduct for management accountants:
Services/Tasks of Management AccountantsListed below are the primary tasks/services performed by management accountants. The degree of complexity relative to these activities are dependent on the experience level and abilities of any one individual.
Distinctions between Management Accounting and Financial AccountingFinancial accounting and management accounting are closely inter-related since management accounting draws out a major part of the information form financial accounting and modifies the same for managerial use. Financial accounting ensures that the assets and liabilities of a business are properly accounted for and provides shareholder investors, tax authority, creditors, etc. On the other hand, management accounting provides information, especially for the use of managers who are responsible for making proper decisions within an organization. Financial accounting is concerned with the recording of day-to-day transactions of the business. Though both financial and management accounting relies on the same financial data, there are some differences between financial and management accounting. Distinctions between Management Accounting and Financial Accounting are the following:
Difference between Cost Accounting and Management AccountingManagement accounting and Cost accounting are two important branches of accounting. Both of these branches of accounting help the management in accomplishing their assigned task. Management accounting and cost accounting involves the presentation of accounting information in a manner that facilitates a prudent planning, correct decision-making, and effective controlling of day-to-day operations. It goes without saying that both the systems overlap each other in some areas of functioning. Most of the cost accounting concepts are freely used in management accounting for assisting the management. Naturally, it is difficult to draw a sharp distinction between the two. Despite this situation, some distinctions which can be identified, are placed in the following manner:
ConclusionAccording to the Institute of Management Accountants (IMA): “Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy”. The area and scope of management accounting are different in comparing financial accounting. Managerial accounting is concerned with providing information to managers—that is, the people inside an organization who direct and control its operations. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside the organization. This contrast in orientation results in several major differences between financial and managerial accounting, even though they often rely on the same underlying financial data, financial and managerial accounting differ not only in their user orientation but also in their emphasis on the past and the future, in the type of data provided to users, and in several other ways. Information provided by management accounting is not prepared by following GAAP. Yes, we are agreed with the statement. Because it is not mandatory to follow GAAP in management accounting, managers can set their own rules concerning the content and form of internal reports. The managers are not bounded by GAAP. So the information about management accounting depends on the managers’ own rules and regulations. Hence, we can say that the information provided by management accounting is not prepared by following GAAP. How is managerial accounting used for planning controlling and decisionManagerial accountants help a business decide when, where and how much money to spend based on financial data. Using standard capital budgeting metrics, such as net present value and internal rate of return, to help decision makers decide whether to embark on costly projects or purchases.
How is management accounting being used in decisionManagerial accounting can be used in short-term and long-term decisions involving the financial health of a company. Managerial accounting helps managers make operational decisions–intended to help increase the company's operational efficiency–which also helps in making long-term investment decisions.
What are the applications of management accounting?They should be used for the following:. Record keeping. recording business transactions. measuring results of financial changes. ... . Planning and control. collecting cash. controlling stocks. ... . Decision making. using cost information for pricing, capital investment and marketing. evaluating market and product profitability.. What is the role of management accounting controlling in organizations?What Is the Role of Management Accounting? Management accounting helps managers within a company make decisions. Also known as cost accounting, management accounting is the process of identifying, analyzing, interpreting and communicating information to managers to help achieve business goals.
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