MANAGEMENT ACCOUNTING

WHAT IS MANAGEMENT ACCOUNTING?

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

IFAC(International Federation of Accountants) defined management accounting process as “The process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control an organization and to assure appropriate use and accountability for its resources.”

SCOPE OF MANAGEMENT ACCOUNTING

Formation, installation and operation of accounting, cost accounting, tax accounting and information systems. Management accountant has to construct and re- construct these systems to meet the changing needs of management functions.

The compilation and preservation of vital data for management planning. It presents the past data in such a way as to reflect the trends of events to the management.

Providing means of communicating management plans to the various levels of organization. This insures the coordination of various segments of the enterprise plans and also defines the role of individual segments in the whole plan and assist the management in directing their activities.

Assisting management in decision making by providing relevant accounting and other data, analyzing the effect of alternative proposals on the profits and position of the enterprise.

Providing methods and techniques for evaluating the performance of the management in light of the objectives of the enterprise, thus assisting in the implementation of the principle “management by objectives”.

Providing and installing an effective system of feedback reports. By pin pointing the significant deviation between actual and expected activities and by adhering to the principles of selectivity and relevance, such reports help in the installation and operation of the system of “management by exception”.

Improving, modifying and sharpening the effectiveness of the existing techniques of analysis. The management accountant would always think of increasing the practability of existing techniques.

NATURE OF MANAGEMENT ACCOUNTING

Providing Accounting Information: Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. 

Cause and effect analysis: Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result, i.e., profit or loss management accounting goes a step further. The ‘cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors different expenditures, current assets, interest payables, share capital, etc. 

Supplies Information and not decision: The management accountant supplies information to the management. The decisions are to be taken by the top management. 

Concerned with forecasting: The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action.

Use of Special Techniques and concepts: management accounting uses special techniques and concepts to make accounting data more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. 

Increase in Efficiency: The purpose of using accounting information is to increase efficiency of the concern. The efficiency can be achieved by setting up goals for each department. 

FUNCTIONS OF MANAGEMENT ACCOUNTING

Management accounting is one of important part of accounting. To use accounting for decision making encourages its development. Management accounting’s main function is to collect accounting information which is useful for different managerial functions like planning, organization, coordination and control. Other important functions of management accounting:

Modification of data: First good function of management accounting is to modify of raw accounting data. After this, businessman bids fair to effective use these modify data in business’s management. Management accounting can be used to classify every accounting item in different views. There are so many accounting software which can be helpful to show sale or purchase or any other accounting items according to production level, area, season, country, age or quality of debtors or creditors. 

Interpretation function: It is also function of management accounting to do complete interpretation of financial analysis. It cuts down work burden of manager because management accountant supports him by providing fact and interpretation of financial data after its analysis.

Management control function: Management control can be possible only with management accounting function. Management accounting uses responsibility accounting tool in which different cost, revenue and investment centers are made. Proper budget is maintained in each centre. Analysis of actual recorded performance is compared with standard performance and deviation is evaluated. This will be helpful to fix up wrong side of company’s decision promptly.

Communication functions: Management accounting puts together all useful accounting information with comparable past data for good communication with govt., bankers and investors.

FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING

Necessity· Financial Accounting (FA): SEC (or banks or

suppliers) requires publicly traded companies to publish financial statements according to GAAP.

· Management accounting (MA) is optional.· Purpose.

· FA: Produce financial statements for outside users.

· MA: Help managers plan, implement and control.

· Users· FA: faceless group, external users, present

or potential shareholders.· MA: Known managers who influence what

information is needed.· Underlying structure

· FA: built around: Assets = Liabilities + Stockholders’ Equity.

· MA: 3 purposes each with its own set of concepts and constructs (addressed later).

· Source of principles· FA: GAAP.· MA: whatever managers believe is useful.

· Time orientation· FA: historical, tell it like it was.· MA: future/decision oriented, tell it like it

will be. (However, the past is often a good predictor of the future.)

· Information content· FA: financial statements are the end

product and include primarily financial info.· MA: non-monetary as well as monetary

info. · Information precision

· FA: Uses approximations but as a generalization is more precise than MA.

· MA: Management needs info rapidly to be useful in decision making and therefore precision is sometimes sacrificed.

· Report frequency· FA: Publicly traded, SEC: quarterly, with

more detailed info annually. · MA: Up to management.

· Report timeliness· FA: Usually, several weeks to months after

fiscal close of accounting period.· MA: Quickly to be useful for decision

making.

· Report entity· FA: Organization as a whole.· MA: Relatively small parts

(responsibilities centers such as departments, product lines, divisions, subsidiaries as well as organization as a whole.)