Management accounting is a
modern concept of accounting as a tool of management. It is also known
as managerial accounting and can be defined as a process of providing financial
information and resources to the managers which helps them in decision making.
The emphasis of management accounting is to redesign accounting in a manner which is helpful to the management in framing of policies and control of their execution. 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. Management accounting covers a wide range of areas, such as financial accounting, cost accounting, budgeting, and taxes. The primary goal is to assist management in performing its planning, directing, and managing tasks.
Management accounting has been defined in different ways by different authorities. But yet, the central point in these definitions is the provision of accounting information to management for the efficient discharge of their functions of planning, organising, directing, controlling the operations of business. In this context, it is worthwhile to examine some of the well-known definitions of management accounting.
For
better understanding, following are some definitions given by specialised bodies
:-
According
to CIMA,” Management accounting is the process of identification, measurement,
accumulation, analysis, preparation, interpretation of communication of
information used by management to plan, evaluate and control within an entity
and to assure appropriate use of accountability for its resources.”
According to ICMA,”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.”
Brown and Howard, in their Book entitled “Principles and Practice of Management Accountancy”, define the discipline thus: “Management Accounting may be defined broadly as that aspect of accounting which is concerned with the efficient management of a business through the presentation to management of such information as will facilitate efficient and opportune planning and control.”
According to Kohler, Management Accounting is “that portion of accounting which attempts to supply management with quantitative information as basis for decisions.”
Contents
- Introduction to Management Accounting
- Meaning and Definitions of Management Accounting
- Emergence of Management Accounting
- Nature and Concept of Management Accounting
- Scope of Management Accounting
- Importance of Management Accounting
- Facets, Functions and Activities of Management Accounting
- Requirements of Management Accounting
- Tools and Techniques of Management Accounting
- Qualification and Qualities of Management Accountant
- Functions of Management Accountant
- Difference between Financial and Management Accounting
- Difference between Cost Accounting and Management Accounting
- Advantages of Management Accounting
- Limitations of Management Accounting
- Criticisms of Management Accounting.
In brief,
management accounting is concerned with all such accounting information that is
useful to management for performing its functions.
Management accounting makes use
of various techniques which include marginal costing, standard costing,
budgetary control, break-even analysis, cost- volume-profit relationship, ratio
analysis, inter-firm comparison and uniform costing, internal audit, etc. Most
of these techniques are also employed by a cost accountant.
Thus, the objectives of cost
accounting are quite similar to those of management accounting. In fact
management accounting is an extension of cost accounting.
Batty, J. gives a more comprehensive definition of Management Accounting. In his Book, Management Accountancy, Batty defines the subject thus: “Management Accountancy 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 maximising profits or minimising losses.”
In his view, obtaining finance, managing the financial resources, controlling costs and providing data, for decision making are just as important in maximising profit as any other function.
The above definition of Batty, which is sufficiently comprehensive, makes the field of activity of the management accountant very wide in its application. Batty himself states that “Management Accountancy is now a wide and diverse subject. It is the blending together into a coherent whole, financial accounting, cost accounting and all aspects of financial management.”
Emergence of Management Accounting
Till the emergence of cost accounting, financial accounting information communicated through the medium of financial statements was being used even by management. The information conveyed assisted management to control the affairs of their business in a general way. Further, managerial decisions were also based on such information.
With the emergence of cost accounting, however, it was possible for management to ascertain cost per unit of a product, process or operation. Direct costs could be traced to products. As such, the resources consumed by products could also be accurately measured.
In the case of indirect costs, however, the overhead resources consumed could only be estimated since specific items of overheads cannot be traced to individual products. Consequently, product costs are less likely to be accurate.
In spite of the fact that product costs ascertained as above are not accurate, they can still be used for financial accounting requirements. In fact, such costs were used for the purpose of allocating manufacturing costs incurred during a given period, between the cost of goods sold and inventories.
Even in the case of a multiproduct concern, product costs arrived at, although inaccurately by overstatement of costs some products and understatement of costs of others were used for the same purpose.
Besides the use of product costs to meet financial accounting requirements, cost information provided by cost accounting was also used by management for their own decision making. However, it was soon realised that inaccurate product costs which are sufficient to meet the financial accounting requirements of allocating manufacturing cost between cost of goods sold and inventories, are inadequate and unsuitable for managerial decision making.
This was the main reason for accumulating cost data for use by management in their function of decision making, in a different manner than that for purpose of financial accounting. The shift in emphasis from cost accumulation for stock valuation necessary to meet financial accounting requirements to cost data for managerial decision making, was responsible for the emergence of management accounting.
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.
Concept of Management Accounting:
In fact, the CIMA Terminology itself mentions the fundamental management accounting concepts such as:
i. Accountability Concept:
According to this concept, management accounting presents information measuring the achievement of the objectives of an organisation and appraising the conduct of its internal affairs in that process. On the basis of this information, the responsibilities and key results of individuals within the organisation are identified.
ii. Controllability Concept:
Management accounting identifies activities which management can or cannot influence. Risk and sensitivity factors are also assessed for purpose of control, analysis, comparison and interpretation of information which can be used in the control, evaluation and corrective functions of management.
iii. Interdependency Concept:
Management accounting should tap both external and internal information sources from interactive functions such as marketing, production, personnel, procurement and finance. This is necessary in the light of increasing complexity of business and ensuring proper balancing of information.
iv. Relevancy Concept:
It is necessary to maintain flexibility in assembling and interpreting information. Flexibility facilitates exploration and presentation of many alternatives for decision making.
v. Reliability Concept:
Management accounting information should be reliable. Its reliability to the user is dependent upon its source, integrity and comprehensiveness.
Management Accounting – Top 8 Scope
The ‘functional’ definition of management accounting given by the Official Terminology of the CIMA is quoted above. This definition sufficiently demonstrates the fact that the domain of the management accountant is very wide. It includes within its fold, almost every activity necessary to enable management to achieve the objective for which it is called upon to manage a specific enterprise.
It is, therefore, difficult to circumscribe the scope of management accounting within specific limits.
But yet, the following activities may be considered to be falling within the scope of management accounting:
Scope # i. Financial Accounting:
According to CIMA Official Terminology, management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. External reporting is thus a part of management accounting.
The information conveyed by financial accounting is made use of by the management accountant for making external reporting. Further, the same information is re-arranged in such a way as the management may make use of the same for internal control of operations.
Thus, financial accounting assists management accounting and enables the management accountant to discharge his functions efficiently.
Scope # ii. Cost Accounting:
Financial accounting assists management accounting in making historical financial information available to its end users. Cost accounting, however, satisfies financial accounting requirements of product costing and inventory valuation.
It focuses attention on internal reporting of cost data with the help of which management formulate strategic and short-term operation plans, establish standards of performance, ascertain deviations and take corrective action. It also facilitates managerial decision making by doing away with intuition and hunch.
Scope # iii. Financial Management:
Management accounting is also concerned with ensuring appropriate use of and accountability of its resources. Acquisition and use of finance and optimising the use of the same is as important as safeguarding the assets of an undertaking. No concern, whether small or big, can come into existence, continue and expand without the requisite amount of finance.
It is equally necessary that the available amount of finance is properly and profitably used. It is, in this context, that management accounting is related to financial management.
Scope # iv. Statistics:
It is within the purview of management accounting that the information conveyed to both external and internal users should be effective, precise and timely. Non- management groups being composed of laymen should be in a position to comprehend the information conveyed and take appropriate decisions with regard to disposal of their relatively scarce resources.
As such, statistics should be made use of in analysis, interpretation and reporting of accounting information. Frequently, the information conveyed will be in the form of charts, graphs and diagrams which are intelligible and easily understood by the recipients.
Scope # v. Engineering:
Right from the days of Scientific Management, there is a close connection between accounting and engineering. The plant engineer has to assist the management accountant where a process consists of a number of operations and some or all of them are performed at variance with the established standards of performance, or, there is no ready means of relating the performances to their combined effects.
Scope # vi. Taxation:
Determination of tax to be paid to the Government, making the payment and providing the supportive evidence also fall within the domain of management accounting. It is also within this field, the task of determining the amount of tax to be deducted from wages and salaries of employees and pay the same to the Government.
A growing concern feels the necessity of reducing paperwork and, at the same time, save time and labour. For this purpose, it installs a computer. Besides, it may make use of computer for receiving and storing accounting information as well as for inventory control. In a number of concerns, the work of data processing is assigned to the management accountant.
In some concerns, however, a separate department is established under the management accountant. In either case, management accounting utilises the facility of computers for its accounting and reporting functions.
Scope # vii. Electronic Data Processing:
A growing concern feels the necessity of reducing paperwork and at the same time save time and labour. For this purpose it installs a computer. Besides it may make use of computer for receiving and storing accounting information as well as for inventory control.
In a number of concerns, however, a separate department is established under the management accountant. In either case, management accounting utilizes the facility of computers for its accounting and reporting functions.
Scope # viii. Quantitative Techniques:
Quantitative techniques involving mathematics, and going by the name Operations Research, are also a part of management accounting. Linear programming, game theory and queuing theory, etc., have been increasingly made use of in recent times as important tools in many fields of managerial decision making.