Management accounting is concerned with the provisions and use of accounting information to Managers within organizations to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. Unlike financial accountancy information, management accounting information is used with an organization
“Typically for decision-making” and is usually confidential and its access and available only to a select few.
The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources.
Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. Management accounting as Practice extends to the following three areas:
- Strategic management –advancing the role of the management accountant as a strategic partner in the organization.
- Performance management –developing the practice of business decision -making and managing the performance of the origination
- Risk management-contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement the objectives of the organization.
A management accountant applies his as her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such way as to assist management in the formulation of policies and in the planning and control the operation of the undertaking. Management accounting provide helps an organization to survive in the competitive, ever-changing world, because it provides an important competitive advantage for an organization that guides managerial action, motivates behaviors, supports and creates the cultural values necessary to achieve an organization’s strategic objectives.
Management Accounting Techniques:
Management decisions are basically based on some measures/techniques traditionally designed based on quantitative data. However, in recent past to cope with global business environment, change in business, increase in competition and complexity of decision making some advanced quantitative techniques like Activity-based costing and Target costing and some improved programs like just-in-time (JIT), Total Quality Management (TQM), Process Reengineering and Theory of constraints (TOC), have been introduced for application. Now, both traditional and advanced management accounting techniques are shown in the following chart.
|Traditional Techniques||Advanced Techniques|
|Financial statement Analysis||Activity-based costing|
|Fund flow Analysis||Target costing|
|Cash Flow Analysis||Just-in-time (JIT)|
|Marginal costing||Total quality management|
|Absorption Costing||Process Reengineering management|
|Differential Costing||The Theory of Constraints (TOC)|
|Inter firm comparison|
|Cost-volume –Profit Analyses|
The above chart identifies the generally used management accounting techniques by classifying then as to traditional and modern techniques.
MANAGEMENT ACCOUNTING FUNCTIONS:
Management accounting is a financial method that helps senior Managers and department heads analyze business performances. Management accounting functions relate primarily to budgeting and cost analysis, internal financial reporting and monitoring of cost controls. Actually, management accounting may be used to include all
Activities connected with collecting, processing, interpreting and presenting information to management. The management accounting satisfies the various needs of management for arriving of appropriate business decisions. They may be described as modification of data, analysis and interpretation of data, facilitating management control, formulation of business budgets, use of qualitative information and satisfaction of informational needs of management.
Listed below are the primary tasks performed by management accountants generated by different cost accounting tools. The degree of complexity relative to these activities is dependent on the experience level and abilities-
- Variance Analysis
- Rate and volume analysis
- Product profitability.
- Cost Analysis and cost benefit analysis
- Cost-volume –profit Analysis
- Life cycle cost analysis
- Capital budgeting.
- Strategic planning and strategic management advice.
- Internal financial Presentation and communication.
- Sales and financed forecasting and annual budgeting
- Cost allocation.
- Resource allocation and utilization.
Relationship between cost accounting, financial accounting, management accounting and financial management.
Cost Accounting is a branch of management accounting, which has been developed because of the limitations of Financial Accounting from the point of view of management control and internal reporting. Financial accounting performs admirably, the function of portraying a true and fair overall picture of the results or activities during a period and its financial position at the end of the year.
Also, on the basis of financial accounting, effective control can be exercised on the property and assets of the enterprise to ensure that they are not missed or misappropriated. To the extent financial accounting helps to assess the overall progress of a concern, its strength and weakness by providing the figures relating to several previous years. Data provided by cost and financial accounting is further used for the management all processes associated with the efficient acquisition and deployment of short, medium and long term financial resources. Such a process of management is known as financial management. The objectives of financial management are to maximize the wealth of shareholders by taking effective investment, Financing and dividend decisions. Investment decisions relate to the effective deployment of scarce resources in terms of funds while the financing decisions are concerned with acquiring optimum finance or attaining financial objectives. On the other hand, management accounting refers to managerial processes and technologies that are focused on adding value to organizations by attaining the effective use of resource, in dynamic and competitive context. Hence, management Accosting is a distinctive form of resource management which facilitates management’ decision making by producing information for Managers within an organization.