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Management
Accounting
Introduction: - The scope of Management Accounting is broader than the scope of cost accounting. In cost accounting, as we have seen, the primary emphasis is on cost and it deals with collection, analysis, relevance, interpretation and presentation for various problems of management. Management Accounting is an accounting system which will help the Management to improve its efficiency. The main thrust of Management Accounting is towards determining policy and formulating plans to achieve desired objectives of management. It helps the Management in planning, controlling and analyzing the performance of the organization in order to follow the path of continuous improvement. Management Accounting utilizes the principle and practices of financial accounting and cost accounting in addition to other modern management techniques for effective operation of a company. In fact there is an overlapping in various areas of cost accounting and management accounting.
Features
of Management Accounting
The
features of Management Accounting are given below.
The
Management Accounting data are derived from both, the financial accounting and
cost accounting.
The
main thrust in management accounting is towards determining policy and
formulating plans to achieve desired objectives of management.
Management
Accounting makes corporate planning and strategy effective and meaningful.
It
is concerned with short and long range planning and uses highly sophisticated
techniques like sensitivity analysis, probability techniques, decision tree,
ratio analysis etc for planning, control and evaluation.
It
is futuristic in approach and predictive in nature.
Management
accounting system cannot be installed without proper cost accounting system.
Management
Accounting systems generate various reports which are extremely useful from the
Management point of view.
Management
Accounting Information and their use
In the above paragraphs, we have seen the utility of Management Accounting. One of the distinguishing factors between the financial accounting and management accounting is that the management accounting does not have a unified structure. The format in which it is prepared varies widely according to the circumstances in each case and the purpose for which the information is being summarized. The management accounting generates information, which is used for three different purposes.
Measurement
Control
Decision
making
For
each of these purposes, management accounting generates vital information. The uses
of information for each of the three purposes of management accounting are
explained below.
Measurement:
For
measurement of full costs, the management accounting system focuses on the measurement
of full costs. Full costs are the total costs required for producing goods or
offering services. These costs are divided into A] Direct costs and B] Indirect
costs. Direct costs are identifiable or traceable to the products or services
offered while indirect costs are not traceable to the products or services.
Full cost accounting measures not only the total costs [direct plus indirect
costs] required for producing products or services but also the full costs
required to run other activity like conducting a research project or running a
welfare scheme and so on. Thus full cost accounting is not restricted to solely
to measure the cost of manufacturing.
Control:
An
important aspect of the management accounting information is to provide
information, which can be used for ‘Control’. The management accounting
system is structured in such a manner that information is generated for each
‘Responsibility Center’. A responsibility center is an organization unit headed
by a manager who is responsible for its operations and performance. Management
accounting helps to prepare budget for each responsibility center and also
facilitates comparison between the budgeted and actual results. A report is
prepared for each responsibility center, which shows the budgeted and actual
performance and also the difference between the two. This enables the
performance analysis of each responsibility center so that proper corrective
action can be taken in this respect.
Decision Making:
Management
accounting generates useful information for decision making. Management
has to take several decisions in the course of business. Some of the major
decisions are, Make or Buy, Accepting or rejecting of an Export Order, Working
of second shift, Fixation of selling price, Capital expenditure decisions, increasing
production capacity, Optimizing of Product Mix and so on. For all these
decisions, providing of information is necessary and the management accounting
generates this information, which enables the management to take such
decisions.
The role of
management accounting and financial accounting is quite different from each
other as they have different goals altogether. Management accounting measures
analyzes and reports financial and non financial information that helps
managers to take decisions to fulfill the goals of an organization. Managers use
management accounting information to choose, communicate and implement
strategy. They also use management accounting information to coordinate product
design, production and marketing decisions. Management accounting focuses on
internal reporting. The following points highlight the role played by
Management Accounting in the business organization.
Implementing Strategy: Managers implement strategies by translating them into actions. Creating value for customers is an important part of planning and implementation of strategies. Strategic planning and implementation will include decisions regarding the design of products, services or processes, research and development, production, marketing, distribution and customer services. Each of this area is important for satisfying customers and keeping them satisfied.
Management accounting will
help to track the costs of each of the activity mentioned above. The ultimate
target is to reduce costs in each category and to improve efficiency. Cost
information also helps managers make cost benefit analysis. For example,
managers can find out that is it cheaper to buy products from outside vendors
or to do manufacturing in-house? Is it worthwhile to invest more resources in
design and manufacturing if it reduces costs in marketing and customer service.
Supply Chain Analysis: Companies can also implement strategy, cut costs and create value by enhancing their supply chain. The term ‘Supply Chain’ describes the flow of goods, services and information from the initial sources of materials and services to the delivery of products to customers regardless of whether those activities occur in the same organization or in other organization. Customers expect improved performance from companies through the supply chain. They expect that the companies should perform all these activities in an efficient manner so as to reduce costs and also maintain quality of the products and the products be available easily for them.
This is no doubt a daunting task and the management
accounting plays a vital role in ensuring value for money for the customers. Tools
like standard costing and target costing can be used effectively for cost
control and cost reduction and thus ensure reasonable prices for customers. A
system of budgets and budgetary control will ensure continuous planning and
monitoring various functions and thus provide for introspection. Continuous
improvement in these activities will help in creating value for customers.
Decision Making:
One
of the important functions of management is decision making. Management Accounting
helps in this crucial area by providing relevant information to the management.
Techniques like marginal costing helps to generate information, which will be
useful for taking decisions. Decisions include make or buy decisions, adding or
dropping a product line, working of additional shift, shut down or continue
operations, capital expenditure decisions and so on. Decisions based on
information are expected to be more rational and objective rather than
subjective.
Performance Measurement: Management accounting helps immensely for the measurement of performance of the organization. The main aspect of performance measurement is comparison between the targets and actual. There are several tools and techniques like budgets and budgetary control, standard costing and marginal costing, which are used in measuring the actual performance against the target performance. This will facilitate introspection and corrective action can be taken for further improving the performance.
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