Q.1: Define Management Accounting and Discuss Its Features and Importance
Management accounting is decision-making accounting. It presents data in such a way as to assist management in policy-framing and the day-to-day running of the organization.
Management accounting essentially refers to accounting for the management (i.e., accounting that provides the necessary information to management, enabling key personnel to discharge their functions).
These functions are planning, organizing, directing, and controlling. Management accounting provides the necessary data for management to exercise effective and efficient control of the business.
Therefore, management accounting was developed to blend these pieces of information, ensuring that the process of decision-making becomes easy, simple, and efficient.
Definitions of Management Accounting
The following are the main definitions of management accounting.
1. Robert N. Anthony: “Management Accounting is concerned with accounting information that is useful to management.”
2. W. Keller and Ferrara: “Management accounting for profit control includes income accounting, cost accounting and budgetary, planning and control; of these, cost accounting is the keystone.”
3. The Institute of Chartered Accountants of England and Wales: Management accounting is “any form of accounting which enables a business to be conducted more efficiently.”
4. V. Smith: “Management accounting is a more intimate merger of the two older professions of management and accounting, wherein the informational needs of the manager determine the accounting means for their satisfaction.”
5. Batty: “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 maximizing profits or minimizing losses.
6. Shillinglaw: “Accounting, which serves management by providing information as to the cost or profit associated with some portion of the firm’s total operations, is called managerial accounting.”
7. Management Accounting Practices Committee (MAPC) of the United States: “Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by the management to plan, evaluate, and control.”
Nature/Characteristics of Management Accounting.
The following are the chief features of management accounting:
1. Management accounting lays stress on the future: Many schools of thought feel that management accounting is futuristic accounting. Standard costing, cost variance, and budgetary control are examples of techniques that focus attention on the future.
2. Management accounting is selective accounting: The technique of management accounting selects the best course of action; in particular, the best, most suitable, and most profitable action is selected.
3. Management accounting provides data and not decisions: Management makes decisions based on the pieces of information they obtain from financial data. Thus, management accounting provides data for decision-making.
4. Management accounting studies the nature of cost elements: These elements are:
- Fixed costs: Related to time, such as work expenses, office expenses, and selling and distribution expenses.
- Variable costs: Always in proportion to output, these are the costs of materials, labor, and chargeable expenses.
- Variable costs: These costs can be variable to a fixed level of output and can be variable, for example, with 60% being fixed and 40% variable.
5. Management accounting studies causes and effects seriously: Financial accounts only provide information about the amount of profit, whereas management accounting studies causes and effects and also relates profits to sales.
6. No set principle: Like financial accounting, management accounting does not follow set principles; the required data can be changed as and when the need arises.
7. Maximization of profit: Management accounting checks all forms of waste and seeks to bring efficiency to maximize profit
8. Management accounting increases efficiency: It is a science that always monitors waste and seeks to promote efficiency.
Importance of Management Accounting
The following points highlight the importance of studying management accounting:
1. Modification of data: Management needs accounting data for decision-making. Management accounting serves up this data for both this purpose and policy framing.
2. Helpful in analyzing and interpreting data: Management accounting is concerned with the analysis and interpretation of financial data. Thus, data becomes more useful and reliable when management accounting is used.
3. Helpful for control: Management accounting is a useful technique for exercising control over various forms of waste. This is achieved using techniques of setting standards and budgeting, which is a vital part of management accounting.
4. Helpful when preparing budgets: The techniques of management accounting are widely used and accepted for preparing budgets. These budgets are compared with actual results when these are known and thus an effort is made to up-root the variances if any.
5. Helpful in decision-making: There are always many courses open for management, where the selection of the best alternative is decided by the techniques or the management accounting. Thus, it is useful for choosing the best action.
6. Useful in profit maximization: Management accounting is useful for checking and encouraging efficiencies. Here, all unwanted expenses are checked, new areas are studied, and capital is optimally utilized to uplift the profits.
7. Safeguarding against financial decline: The information received from management accounting illuminates past records. Management can make use of such data for future planning and can avoid the dangers of trade depressions.
8. Supply of commodities at a reasonable price: The technique of management accounting helps management to control costs and increases the output. Increasing the output lowers the per-unit cost, which can increase new customer acquisition.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.