Q.1: Define the term ‘Management Accounting’. Discuss its features and importance.
Management accounting is the decision-making accounting. It presents data in such a way so as to help management in policy-framing and day to day running of the Organization. Management Accounting refers to accounting for the management i. e. accounting which provides necessary information to the
management for discharging its functions.
These functions are: planning, organizing. directing and controlling. Management accounting provides necessary data for management for effective and efficient control of the business. Thus. Management Accounting was developed to blend these pieces of information so that the process of decision making may become easy and simple.
Definition 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 usefill 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 has stated that “any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting.
4. Vein, Smith observes, “Managenænt Accounting is 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 has opined that “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. ” It is, thus, evident that the common thread underlying all these definitions is that Management Accounting is concerned with the efficiency of the various phases of management.
7. Management Accounting Practices Committee (MAPC) of U.S.A. “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. There are many schools of thought who feel that Management Accounting is futuristic Accounting. Standard costing, cost variance, budgetary control are such techniques which focus attention on the future.
2. Management Accounting is Selective Accounting. The technique of Management Accounting selects the best course of Action, here the best suitable and profitable action is selected.
3. Management Accounting provides data and not decision. Management takes the decision on the basis of pieces of information provided by financial data. Thus, management accounting provides data for decisions.
4. Management Accounting studies the nature of cost elements. The cost can be:
- Fixed Cost. Which is related to time such as works expense, office expenses and selling and distribution expenses.
- Variable Cost. Which is always in proportion to output, these are costs of materials, labor and chargeable expenses.
- Some Variable Costs. These can be variable to a fixed level of output and can be variable to some extent basis is past experience such as office expenses $6000, sixty percent is fixed, rest is variable.
5. Management Accounting studies the causes and effects seriously. The financial accounts only speak about the amount of profit whereas Management Accounting studies the cause and its effect 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 need so arrived.
7. Maximization of profit. The Management Accounting checks all wastes and tries to bring efficiency which results in maximum profits
8. Management Accounting increases efficiency. It is the science which always checks wastes and promotes efficiency.
Importance of Management Accounting
The following are the points which highlight the importance of the study of Management Accounting.
1. Modification of data. The management needs Accounting data for decision making which Management Accounting complies and classify for the above purpose and policy framing.
2. Helpful in Analysis and interpretation of data. No doubt. Management Accounting is concerned with the analysis and interpretation of financial data. Thus, data becomes more useful and reliable.
3. Helpful in control. Management Accounting is a useful technique for control on wastes. This is done by using techniques of standards and budgeting which is a vital part of management accounting.
4. Helpful in 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, selection or the best alternative is decided by the techniques or the Management Accounting. Thus, it is useful for the selection of the best action.
6. Useful in maximization of profit. Management Accounting is useful for checking and encourages efficiencies. Here all unwanted expenses are checked, new areas are studied and best use or capital is made to uplift the profits.
7. Safety depressions. The information received from Management Accounting through light on the past records. The management can make use of such data for future planning and can avoid the dangers of trade depressions.
8. Supply of comInodities at reasonable price. The technique management accounting helps the management to control the costs and increases the output. Increase in output lowers per unit cost which alternately increases the new customers.