Functions of Management Accounting
The main functions of management accounting are summarized below.
1. Useful in planning: Management accounting is useful in planning. Before planning, management must evaluate past and future strategies. Management accounting provides valuable data for guiding future lines of action.
2. Decision-making functions: Before making decisions, an organization’s management considers alternatives. Management accounting plays a critical role in guiding effective decision-making.
3. Control functions: The information collected by management accountants is suitable for creating targets and key performance indicators. Variances, if any, can be checked to assist in organizational control.
4. Profit maximization: Management accounting techniques help companies to check all types of waste, which improves efficiency and profitability.
5. Asset protection: Management accounting provides internal checks and controls to protect a company’s assets. Proper insurance coverage is recommended.
6. Protection of business interests: Management accounting is useful for interpreting and reporting the effects of external influences on progress toward business goals.
This function stresses the importance of continuously appraising the economic, social, and governmental policy forces that directly influence the operations of the business.
7. Performance appraisal: Management accounting enables managers to create systems of performance measures and targets. These measures encompass wide-ranging aspects of business, serving as an invaluable source of guidance.
8. Helpful in business budgeting: Management accounting is useful in planning, which involves setting objectives, identifying strategies for achieving the objectives, and selecting the most appropriate alternatives.
9. Provides wide-ranging information: Management accounting provides concise information covering the entire field of business activities relatively for the long interval to the top management.
10. Helpful for organizing: Management accounting helps to establish an organized company structure by dividing the whole organization into different cost centers.
The fixing and controlling of responsibilities and costs at each of these centers help to create an efficient business structure.
A good system of internal control and internal audit for each cost center, along with the constant review of procedures, helps the businesses to make improvements if needed.
11. Motivational: Well-structured leadership is central to management accounting. It facilitates high standards and cooperation among employees.
Senior management should be able to identify the needs of employees and understand gaps in their knowledge. This awareness will lead to more productive and satisfied employees.
This is made possible through periodical departmental profit and loss accounts, budgets, and reports prepared by each department.
Limitations of Management Accounting
The limitations of management accounting are described below.
1. Dependent on accounting information: Management accounting depends upon high-quality financial accounting records and cost records for information. The reliability of the conclusions derived depends on the accuracy of this information.
2. Dependent on other data: Management accounting is only a tool; it cannot replace management. Its usefulness depends on the extent to which the available data are used by management to make decisions.
The whole utility of management accounting will go to waste if management accountants lack suitable capabilities.
3. Interdisciplinary: Management accounting requires a blending of knowledge from different fields, including accountancy, statistics, economics, and law. Insufficient knowledge in any aspect can lead to unsound conclusions.
4. Expensive: Implementing a management accounting system entails costs, procedures, and infrastructure that, in general, are not affordable in small organizations.
5. Management accounting is in its infancy: Management accounting is a new technique in its evolutionary stage. New ideas and techniques are still being introduced where needed.
Therefore, it is essential to keep a continuous track of the latest theories and developments in the field.
As the requirements of management accounting are well-defined, implementing new ideas is uncommon. This is due to the fact that new ideas always need to adhere to standard protocols within the industry.
6. Bias or internal resistance: Traditional methods of accounting have been used for a long time. This can lead to changes or new approaches meeting with resistance from the majority.
Accounting staff will likely be hesitant to new working approaches. Therefore, the introduction of management accounting should be performed in a way that motivates employees to adopt the new approach.
7. No legal recognition: The results that arise from management accounting are not legally recognized. That is to say, the income tax department does not recognize the profits calculated using management accounting techniques.
8. No set principles: There are very few prescribed rules for management accountants. For example, some may prepare fund flow statements using the vertical form while others may follow the horizontal form.
9. Limited use: Management accounting is a new technique, which means that its use is limited to big businesses. For small businesses, it is not cost-effective and is, therefore, rarely used.
10. Lack of knowledge and understanding: The emergence of management accounting has been driven by a fusion of subjects, including statistics, accounting, management theory, economics, and engineering.
Inadequate knowledge in any of these subjects is bound to have an unfavorable effect on solutions to problems concerning management performance. Therefore, ineffective management accounting can be misleading and costly.
11. Persistence of intuitive decision-making: While the main contribution of management accounting has been to eliminate intuition, the temptation persists among many managers to make intuitive decisions.
This lackadaisical approach—rather than arriving at decisions by the newer scientific method of management accounting—can lead to substandard results.