Table of Contents:
- Scope of management accounting
- Nature of management accounting
- Tools and Techniques of Management Accounting
- What is Management Accounting?
- Meaning of Management Accounting
- Difference between financial accounting and management accounting
- Objectives of management accounting
- Definition of management accounting
- Difference between cost accounting and management accounting
- Functions of management accounting
The nature and scope of management accounting are explained below:
Scope of Management Accounting
The scope of management accounting is more comprehensive which draws concepts and applications from various fields.
The scope of management accounting comprises the following elements.
- Cost Accounting
- Operations Research
- Financial Accounting
- Statistical Methods
1) Cost Accounting
It is an important aspect of accounting that provides cost-related information for both products and services offered by a company. It uses various tools such as marginal costing, standard costing, process costing, unit costing, batch costing, and more to analyze and interpret the data. These insights are then used to shape company policies and support the smooth functioning of the business.
2) Operations Research
It serves as an essential tool that complements management accounting, aiding in the formulation of rational decisions through decision tree analysis and so on.
3) Financial Accounting
It is a traditional accounting method that provides historical information about a company’s past performance. This recorded data is used to shape future strategies and financial forecasts. For example, by analyzing previous financial statements, a company can plan for future sales volume and purchase volume. It can then effectively manage accounts receivable and accounts payable, monitor its stock levels, and determine daily cash requirements to meet financial obligations.
4) Statistical Methods
It is another component of management accounting which plays a pivotal role in the presentation of information through charts, diagrams etc., by the various departments.
Nature of Management Accounting
The nature of management accounting is explained as follows:
1) Cause and Effect Analysis
When a loss occurs, the reasons for the loss are investigated. Likewise, when there’s a profit the factors directly influencing the profitability are also studied. The figures of profits are compared to sales, different expenditures, current assets, interest payables, share capital, etc. Therefore, in management accounting, it’s possible to study cause-and-effect relationships.
2) Achieving Objectives
In management accounting, the accounting information is used strategically to effectively accomplish organizational objectives. Historical data is used to create plans and establish objectives. The recording of actual performance and comparing it to the targeted figures provides management with insights into the performance of different departments.
3) Providing Accounting Information
The primary function of the accounting department is data collection and classification. The information collected is used by the management to make policy decisions. Management accounting involves the presentation of information in such a way that it suits managerial needs.
4) Provides Information, not Decisions
The management accountant provides information to the management. The decisions are to be taken by the top management.
5) Taking Important Decisions
It supplies the necessary information to the management, which may base its decisions on it. The historical data is studied to understand its potential influence on future decisions.
6) Use of Special Techniques and Concepts
The techniques used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will depend on the specific situation and its requirements.
7) Concern with Forecasting
8) Increase in Efficiency
The purpose of using accounting information is to increase the efficiency of the organization. Efficiency can be achieved by establishing goals for each department or section. Performance appraisal helps management to identify both the efficient and inefficient areas.
Tools and Techniques of Management Accounting
Several tools and techniques are used to supply the information required by the management. No single technique can satisfy all managerial requirements. The tools and techniques used in management accounting are explained as follows:
Tools and techniques of management accounting are listed below:
- Financial Policy and Accounting
- Historical Cost Accounting
- Standard Costing
- Decision Accounting
- Control Accounting
- Analysis of Financial Statements
- Budgetary Control
- Marginal Costing
- Revaluation Accounting
- Management Information Systems
- Working Capital Management
1) Analysis of Financial Statements
The analysis of financial statements is meant to classify and present data in a manner that is beneficial for the management. The meaning and significance of the data are explained in a non-technical language. In this technique, we collect four financial statements, one is a profit and loss account, the second is a balance sheet, the third is a cash flow statement and the fourth and last is a fund flow statement. Following this, we calculate more than 30 ratios and conduct a detailed analysis of the financial statement through financial analysis, fund flow analysis, and cash flow analysis.
2) Historical Cost Accounting
The practice of recording actual cost data on or after the date when it has been incurred is referred to as historical cost accounting. Comparing the actual cost to the standard cost provides an idea about the performance of the organization. Though costing is important by itself its utility is limited.
3) Standard Costing
Standard costing is an important technique employed for cost control. In a standard costing system, costs are determined in advance. The establishment of standard costs is based on a systematic analysis of existing conditions. Actual costs are documented and then compared to the standard costs. The variances, if any, are analyzed and their reasons are ascertained. Standard costing helps to enhance both the efficiency of the organization and the practice of management by exception.
4) Financial Policy and Accounting
Every concern has to decide on the sources of raising funds. The funds can be raised either through the issue of share capital or by obtaining loans. Again a decision must be made regarding the type of capital to be utilized, i.e., equity share capital or preference share capital. Preference share capital can be subdivided into several types.
The second decision relates to the acquisition of loans. The choice between long-term or short-term loans is, once again a matter of policy. The proportion between loans and share capital should also be decided. All these decisions are very important and management accounting offers a range of techniques to facilitate effective financial planning. Tax planning is another aspect where management accountants provide invaluable assistance to the management team. They try to use various rules and regulations to benefit the organization.
5) Decision Accounting
An important work of management is to make decisions. Decision-taking involves a choice from various alternatives. There may be decisions about capital expenditure, make-or-buy choices, pricing strategies, expansion or diversification, etc. Management accounting calculates the financial implications of various courses of action and enables management to make well-informed decisions and select the best course of action.
6) Working Capital Management
Through the use of this management accounting tool, short-term assets and short-term liabilities can be effectively managed. All cash management, debtor management and inventory management will be included in working capital management. We make also a working capital cycle to know the firm’s ability to convert its resources into cash. If there is a low time for conversion of raw material into sales and then cash from the debtor, it is a good indication.
7) Revaluation Accounting
This is also known as replacement accounting. The primary objective of management is to secure the preservation of capital within the business. The profits are calculated in such a way that ensures the preservation of capital in real terms. In times of inflation or rising prices, the value of capital is greatly affected.
As per Batty, “Revaluation accounting is used to denote the methods employed for overcoming the problems connected with fixed asset replacement in a period of rising prices.”
8) Budgetary Control
Budgetary control is a system which uses budgets as a tool for control and planning. Budgets for each functional department are prepared in advance. The budgets are formulated using both documented data and future possibilities. The actual performance is recorded and then compared with the predetermined targets. Management can assess the performance of every person in the organization. The timing of budgets and identifying deviations is an important tool for effective planning and controlling.
9) Management Information Systems
The development of electronic data recording and classifying data has greatly enhanced the process of reporting to management. Data planning, coordination, and control are provided to management. Feedback of information along with responsive actions can be employed as control techniques.
10) Marginal Costing
This method of costing is concerned with changes in costs resulting from changes in the volume of production. Under this system, the cost of the product is divided into marginal (variable) and fixed costs.
The fixed portion of the cost is considered constant and is allocated based on a production level, while any additional production units involve only variable costs. Marginal costing is a valuable tool for the measurement of profitability of different production lines, different departments and divisions within an organisation. The decisions about short-term utilization of capacity are also assessed with the help of marginal costing.
11) Control Accounting
Control accounting is not an independent accounting system. Different systems have their control devices which are utilized in the field of control accounting. Standard costing and budgetary control can be implemented through the use of variance analysis reports. In control accounting, we can use internal checks, internal audits, statutory audits and organization and methods for control purposes.
What is Management Accounting?
Management accounting focuses on presenting accounting information to assist management in their decision making, planning, and control functions. Management accounting was developed because of management’s demand for information on past and present operations for predicting future trends.
The management accounting system acts as a decision support system for providing the right information to the right people at the right time. It deals with accounting information for managerial decision-making purposes.
Management accounting is dynamic and forward-looking. It provides various techniques for solving problems, decision making, planning, controlling and efficiently planning business operations. Its primary objective is to help managers to run their organisations smoothly. It is a value-adding process that guides management actions and motivates the behaviour of organisational people.
It creates cultural values necessary to achieve an organisation’s strategic, tactical and operating objectives. An effective management accounting system can create considerable value for organisational success by providing timely and accurate information about the various activities required.
Meaning of Management Accounting
Management accounting is a discipline that is comprised of two words ‘Management’ and ‘Accounting’. It is concerned with the study of the managerial aspect of accounting. The primary focus of management accounting is to reconfigure accounting in a manner that serves the needs of the management team. This includes aiding in the development of policies, facilitating the implementation of controls, and enabling effective evaluation. It is that system of accounting which helps management in enhancing efficiency by facilitating various functions.
Definition of Management Accounting
According to T.G. Rose, “Management accounting is the adaptation and analysis of accounting information and its diagnosis and explanation in such a way as to assist management”.
According to the American Accounting Association, “Management accounting includes the method and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances”.
As per the Institute of Chartered Accountants of England & Wales, “Any form of accountancy which enables a business to be conducted more effectively can be regarded as Management Accounting”.
According to the Anglo-American Council on Productivity, “Management accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking”.