Similarly, according to the American Accounting Association, “It includes the
methods and concepts necessary for effective planning for choosing among
alternative business actions and for control through the evaluation and
interpretation of performances.
From the above definitions, we can say that the part of accounting that
provides information to the managers for use in planning, controlling
operations, and decision making is called management accounting.
Characteristics/Nature of Management
Accounting
The nature/characteristics of management accounting may be summarized as
under:
Management accounting is a technique of selective nature. It does not
use the whole data provided by financial records. It selects and picks up
only that information form different financial records (such as profit and
loss account or balance sheet), which are relevant and useful to the
management to arrive at important decisions on different aspects of the
business.
Management accounting is concerned with the future. It collects and
analyses data to plan the future. The primary function of management is
to decide bout the future course of action. Management accounting,
with the help of different techniques, formats the future course of
action.
Management Accounting makes available useful information which
helps the management in planning and decision-making. It can only
provide information but cannot proscribe. It is up to management to
what extent it. It can make use of the information depending upon its
efficiency and wisdom.
Management accounting studies the relation between causes and
effects. Financial accounting does and analyses the causes responsible
for profits or losses. Management accounting attempts to study the
cause-and-effect relationship by analyzing the different variables
affecting the profits and profitability of the business.
Management accounting is no bound by the rules of financial
accounting. Financial accounting procedures are designed based on
GAAPs.
Functions of Management Accounting
The basic function of management accounting is to assist the management in
performing its functions effectively. The functions of the management are
planning, organizing, directing, and controlling.
Management accounting is a part of accounting. It has developed out of the
need for making more use of accounting for making managerial decisions.
Management accounting helps in the performance of each of these functions
in the following ways:
1. Provides data
Management accounting serves as a vital source of data for management
planning. The accounts and documents are a repository of a vast quantity of
data about the past progress of the enterprise, which is a must for making
forecasts for the future.
2. Modifies data
Management accounting modifies the available accounting data rearranging
in such a way that it becomes useful for management.
The modification of data in similar groups makes the data more useful and
understandable. The accounting data required for management decisions is
properly compiled and classifies.
For example, purchase figures for different months may be classified to know
total purchases made during each period product-wise, supplier-wise, and
territory-wise.
3. Communication
Management accounting is an important medium of communication. Different
levels of management (top, middle, and lower) need different types of
information.
The top management needs concise information at relatively long intervals,
middle management needs information regularly, and lower management is
interested in detailed information at short-intervals.
Management accounting establishes communication within the organization
and with the outside world.
4. Analyses and interprets data
The accounting data is analyzed meaningfully for effective planning and
decision-making. For this purpose, the data is presented in a comparative
form, Ratios are calculated, and likely trends are projected.
5. Serves as a means of communicating
Management accounting provides a means of communicating management
plans upward, downward, and outward through the organization.
Initially, it means identifying the feasibility and consistency of the various
segments of the plan. The later stages it keeps all parties informed about the
plans they have been agreed upon and their roles in these plans.
6. Facilitates control
Management accounting helps in translating given objectives and strategy
into specified goals for attainment t by a specified time and secures the
effective accomplishment of these goals efficiently. All this is made possible
through budgetary control and standard costing, which is an integral part of
management accounting.
7. Uses also qualitative information
Management accounting does not restrict itself to financial data for helping
the management in decision making but also uses such information that may
be capable of being measured in monetary terms. Such information may be
collected from special surveys, statistical compilations, engineering records,
etc.
8. To assist in planning.
Management Accounting assists the management in planning as well as to
formulate policies by making forecasts about the production, selling the inflow
and outflow of cash, etc.
Not only that, but it may also forecast how much may be needed from
alternative courses of action or the expected rate of return from that place and
at the same time decides upon the programmed of activities to be
undertaken.
9. To assist in organizing.
By preparing budgets and ascertaining specific cost centers, it delivers the
resources to each center and delegates the respective responsibilities to
ensure their proper utilization.
As a result, an interrelationship grows among the different parts of the
enterprise.
10. Decision-Making
Management accounting furnishes accounting data and statistical information
required for the decision-making process, which vitally affects the survival and
the success of the business.
Management accounting supplies analytical information regarding various
alternatives, and the choice of management is made easy.
11. To assist in motivation.
By setting goals, planning the best and economic courses of action, and also
by measuring the performances of the employees, it tries to increase their
efficiency and, ultimately, motivate the organization as a whole.
12. To Coordinate
It helps the management in coordination the whole activities of the enterprise,
firstly by preparing the functional budgets, then co-coordinating the whole
activities of the enterprise, firstly, by preparing the functional budgets, then
co-coordinating the whole activities by integrating all functional budgets into
one which goes by the name of ‘Master Budget.’
In this way, it helps the management by con-coordinating the different parts
of the enterprise. Besides, overall coordination is not at all possible without
budgetary control.’
13. To Control
The actual work done can be compared with ‘Standards’ to enable the
management to control the performances effectively.
Purpose and Objectives of Management
Accounting
The primary objective of Management Accounting is to enable the
management to maximize profits or minimize losses.
The fundamental objective of management accounting provides information
to the managers for use in planning, controlling operations, and decision
making.
Main purpose and objectives of management accounting may be summarized
as under:
1. Uses of Information
The primary functions of management are the uses of information. It presents
accounting information in a form that enables the management, investors, and
creditors to analyze the financial statements.
2. Planning and Policy Formulation
Planning is deciding in advance what is to be done. It helps the management
of ineffective planning. It provides costing and statistical data to be utilized in
setting goals and formulating future policies.
3. Decision Making
