Category: Management Accounting

  • Management Accounting Tools: How to be Know

    Management Accounting Tools: How to be Know

    What are the Important Tools and Techniques of Management Accounting? Management accounting is a branch of accounting that focuses on providing financial and non-financial information to internal users within an organization, such as managers, executives, and decision-makers. Its primary objective is to support effective decision-making, planning, and control within an organization.

    Top 10 Tools and Techniques for Management Accounting

    Management accountants analyze and interpret financial data, as well as gather and present relevant information about the organization’s operations, performance, and financial position. They go beyond the traditional financial statements to provide managers with insights and analysis needed for strategic planning, resource allocation, performance evaluation, and cost management.

    Scope of Management Accounting

    The scope of management accounting encompasses various areas, including:

    Cost accounting:

    This involves analyzing and determining the costs associated with producing goods or providing services. Management accountants use cost data to evaluate profitability, set pricing strategies, and make decisions related to product lines or cost reduction initiatives.

    Budgeting and forecasting:

    Management accountants play a crucial role in preparing budgets and financial forecasts. They work closely with managers to set financial targets, allocate resources, and also monitor performance against the budgeted figures.

    Performance measurement and analysis:

    Management accountants develop key performance indicators (KPIs) and performance measurement systems to assess the organization’s overall performance and individual departments or business units. Also, They identify trends, variances, and areas of improvement and communicate these findings to management.

    Strategic planning and decision-making:

    Management accountants provide financial analysis and insights to support strategic decision-making. They evaluate investment proposals, conduct feasibility studies, perform cost-benefit analyses, and also assess the financial implications of different business strategies.

    Risk management:

    Management accountants assist in identifying, assessing, and managing various risks that could affect an organization’s financial health. Also, They contribute to risk analysis, develop risk mitigation strategies, and monitor the effectiveness of risk management initiatives.

    Internal reporting:

    Management accountants prepare and present reports tailored to the needs of different levels of management. These reports may include financial statements, budgets, variance analysis, performance dashboards, and ad hoc analyses to facilitate informed decision-making.

    Overall, management accounting focuses on providing timely, relevant, and accurate information to help managers make informed decisions that drive organizational performance and success.

    Top 10 Tools and Techniques for Management Accounting Image
    Top 10 Tools and Techniques for Management Accounting

    10 Tools of Management Accounting

    There are various tools and techniques used in management accounting to facilitate financial analysis, planning, and decision-making. Here are 10 commonly employed tools in management accounting:

    Budgeting:

    Budgeting involves creating a detailed financial plan for a specific period, typically a year. It helps in setting financial targets, allocating resources, and monitoring performance against the budgeted figures.

    Variance Analysis:

    Variance analysis compares actual financial results to budgeted or standard costs, highlighting the differences or variances. Also, It enables managers to identify areas of concern or improvement and take appropriate actions.

    Cost-Volume-Profit (CVP) Analysis:

    CVP analysis assesses the relationship between costs, volume of production or sales, and profit. It helps in determining breakeven points, analyzing profitability at different levels of activity, and evaluating the impact of changes in volume or pricing.

    Activity-Based Costing (ABC):

    ABC is a method of allocating costs to products or services based on the activities required to produce them. Also, It provides a more accurate understanding of costs and helps in identifying cost drivers and improving cost efficiency.

    Balanced Scorecard:

    The balanced scorecard is a performance measurement framework that incorporates financial and non-financial measures to assess organizational performance. Also, It focuses on four perspectives: financial, customer, internal processes, and learning and growth.

    Key Performance Indicators (KPIs):

    KPIs are quantifiable metrics used to evaluate performance against strategic objectives. They provide a snapshot of critical areas and help in monitoring progress and identifying areas for improvement.

    Cost-Benefit Analysis:

    Cost-benefit analysis compares the costs incurred with the benefits gained from a particular project, investment, or decision. Also, It helps in assessing the financial viability and determining whether the benefits outweigh the costs.

    Decision Trees:

    Decision trees are graphical representations of decision-making scenarios. They assist in evaluating different options by considering the probability of outcomes and associated costs and benefits, aiding in informed decision-making.

    Financial Ratios:

    Financial ratios are calculations that analyze the relationship between different financial variables. They help in assessing the liquidity, profitability, efficiency, and solvency of a business and provide insights into its financial health.

    Performance Dashboards:

    Performance dashboards present key performance indicators and financial data in a visual format, often using graphs or charts. Also, They provide a quick overview of performance and enable managers to monitor trends, identify issues, and make data-driven decisions.

    These tools and techniques support management accountants in analyzing financial data, facilitating planning and control, and providing valuable insights for effective decision-making within an organization.

    10 techniques of Management Accounting

    Certainly! Here are 10 commonly used techniques in management accounting:

    Standard Costing:

    Standard costing involves setting predetermined costs for materials, labor, and overheads for a specific level of production. It enables cost control by comparing actual costs to standard costs and identifying variances.

    Activity-Based Costing (ABC):

    ABC is a technique that assigns costs to products or services based on the activities required to produce them. Also, It provides a more accurate understanding of costs and helps in identifying cost drivers and improving cost efficiency.

    Throughput Accounting:

    Throughput accounting focuses on maximizing the rate at which products move through the production process, thereby increasing throughput. It emphasizes the impact of bottleneck operations and aims to improve overall organizational profitability.

    Marginal Costing:

    Marginal costing separates costs into fixed and variable components. It helps in determining the contribution margin per unit and assessing the impact of changes in volume or pricing on profitability.

    Cost-Volume-Profit (CVP) Analysis:

    CVP analysis examines the relationship between costs, the volume of production or sales, and profit. It aids in determining breakeven points, analyzing profitability at different activity levels, and evaluating the impact of pricing decisions.

    Just-in-Time (JIT) Inventory Management:

    JIT is a technique that aims to minimize inventory levels by receiving materials or producing goods only when they are needed. Also, It reduces storage costs, improves cash flow, and eliminates waste from excess inventory.

    Target Costing:

    Target costing involves setting a target cost for a product or service based on customer expectations and market conditions. It requires designing products with cost targets in mind and finding ways to meet those targets while maintaining desired quality and functionality.

    Return on Investment (ROI) Analysis:

    ROI analysis measures the return generated from an investment or project relative to its cost. Also, It helps in evaluating the profitability and attractiveness of investment opportunities.

    Break-Even Analysis:

    Break-even analysis determines the point at which total revenues equal total costs, resulting in zero profit or loss. Also, It helps in understanding the minimum sales volume required to cover costs and make a profit.

    Cost Allocation and Transfer Pricing:

    Cost allocation involves assigning shared costs to different products, departments, or projects based on appropriate allocation methods. Transfer pricing establishes the price at which goods or services are transferred between different divisions or entities within an organization.

    These techniques are employed by management accountants to analyze costs, optimize resource allocation, evaluate profitability, and support decision-making within an organization.

  • What is Modern Management Accounting? Discuss

    What is Modern Management Accounting? Discuss

    Modern Management Accounting; Over the last two decades, managerial accounting has developed as a practical tool for executives and as a topic for academic education and research; Thus, managerial accounting states that “It is the process of identifying, measuring and communicating economic information that enables informed judgments and decisions of information users”. Managerial accounting plays a very important role; where it gives the manager enough time and relevant information and sets goals, monitors performance; and systematically improves the efficiency and effectiveness of the organization in achieving goals. . within the organization.

    Here are the articles to explain, Modern Management Accounting Discuss, Definition, Role, techniques, and TQM!

    To bring our history of management accounting closer to date, developments since 1975 have identified an information and reporting system that affects individuals. Although managerial accounting developed in the fourteenth century, with the principles of financial accounting and bookkeeping, business accounting and small business owners did not practice it before the Industrial Revolution. In the nineteenth century, new accounting methods developed when entrepreneurs began hiring people on a long-term basis, investing capital, and introducing more complex technologies.

    Definition of Modern Management Accounting;

    “Critically discuss the role of modern management accounting and the extent to which it shapes, or is shaped by, the changing organizational and global context within which it is practiced”.

    “Concerning relevant literature, critically evaluate the effectiveness of Three recent developments in management accounting techniques, within specific organizational or national contexts of your choice (e.g. Manufacturing or Service Sectors, Advanced or Emerging Economies)”.

    Concerning the relevant literature, there have been few recent developments in management accounting techniques within the manufacturing and service sectors. The practice of modern management accounting is different from traditional accounting. The recent developments enable managers to make sound decisions to minimize cost; as well as at the same time add value to the products and services by improving the quality of products; which is required by the customers and reducing waste.

    However, the pendulum swung in the other direction over the next decade as an effect of new “Techniques” in the management accounting area. Activity-based costing (ABC), Just-in-time (JIT), and Total-quality-management (TQM) have been developed to update the traditional accounting model so it adequately reflects today’s manufacturing environment.

    Role of management accounting;

    The relation between accounting and management has been commonly expressed by the phrase, “Accounting is a tool of management”. Accounting practice has developed in response to a changing business economy. Because of these changes, effects have been made to clarify, redefine, and seek acceptance of accounting doctrine and practice.

    Management accounting systems (MAS) are recognized as providing a most important source of journal information in organizations, a source of power deriving from the possession of that information, and a means for distributing that power and managing the organizational system.

    The direct impact of organizational changes on the different roles of management accounting is difficult to measure. The changing role of management accounting becomes evident through the substantiation of management accounting. Pointed out that the role of management accounting consists of;

    Direct attention:

    This means providing full information to specific situations e.g. Where the problem occurs, and who creates a loss. In the highly competitive market, this role alerts the manager about competitors’ information such as their strategy, and new products.

    Keeping the score:

    This role aims to answer the questions: how much and how many. (How much implies those things is related to allocation and the share of costs within the whole organization, and how many refers to the number of inputs that will be used). In strategic management, the answer to those questions may be extended; such as how much the market share, is and how many compared to the competitors.

    Solving the problems:

    Management accounting is a good channel for managers to provide the nearest relevant methods for solving the subsisting problems. Due to M/A, the manager can collect all detailed information about the problems such as what causes them, and when it starts and then based on that information, several answers will be provided and the task of a manager is to choose the most appropriate one.

    Comparison of Traditional and Modern management accounting;

    During the 1950s and 1960s, accountants gradually discovered that product costs; which had been constructed for financial reporting purposes, were being taken seriously by operating executives. In the late 1960s and early 1970s, management accounting thought developed that attempted to subsume the two previous approaches into a broader conceptual framework.

    Historical and contemporary studies of accounting have shed light on the diverse ways in which accounting has been and is been implicated in a wide range of activities and social arrangements. Accounting cannot be understood simply concerning its supposed functional properties because it stands implicated in shaping its context.

    This said much of the evidence to date suggests that, in practice, traditional management accounting techniques remain popular. However, it appears also that such traditional techniques stand used alongside new and ‘advanced’ accounting techniques, such as ABC, JIT, and TQM.

    Management accounting stands used to help managers make solid business decisions. Because of the revolution in management accounting, both the smallest corner stores and largest multinational organizations start their innovation in their accounting perspective.

    Successful organizations adapt to changes in their environment and proactively change their environment. Management accounting should help organizations recognize the need for initiating change and suggest the appropriate response to an environmental change.

    Change in Global/ Organisational context and management accounting;

    Since 1975 important changes have taken place in the context of political, economic, and social settings. Management accounting faces a few challenges over environmental changes as well as an internal process within organizations. Therefore, management accounting must respond to these changes by adopting new techniques and concepts.

    The measurement of costs:

    By using modern management techniques, the value and profitability of information services can generate.

    The birth of “hybrid” accountants:

    As a result of new forms of organizations and requirements of strategic management accounting (SMA). SMA links performance measurement systems with corporate vision and strategies.

    Open-book accounting:

    These techniques are an important part of outcome control measurement for companies in inter-organizational relationships; which are another result of increased globalization.

    In discussing the nature of settled habits of thought and action Hodgson, defined habits as more or less self-actualizing dispositions or tendencies to engage in previously adopted or acquired forms of action.

    A strategy of change provides a critical appraisal of current ideas about “organizational culture“, “total quality management“, “flexibility”, and “excellence”. Dealing is an integrated way with the full spectrum of survival in today’s changing environment.

    Characteristics of manufacturing and service sectors;

    Much of the literature on international business has taken on a manufacturing perspective. The recent literature has paid attention to the internationalization of service firms.

    Characteristics of service production.
    • Intangible output.
    • Customized output.
    • Labour intensive.
    Manufacturing Orientations in Service firms.
    • Physical goods as a component of a service package.
    • Manufacturing logic in back-office service operations.
    • Deprofessionalization of service production and delivery.
    Service Orientations in Manufacturing Firms.
    • Component of the product.
    • Element of product strategy.
    Characteristics of manufacturing production.
    • Tangible output.
    • Standardized output.
    • Technical care buffered from the customer.
    The conflict between manufacturing and service sectors.

    The center box exhibits orientations among manufacturing and service sectors. Also, The right box exhibits the features of the manufacturing firms and the left box exhibits the features of the service firms. Manufacturing firms, particularly those with diversified product lines, have a good deal more flexibility and control than extractive investors; they may be able to exercise considerable choice in their response to host country demands.

    The continued growth of service sectors in almost all the developing economies has fascinated and occasionally alarmed economists and other observers. Why is the problem more serious in some of the service sectors? Partly it is a data problem, importantly, it is a conceptual one. Both manufacturing and service company managers need operational control systems that will enhance the cost-improvement, quality-improvement, and process-time reduction activities of their employees.

    Management accounting techniques:

    The following Three techniques below are:

    Activity-Based Costing (ABC);

    “Activity-based costing is a method that is projected to provide managers on cost information for strategic and other conclusions that potentially affect the capacity and therefore fixed costs”.

    Benefits related to activity-based costing (ABC) are many. In ABC, the aim is to understand the overhead and profitability of the products and customers. ABC works mainly in the large cost drivers related to a decision to be sure of or a process being studied.

    In developing countries, the manufacturing industries started adopting new techniques, to maintain the relationship between market development and technological innovation to archive long-term success. Seemingly, ABC developed as an accounting technique to provide applicable information for advanced manufacturing firms producing various products in a competitive environment.

    Whilst the thoughtfulness, ABC as yet focused on manufacturing firms, ABC can be useful to a few service organizations. There are few very disputes among the manufacturing and service sectors. Manufacturing firms execute similar types of activities; however, there is a slight similarity between the activities of an insurance firm, a hospital, and law firms. The service sector is less tangible and, harder to define.

    In developed countries like the UK, when the survey of ABC took place for nearly 1000 companies, the result indicated that even after adopting ABC; it has stood rejected by a healthy number, and the majority of the companies have to still decide on its use.

    As cost driver and ABC concepts improve the measurement of costs and allocation of information for service departments within manufacturing firms, service firms such as accounting/law firms could also use cost driver and ABC concepts.

    Just-In-Time (JIT):

    “JIT is a process which is capable of instant response to demand without the need for any overstocking, either in exception of the demand being forthcoming or as a result of inefficiencies in the process”.

    Under certain circumstances of the JIT concept, a company maneuvering a JIT system would buy only enough raw materials each day to meet that day’s need. JIT manufacturing scheme calls for making a good or service only when the customer, internal or external needs it. JIT manufacturing is simple in theory, however, one had to practice. ”Keeping everyone busy”, is another characteristic of conventional manufacturing.

    JIT has many advantages, for eg,

    “An American standard uses cell manufacturing to cut inventories and reduce manufacturing time. The result is a breakthrough in speed. Manufacturing a pump now takes six minutes than two weeks”.

    JIT production process and the manufacturing effectiveness ratio for manufacturing operations apply to service companies too. The service delivery process is even more important than in manufacturing companies. Eg. In the banking industry, the process of gaining approval for a mortgage on a house that we like to purchase needed 26 days, and after applying the JIT process they just need 15 min.

    Total Quality Management (TQM):

    “TQM is the most popular approach to a continuous improvement. Its major characteristics are to focus on serving customers and the systematic problem-solving team made up of front-line workers”.

    A few thousand companies have existed involved in TQM and similar programs. For a business, the major driving force is the element of competition. The competitiveness of suppliers stands determined by the quality of its product or services. Most manufacturing companies adopt TQM, either to improve the work atmosphere for the employees or to help improve the profits of a company. “Penril Datacomm is a Maryland designer and producer of data communications equipment. Before TQM the defect rate of the company was high.

    Applying TQM techniques resulted in an 81% decrease in defects, an 83% decrease in failures, and a 73% decrease in first-year warranty repairs”. The concept and tools of service began with Thomas Peters and Robert Waterman’s “In Search of Excellence”, to achieve customer satisfaction, service companies such as Disney Corporation and SAS Airlines adopted TQM. TQM in education as a business is difficult.

    What is Modern Management Accounting Discuss Image
    What is Modern Management Accounting? Discuss; Image by Megan Rexazin from Pixabay.
  • What is Management Accounting? Meaning and Definition

    What is Management Accounting? Meaning and Definition

    Management Accounting Meaning: The accounting information is presented to prepare the policies adopted by the management accounting management and to help in day-to-day activities. Do you study to learn: If Yes? Then read the lot. What is Management Accounting? Meaning and Definition.

    Explains – What is Management Accounting? Meaning and Definition.

    Management accounting is also called managerial accounting or cost accounting. The process of analyzing business costs and operations to prepare internal financial reports, records, and accounts to assist in the decision-making process of the manager in achieving business goals. Management accounting (also known as managerial or cost accounting) is different from financial accounting. In which it prepares reports for the company’s internal stakeholders in opposition to the external stakeholders. After we discuss management accounting meaning also take look at their definitions below.

    Definition of Management Accounting:

    The following definition is below;

    According to R. N. Anthony:

    “Management Accounting is concerned with accounting information that is useful to management.”

    The ICMA (Institute of Cost and Management Accountants), London, has defined Management Accounting as:

    “The application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertakings.”

    The ICAEW (Institute of Chartered Accountants of England and Wales) defines Management Accounting as:

    “Any form of accounting, which enables a business to conducte more efficiently, can regard as Management Accounting.”

    According to the American Accounting Association (AAA):

    “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.”

    The opinion of Haynes and Massie:

    “The application of appropriate techniques and concepts in processing the historical and projected economic data of an entity to assist management in establishing a plan for reasonable economic objectives and in making of rational decisions with a view towards achieving these objectives.”

    And the last definition best define by J. Batty:

    “Management Accountancy is the term uses to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”

    What is Management Accounting Meaning and Definition
    What is Management Accounting? Meaning and Definition

  • Management Accounting of Functions, Advantages, and Limitations

    Management Accounting of Functions, Advantages, and Limitations

    The meaning of management accounting is Presentation of accounting information is to assist in the management of management accounting policy creation and to help in the day-to-day operation of an undertaking. Management Accounting of Functions, Advantages, and Limitations. Thus, it is related to the use of aggregated accounting data with the help of financial accounting and cost accounting with the objective of planning, planning, controlling and decision making by the management. Management accounting link management with accounting is the subject of management accounting as any accounting information required to make managerial decisions. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।

    Better Explanation of Management Accounting of Functions, Advantages, and Limitations. With Meaning and Definition.

    Management Accountancy is a composite mix together in all aspects of complete, financial accounting, cost accountancy, and financial management. This crystal becomes clear that management presents accounting management accounting information in the form of processed data collected from financial accounting, cost accounting so that it can be very useful in the management part to make appropriate decisions in management, Scientific methods, when necessary.

    Meaning of Management Accounting:

    Management Accounting is the presentation of accounting information in order to formulate the policies to be adopted by the management and assist its day-to-day activities. In other words, it helps the management to perform all its functions including planning, organizing, staffing, directing and controlling.

    Definitions of Management Accounting:

    In the words of J. Batty:

    “Management Accountancy is the term used to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”

    According to R. N. Anthony:

    “Management Accounting is concerned with accounting information that is useful to management.”

    According to ICWA of India:

    “Management accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.”

    According to CIMA London:

    “Management accounting is the provision of information required by management for such purposes as the formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those external to the entity (shareholders and others), disclosure to employees and safeguarding of assets.”

    According to the American Accounting Association:

    Management Accounting is “The application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”.

    From the above it is clear that management accounting uses all techniques of financial accounting, cost accounting and statistics to collect and process data for making it available to management so that it can take decisions in a scientific manner.

    The Objects or Functions of Management Accounting:

    The primary object of Management Accounting is to present the accounting information to the management. The Following objects are:

    Planning:

    Management Accounting assists the management in planning as well as to formulate policies by making forecasts about the production, the selling, the inflow and outflow of cash, etc., i.e., in planning a very wide range of activities of the business. Not only that, but it may also forecast how much may be needed for alternative courses of action or the expected rate of return therefrom and, at the same time, decide upon the program of activities to be undertaken.

    Organizing:

    By preparing budgets and ascertaining specific cost center, it delivers the resources to each center and delegates the respective responsibilities to ensure their proper utilization. As a result, an inter-relationship grows among different parts of the enterprise.

    Motivating:

    By setting goals, planning the best and economical 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.

    Coordinate:

    It helps the management in coordinating the activities of the enterprise, firstly, by preparing the functional budgets, then coordinating the whole activity by integrating all functional budgets into one which goes by the name of “Master Budget”. In this way, it helps the management by coordinating the different parts of the enterprise. Besides, overall coordination is not at all possible without “Budgetary Control”.

    Control:

    The actual work done can be compared with ‘Standards’ to enable the management to control the performances effectively.

    Communicate:

    It helps the management in communicating the financial information about the enterprise. For taking decisions as well as for evaluating business performances, management needs information. Now, this information is available with the help of reports and statements which form an integral part of Management Accounting.

    Interpret Financial Information:

    It is not possible for all concerned to understand clearly the different treatments of accounting until and unless the users have acquired a piece of sufficient knowledge about the subject since accounting is a highly technical subject.

    And, for the same reason, management may not understand the implications of the accounting information in its raw form. But this problem does not arise in the case of Management Accounting as it presents the required information in an intelligible and non-technical way. This leads the management to interpret financial data, evaluate alternative courses of action and to take correct decisions.

    Miscellaneous:

    • While evaluating the efficiency and effectiveness of different policies.
    • Locating uneconomic as well as the inefficient place of business activities, and.
    • Solving business problems, e.g., to expand the existing business unit or not, etc.

    Advanced Advantages of Management Accounting:

    Management accounting has various advantages. Through an effective management accounting system, it is possible to enhance the overall performance of the company. Let us have a look at the advantages of management accounting.

    Advanced technique and features:

    The reasons because of which the management system seems reliable are the special tools and technique. To form an accurate and valid report special techniques like budget controlling, marginal costing, control accounting, etc are used. Use of the technique may differ according to the issue at hand. However, this technique makes it easier to make decisions in favor of the company.

    Cost transparency:

    In the corporate world, the majority of the costs come from the Information Technology (IT). The work of management accounting in the firm is to work with the IT department closely. This action ensures budget actions and provides cost transparency to the company.

    Flexibility and freedom:

    Management accounting systems of a flexible nature. These reports do not require to be made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a perfect report.

    Marginal costing:

    Marginal costing is possible with the aid of the management accountant. It fixes the selling price of the products created in the organization. Further, it also suggests several ways to use scarce materials and resources. It also recommends actions based on a fixed cost, contribution, and other extras.

    The efficiency of the company:

    Companies opt for Management accounting as it increases the efficiency of the company in performing operations. It contributes to striving for better performance by evaluating and comparing. Management accounting makes it easier to achieve various results. This indirectly motivates employees to strive for better performance. As a result, they receive rewards in the form of promotions. Thus, management accounting indirectly increases the efficiency of the company as a whole.

    The bar of Profitability:

    Management accounting includes budgetary control and capital budgeting. The use of this method makes it easier for the company to cut short the extra expenditure for performing vital operations. This indirectly increases the bars of profits for the company, as the company is able to reduce its pricing on the products.

    Simplifies the decision making in Financial Statements:

    Managerial decisions and other activities of management require a simplified report of the financial statement of the company. For this action, the management accountant creates a detailed technical report with simpler interpretations. Here, he represents the key facts of the financial statements. This enables the managing officers to take up appropriate decisions for the betterment of the company.

    Enables the fluctuation of business monetary fund:

    One of the essential factors in business is the monetary fund. Management accounting enables control over the fluctuation of this monetary fund. Management accounting studies the flow of the funds in detail. Moreover, it helps in maintaining the emergency fund in case of any urgency. Further, it also helps in eliminating any source within the company that misuses the fund. After all, emergency preparation should always be kept aside before setting up any business.

    Assist in goal completion:

    The objective of the report presented by the management accountant is to assist in achieving a long-term goal. It becomes possible to achieve the goal due to the detailed information of the management accountant, which highlights the strong and weak points of the company. In addition, this information helps to identify the weakness and takes measures to overcome them.

    Future prediction from the past result:

    Every new system that evolves for the corporate world has a single motive. It is to attain success in the competitive market. With similar intent, management accounting system also strives for betterment in performance. Thus, with the help of given data of the past (of the company), it provides a chance to prepare for better future results.

    Although management accounting does not promise perfect decisions, they do increase the chances of taking effective and efficient decisions.

    Key Advantages of Management Accounting:

    The following advantages maybe derive from Management Accounting:

    • The business activities are managing better by the application of both budgeting and planning.
    • No doubt it helps to increase the efficiency of the business.
    • Measures the actual performance in comparison with the budgets.
    • Also helps to improve the relationship between management and labor.
    • It helps the management to chalk-out future plans of action on the basis of past results.
    • Helps the management in such a way that the latter can maximize the rate of return on capital employed.

    Advanced Limitations of Management Accounting:

    The origin of management accounting can trace to overcome the limitations of financial accounting and cost accounting. Financial accounting is very useful to the different categories of persons but it suffers from the following limitations:

    Historical Nature:

    Financial accounting is of historical nature. It does not provide the necessary information to the management for planning, control, and decision-making. It does not tell how to increase the profit and maximize the return on the capital employed.

    Technical Subject:

    Financial accounting is highly technical in nature. Financial accounts can be prepared and interpreted only by those persons who possess adequate knowledge of accounting concepts and conventions and are well conversant to the practice of accounting.

    Recording of Actual Cost:

    In financial accounting assets and properties are recorded at their cost. No effect of changes in their value is recorded in the books after its acquisition. Thus, it has nothing to do with their realizable or replaceable value.

    Incomplete Knowledge of Costs:

    In financial accounting data relating to cost is not available according to different products or jobs or processes in order to judge the profitability of each. Information regarding wastages and losses is also not available from the financial accounts. It is also difficult to fix the prices of the products without the availability of a detailed analysis of costs which is not available in financial accounts.

    No-Provision for Cost Control:

    Costs cannot control through financial accounting as there is no provision for corrective action because of expenses being record after their incurrence. No technique to check the reasonableness of any expenditure or no system for fixing definite responsibility on any authority for wastage or excessive expenditure is available in financial accounting.

    No-Evaluation of Business Policies and Plans:

    There is no device in financial accounting by which the actual progress can measure against the targets in order to evaluate the business policies and plans, to know the reasons for deviations and how to correct them if need be.

    Not Helpful in Decision-Making:

    As the data available is of historical nature, financial accounting is not of much help to the management in selecting a profitable alternative. There are many situations where management is requiring to take decisions but the information provided by financial accounting is not adequate.

    Though cost accounting came into existence to remove the limitations of financial accounting its scope as compared to management accounting is limited as it deals primarily with the cost data. In actual practice, cost accountants are doing the jobs of management accountants. Further, most of the techniques of management accounting are also being used by the cost accountants.

    That is why; management accounting is treating as the extension of cost accounting. But for our purpose of the study we treat the management accounting more broad as compared to cost accounting as management accounting, includes many more aspects of the study besides the cost accounting. Thus, the science of accounting is not in a finished state. It is in the process of evolution. The role of accounting has changed after the Second World War.

    Now, it is not a mere recording of business transactions in the books of original entry, then classifying them into the ledger and finally summarizing them by preparing the profit and loss account and balance sheet as is done in financial accounting or calculation and control of cost as is done in cost accounting.

    Rather accounting helps in forecasting, planning and controlling the business events and taking managerial decisions. Keeping this in view a new branch of accounting known as Management Accounting has been developing to cope with the limitations of financial accounting and cost accounting. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।

    Management Accounting of Functions Advantages and Limitations
    Management Accounting of Functions, Advantages, and Limitations. Image Credit from #Pixabay.

  • What are the Role and Duties of the Management Accountant?

    Management Accountant is an officer who is entrusted with the Management Accounting function of an organization. He plays a significant role in the decision-making process of an organization. The organizational position of Management Accountant varies from concern to concern depending upon the pattern of the management system. He may be an executive in some concern, while a member of the Board of Directors in case of some other concern. However, he occupies a key position in the organization. In large concerns, he is responsible for the installation, development and efficient functioning of the management accounting system. He designs the framework of the financial and cost control reports that provide with the most useful data at the most appropriate time. Also Learned, Cost Accounting, What are the Role and Duties of the Management Accountant?

    Learn, Explain What are the Role and Duties of the Management Accountant?

    The Management Accountant sometimes describing as Chief Intelligence Officer because apart from top management, no one in the organization perhaps knows more about various functions of the organization than him. Tandon has explained the position of Management Accountant as follows: “The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel and the hub receiving the information. He processes the information and then returns the processed information back to where it came from”.

    #Role of Management Accountant:

    Management Accountant otherwise calls Controller, is considering to be a part of the management team since he has the responsibility for collecting vital information. Both from within and outside the company. The functions of the controller have been laid down by the Controller’s Institute of America.

    These functions are:
    • To establish, coordinate and administer, as an integral part of management, an adequate plan for the control of operations. Such a plan would provide, to the extent required in the business cost standards, expense budgets, sales forecasts, profit planning, and program for capital investment and financing. Together with the necessary procedures to effectuate the plan.
    • To compare performance with operating plan and standards and to report and interpret the results of the operation to all levels of management, and to the owners of the business. This function includes the formulation and administration of accounting policy and the compilations of statistical records and special reposts as required.
    • To consult withal segments of management responsible for policy or action conserving any phase of the operations of the business. As, it relates to the attainment of the objective, and the effectiveness of policies, organization structures, procedures.
    • The administer tax policies and procedures.
    • To supervise and coordinate the preparation of reports to Government agencies.
    • The assured fiscal protection for the assets of the business through adequate internal; control and proper insurance coverage.
    • To continuously appraise economic and social forces and government influences, and interpret their effect upon business.

    #Duties and Responsibilities of Management Accountant:

    The primary duty of Management Accountant is to help management in taking correct policy-decisions and improving the efficiency of operations. He performs a staff function and also has line authority over the accountants. If the management accountant feels that a decision likely to take by the management based on the information tendered by him shall be detrimental to the interest of the concern. He should point out this fact to the concerned management, of course, with tact, patience, firmness, and politeness. On the other hand, if the decision was taken happens to be the wrong one on account of inaccuracy. Biased and fabricated data furnished by the management accountant. He shall be held responsible for the wrong decision takes by the management.

    Controllers Institute of America has defined the following duties of Management Accountant or controller:

    • The installation and interpretation of all accounting records of the Corporative.
    • The preparation and interpretation of the financial statements and reports of the corporation.
    • Continuous audit of all accounts and records of the corporation wherever located.
    • The compilation of costs of distribution.
    • The compilation of production costs.
    • The taking and costing of all physical inventories.
    • The preparation and filing of tax returns and to the supervision of all matters relating to taxes.
    • Preparation and interpretation of all statistical records and reports of the corporation.
    • The preparation as budget director, in conjunction with other officers and department heads, of an annual budget covering all activities of the corporation of submission to the Board of Directors prior to the beginning of the fiscal year. The authority of the Controller, with respect to the veto of commitments of expenditures not authorized by the budget, shall, from time to time, fix by the board of Directors.

    Continuously;

    • The ascertainment currently that the properties of the corporation are properly and adequately insured.
    • The initiation, preparation, and issuance of standard practices relating to all accounting. Matters and procedures and the coordination of the system throughout the corporation including clerical and office methods, records, reports, and procedures.
    • The maintenance of adequate records of authorizing appropriations and determination. That all sums expend pursuant there into properly accounts for.
    • The ascertainment currently that financial transactions cover by minutes of the Board of Directors and/ or the Executive committee are properly executing and recording.
    • The maintenance of adequate records of all contracts and leases.
    • The approval for payment(and/or countersigning ) of all Cheques, promissory notes and other negotiable instruments of the corporation. Which have to sign by the treasurer or such other officers as shall have to authorize by the by-laws of the corporation or from time to time designated by the Board of Directors.
    • The examination of all warrants for the withdrawal of securities from the vaults of the corporation and the determination. That such withdrawals are made in conformity with the by-laws and /or regulations establishing from time by the Board of Directors.
    • The preparation or approval of the regulations or standard practices. Required to assure compliance with orders or regulations issued by duly constituted governmental agencies.
  • Management Accounting: Objectives, Nature, and Scope

    Management Accounting: Objectives, Nature, and Scope

    What is the definition of management accounting? Management accountants (also called managerial accountants) look at the events that happen in and around a business while considering the needs of the business. Management Accounting is comprising of two words “Management” and “Accounting”. Discuss the topic, Management Accounting: Meaning of Management Accounting, Definition of Management Accounting, Objectives of Management Accounting, Nature and Scope of Management Accounting, and Limitations of Management Accounting! From this, data and estimates emerge. Cost accounting is the process of translating these estimates and data into knowledge that will ultimately use to guide decision-making.

    Learn, Explain Management Accounting: Objectives, Nature, and Scope!

    Management Accounts a tool to assist management in achieving better planning and control over the organization. It is relevant for all kinds of an organization including a not-for-profit organization, government, or Sole Proprietorship’s. It has a significant place in the businesses and widely used by management to achieve better control and quality decision making. Also Learned, In the Hindi language: प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा, Financial Accounting!

    Meaning of Management Accounting:

    Management Accounts not a specific system of accounting. It could be any form of accounting which enables a business to conduct more effectively and efficiently. It’s largely concerned with providing economic information to managers for achieving organizational goals. It is an extension of the horizon of cost accounting towards newer areas of management. Much management accounts information is financial but has been organizing in a manner relating directly to the decision at hand.

    Management Accounts comprised of two words ‘Management’ and ‘Accounting’. It means the study of the managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in the formation of policy, control of execution, and appreciation of effectiveness. Management Accounts of recent origin. This was first used in 1950 by a team of accountants visiting U. S. A under the auspices of Anglo-American Council on Productivity.

    Definition of Management Accounting:

    Definition: It is, also called managerial accounting or cost accounting, is the process of analyzing business costs and operations to prepare the internal financial report, records, and account to aid managers’ decision making process in achieving business goals. In other words, it is the act of making sense of financial and cost data and translating that data into useful information for management and officers within an organization.

    “Management accounting is the practical science of value creation within organizations in both the private and public sectors. It combines accounting, finance, and management with the leading edge techniques needed to drive successful businesses.”

    More of it:

    Anglo-American Council on Productivity defines as:

    “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.”

    The American Accounting Association defines as:

    “The methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances.”

    The Institute of Chartered Accountants of India defines as follows:

    “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting.”

    From these definitions, it is very clear that financial data is recorded, analyzed, and presented to the management in such a way that it becomes useful and helpful in planning and running business operations more systematically.

    Objectives of Management Accounting:

    The fundamental objectives of management accounting are to enable the management to maximize profits or minimize losses. The evolution of managerial accounting has given a new approach to the function of accounting.

    The main objectives of management accounting are as follows:

    Planning and policy formulation:

    Planning involves forecasting based on available information, setting goals; framing policies determining the alternative courses of action, and deciding on the program of activities. Management Accounts can help greatly in this direction. It facilitates the preparation of statements in light of past results and gives an estimation for the future.

    Interpretation process:

    Management Accounts to present financial information to the management. Financial information is technical. Therefore, it must present in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

    Assists in the Decision-making process: 

    With the help of various modern techniques management accounting makes the decision-making process more scientific. Data relating to cost, price, profit, and savings for each of the available alternatives are collected and analyzed and provides a base for making sound decisions.

    Controlling:

    It is useful for managerial control. Their tools like standard costing and budgetary control help control performance. Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets. The performance of every individual is controlled with the help of managerial accounting.

    Reporting:

    Management Accounts keeps the management fully informed about the latest position of concern through reporting. It helps management to take proper and quick decisions. The performance of various departments is regularly reported to the top management.

    Facilitates Organizing:

    “Return on Capital Employed” is one of the tools of Management Accounts. Since managerial accounting stresses more on Responsibility Centre’s to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it helps set up an effective and efficient organization framework.

    Facilitates Coordination of Operations:

    Management accounts provide tools for overall control and coordination of business operations. Budgets are an important means of coordination.

    Nature and Scope of Management Accounting:

    Managerial Accounting involves the furnishing of accounting data to the management for basing its decisions. It helps in improving efficiency and achieving organizational goals. You may know is that Comparative analysis is the scope of management accounting.

    The following paragraphs discuss the nature and scope of management accounting.

    Provides accounting information: 

    Management accounting is based on accounting information. It is a service function and it provides the necessary information to different levels of management. Managerial Accounting involves the presentation of information in a way it suits managerial needs. The accounting data collected by the accounting department is used for reviewing various policy decisions.

    Cause and effect analysis: 

    The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; Managerial Accounting goes a step further. Managerial Accounting discusses the cause and effect relationship. The reasons for the loss are probed and the factors directly influencing the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payable’s, share capital, etc.

    Use of special techniques and concepts:

    It uses special techniques and concepts according to the necessity to make accounting data more useful. The techniques usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.

    Taking important decisions: 

    It supplies the necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taking into account.

    Achieving objectives:

    It is uses accounting information in such a way that it helps in formatting plans and setting up objectives. Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can take at once with the help of budgetary control and standard costing.

    No fixed norms: 

    No specific rules are followed in Managerial Accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most.

    Increase in efficiency: 

    The purpose of using accounting information is to increase the efficiency of the concern. The performance appraisal will enable the management to pinpoint efficient and inefficient spots. An effort makes to take corrective measures so that efficiency improves. The constant review will make the staff cost-conscious.

    Supplies information and not the decision: 

    The management accountant is only to guide and not to supply decisions. The data is to use by the management for taking various decisions. “How is the data to utilize” will depend upon the caliber and efficiency of the management.

    Concerned with forecasting: 

    The management accounts concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan the future course of action. The information is supplied to the object to guide management in making future decisions.

    Techniques and Procedures Design and Installation:

    Management accounting is identifying with the most productive and monetary arrangement of accounting reasonable for any size and kind of embraced. Additionally, it utilizes the best utilization of mechanical and electronic gadgets. Maybe you got your answer; 10 points of Nature of Management Accounting with their scope.

    A portion of the Acts, which have their impact on management choices, are as per the following:

    The Companies Act, MRTP Act, FEMA, SEBI Regulations, and so forth.

    Inside Audit:

    This incorporates the improvement of an appropriate arrangement of inside reviews for inner control. An interior review is led by the business association with the assistance of a paid worker who has careful accounting information. All the significant records are kept up under the management accounting framework with the goal that the inner review is directed in a successful way.

    Inner Reporting:

    This incorporates the arrangement of quarterly, half-yearly, and other interval reports and pays articulations, income and assets stream explanations, scarp reports, and so on.

    Limitations of Management Accounting:

    Hence, it suffers from all the limitations of a new discipline. Some of these limitations are:

    Limitations of Accounting Records:

    Management accounting derives its information from financial accounting, cost accounting, and other records. It is concerned with the rearrangement or modification of data. The correctness or otherwise of the Managerial Accounting depends upon the correctness of these basic records.

    It is only a Tool: 

    Management accounts not alternate or substitute for management. It is a mere tool for management. Ultimate decisions are taking by management and not by management accounts.

    Heavy Cost of Installation: 

    The installation of the Managerial Accounting system needs a very elaborate organization. This results in heavy investment which can afford only by big concerns.

    Personal Bias: 

    The interpretation of financial information depends upon the capacity of the interpreter as one has to make a personal judgment. Personal prejudices and biases affect the objectivity of decisions.

    Psychological Resistance:

    The installation of Managerial Accounting involves the basic change in the organization set up. New rules and regulations are also required to frame which affects the number of personnel, and hence there is a possibility of resistance from some or the other.

    Evolutionary stage: 

    Management accounts only in a developmental stage. Its concepts and conventions are not as exact and established as those of other branches of accounting. Therefore, its results depend to a very great extent upon the intelligent interpretation of the data of managerial use.

    Provides only Data:

    Managerial Accounting provides data and not decisions. It only informs, not prescribes. This limitation should also keep in mind while using the techniques of management accounting.

    Broad-based Scope: 

    The scope of management accounts for wide and this creates many difficulties in the implementation process. Management requires information from both accounting as well as non-accounting sources. It leads to inexactness and subjectivity in the conclusion obtained through it. Also Learned, In the Hindi language: Management Accounting: Objectives, Nature, and Scope (प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा).

    Management Accounting Objectives Nature and Scope
    Management Accounting: Objectives, Nature, and Scope, Image credit from @Pixabay.