What is 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 of Role, Process, and Disadvantages. From this, data and estimates emerge. Cost accounting is the process of translating these estimates and data into knowledge that will ultimately be used to guide decision-making. “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.”
What do you know about Management Accounting of Role, Process, and also Disadvantages? Here are let’s study each Explanation.
It is another way of looking into accounts, it refers to the use of financial accounting information by the top-level management to make future business decisions of the company. Also learn Management Accounting of Functions, Advantages, and Limitations.
Role of Management Accounting:
Management Accounting provides all assistance to the management in all of its functions. By providing the accounting information in the required form and at the required time, it enables management to perform its functions effectively. It makes available the relevant information after modifying the same in suitably for effective planning and decision-making.
The standard of performance enables management to fix responsibilities and know the weak spots in the enterprise without much difficulty. Coordination among departmental managers is essential to avoid conflicts of interest between them to achieve the company’s overall objective as planning.
Effective coordination could achieve through departmental budgets and reports, which form an integral part of management accounting. Organizing is another important function of management. A sound organization entails the delegation of authority and fixing of responsibilities without much difficulty. This can be achieved by establishing cost centers, and profit centers.
Management accounting assists considerably in establishing such centers, as also in establishing a sound system of internal control and internal audit for these centers. Communication is yet another function of management, which involves the transmission of data, information, results, etc., to both outsiders and insiders. While the decisions of the top management to be communicated to the middle and lower-level management, the results and requirements of the lower level should be reported to the top-level management.
Also, the results have to report to the shareholders, creditors, prospective investors, etc., who wish to know about the company’s financial position and progress. Hence, a suitable reporting system is essential for effective communication of relevant facts. They help the management in this regard. From these points, it is clear that management accounting is useful to management in every field of activity and hence, forms a part of management.
Process of management accounting:
Management accounting process takes measures and reports specific information and economic action within the organization. This data helps the managers in planning, performance rating, and maintaining operational status.
1] Performance Score:
It is impossible to complete any task with no effort. Thus, the next step of the Management accountant is to provide data on the inputs of employees from different departments. This data helps in analyzing the input rate and the resultant profit. Moreover, it helps in rewarding the deserving candidate.
2] Maintaining operational status:
Planning and input rating are followed by operational status. Here, the management accountant keeps a record of the functions that take place in the company. For example, it keeps a track of the work in progress and the stage of completion at which the product is in. Further, it also helps in calculating and analyzing the cost of production altogether. It also contributes to identifying the pace decreasing obstacles and helps the managers in tackling those errors. The management system provides data for financial accounting as well.
3] Planning need:
Planning refers to questions like what, where and when. Management accountants provide necessary information regarding what product to produce and at what time. Secondly, it determines the availability of required raw materials and labor. Thus, planning is the first step of the management accountant.
Disadvantages of management accounting:
Advantages always bring along certain disadvantages too. Although the management accounting system has various advantages no one can ignore the disadvantages. It is dependent on cost accounting and financial accounts and therefore the accuracy of it is also dependent on how accurate that data is, hence it is one of the limitations as far as its usability is concerned.
It is affected by the bias of top management and therefore it is likely that they may tweak it in such a way to benefit themselves rather than shareholders. Since it does not follow accounting principles, it cannot be compared with other company’s and hence proper evaluation of the management may not be possible based on management accountancy.
Let us peep into the disadvantages of management accounting:
1] Biased interpretation:
Personal interpretation matters a lot when it comes to decision making. The preparation of these reports by the management office is based on the capability of interpretation and understanding. Prejudices and biased knowledge of the subject make it impossible for the company to come to an accurate decision. Thus, it becomes impossible to get effective results at the end of the day.
2] Based on manually maintained records:
Its system requires information related to financial and cost accounting. The records prepared by the management accounting officers are based on the maintained records. Thus, the efficiency of the records presented relies upon the accuracy of the records that are maintained.
3] Scope for improvement:
Similarly, the management accounting system is a recent invention. Along with the advantages, it also has limitations. Due to its complex nature, it requires a lot of intelligent interpretation. Therefore, it is safe to say that the system still needs to evolve.
Its system is a recent innovation. It works on the availability of old records, present records, and the previously acquired results. Thus, it does not work while facing problems apart from financial help. Therefore, it is impracticable for the overall performance of business organizations.
5] Deficiency of various vital skills of management accountant:
The job description of a management accountant includes subjects like financial accounting, cost accounting, economics, and statistics. Further, he or she should have an insight into a bit of psychology and sociology. Lack of knowledge regarding these subjects may affect the outcome of management accounting. Thus, for better working of management accounting, the accountant needs to have a clear knowledge of the required subjects.
6] It’s own limitations:
A management accounting system is merely a tool that facilitates the management accountant in advising on decision-making. However, the implementation of the actions that are advised depends upon the follow-up action of the management. Thus, management accounting is limited to giving suggestions.
7] Preferences depend upon intuition and experience:
They work upon a set scientific concept. However, following scientific guidelines becomes too much of a hassle. Moreover, scientific decision-making is a complex technique of management accounting. Thus, the preference is given to intuition and experience at all times. It comparatively becomes easier to make decisions.
8] Participation and efforts matter:
A management accounting system is a tool that provides the solution. However, the way of applying that solution also matters. Thus, for better results giving full efforts and participation in the task requires. To attain overall success all the employees from different levels need to give their full inputs.
9] Cannot recommend a particular action:
Various alternatives for problem-solving are presenting before the management. These alternatives can be effective or non-effective. The management accountant’s function is to select any one of the alternatives or toss out all of the given measures. Thus, management can only suggest a certain action; however, it cannot guarantee its effectiveness.
10] Home scope or limited knowledge:
It is a wide concept that is to take into consideration before appointing an accountant. It requires skills and knowledge to look into the matters of monetary and non-monetary transactions of the company. Lack of these skills can hamper the overall report and data. Moreover, this data can be unreliable due to the inefficiencies of the accountant.
11] The score of adopting changes:
People say that old habits die-hard. Similarly, changes are hard to adapt. Thus, when a management accounting system is newly installing in an old setting organization, it depends on the capabilities of the employee to adapt to the sudden change. So installing a management accounting system cannot promise instant success.
12] Not a unique choice for small-scale organizations:
Its system is a very costly tool. As a result, it is not at all ideal for small-scale industries or organizations. Due to the high cost, it is not suitable for low budget businesses. Also, the utility of this system is restricting to large-scale and complex organizations.
The management accounting system is an improved technique. This is a modern tool for the development of the organization completely. The job description of the management accountant is no limit to the financial sector; Instead, it has extensive coverage on the whole business.