What is Management Accounting?
Management accounting is a new concept. It is also known as managerial accounting. Unlike financial accounting, management accounting produces weekly or monthly reports that cover internal issues.
These reports include various stats, available monetary fund, returns generated on sales, piled up orders, amount of payment to be generated, remaining debts, stats of raw materials, etc. These reports are presented to the people of various departments within the organization and are mostly confidential.
It helps in keeping a track of available resources. According to the definition of The Institute of Certified Management Accountants (ICMA), Management accounting system is the ‘value creators’ for the company and its progress.
The Reach of Management Accounting:
According to the American Institute of Certified Public Accountants (AICPA), the reach of the management accounting is divided into three terms. They are:
1. Strategic actions:
Management accounting system is a partner in the strategic planning of the company. Further, it also helps in making proper balance sheet and controls purchasing actions.
2. Performance based actions:
Management accounting looks into the matter related to the performance enhancement. It plays an important role in decision-making as well. This helps in excelling the profit margin and further increases the possibility to make a place in the competitive world.
3. Risk managing actions:
Risk managing actions refer to the decision-making and risk taking. Management accountant provides a predicted data after studying various components and suggest whether employers should take a risky decision. Further, it also helps in understanding and predicting the profit from the risk.
Management Accounting Process:
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.
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.
2. Performance rating:
It is impossible to complete any task with no efforts. Thus, the next step of 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.
3. 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 production is in. Further, it also helps in calculating and analyzing the cost of production altogether. It also contributes in identifying the pace decreasing obstacles and helps the managers in tackling those errors. The management system provides data for financial accounting as well.
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.
1. Increases Efficiency of the company:
Companies opt for Management accounting as it increases the efficiency of company in performing operations. It contributes in striving for better performance by evaluating and comparing. Management accounting makes it easier to achieve various results. This indirectly motivates the 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 at a whole.
2. Increases 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.
3. 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, 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.
4. Enables the fluctuation of business monetary fund:
One of the essential factors in business is the monetary fund. Management accounting enables a 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.
5. Cost transparency:
In the corporate world, 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 a within budget actions and provides cost transparency to the company.
6. Flexibility and freedom:
Management accounting system is of 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.
7. Assist in goal completion (Objectives):
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.
8. Future prediction from 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 intend, 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.
9. 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 the favor of the company.
10. Marginal costing:
Marginal costing is possible with the aid of management accountant. It fixes the selling price of the products created in the organization. Further, it also suggests several ways to use the scarce materials and resources. It also recommends actions based on fixed cost, contribution and other extras.
Although management accounting does not promise perfect decisions, they do increase the chances of taking effective and efficient decisions.
Disadvantages of Management Accounting:
Advantages always bring along certain disadvantages too. Although management accounting system has various advantages but no one can ignore the disadvantages. Let us peep into the drawbacks of management accounting.
1. Based on manually maintained records:
Management accounting system requires the 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.
2. Biased interpretation:
Personal interpretation matters a lot when it comes to decision taking. The preparation of these reports by the management officer is based on the capability of interpretation and understanding. Prejudices and biased knowledge of the subject makes 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.
3. Deficiency of various vital skills of management accountant:
Job description of management accountant includes subjects like financial accounting, cost accounting, economics, and statistics. Further, he or she should have an insight on a bit of psychology and sociology. Lack of knowledge regarding these subjects may affect the outcome of the management accounting. Thus, for a better working of management accounting, it is essential for the accountant to have a clear knowledge of the required subjects.
4. Cannot recommend a particular action:
Various alternatives for problem solving are presented before the management. These alternatives can be effective or non-effective. 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.
5. Preferences depends upon intuition and experience:
The management accounting works 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.
6. Management Accounting has its own limitations:
A management accounting system is merely a tool that facilitates the management accountant in giving advice for 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. Participation and efforts matter:
Management accounting system is a Tool that provides solution. However, the way of applying that solution also matters. Thus, for better results giving full efforts and participation in the task is required. To attain overall success it is important for all the employees from different levels to give their full inputs.
8. Broad scope v/s limited knowledge:
Management accounting is a wide concept that is to be taken 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.
9. Not an ideal choice for small-scale organizations:
Management accounting system is a very costly tool. As a result, it is not at all ideal for small-scale industries or organization. Due to the high cost, it is not suitable for low budget businesses. In addition, the utility of this system is restricted to large scale and complex organizations.
10. Rate of adopting changes:
People say that old habits die-hard. Similarly, changes are hard to adapt. Thus, when management accounting system is newly installed in an old setting organization, it depends on the capabilities of the employee to adapt the sudden change. So installing management accounting system cannot promise instant success.
11. Scope for improvement:
New inventions have a lot of scope for improvement. Similarly, 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.
12. Impracticable in nature:
Management accounting 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 in nature for the overall performance of business organizations.
Management accounting system is indeed an improvised technique. It is a modern tool for the development of the organization as a whole. The job description of the management accountant is not limited to the financial sector; instead, it has a wider coverage over the entire business.
Although it benefits the company at some point but the employers cannot neglect the cons of management accounting system either. Like all other inventions, management accounting is also not flexible enough for all the organizations. However, the complex corporate organizations can surely benefit from this system. This system looks into several sectors within the company.
Starting from the advice providing to various input in business strategy. Therefore, it makes way for having an efficient control over various business tasks by implementing management accounting system. Thus, management accounting clearly plays a significant role in the overall development of the organization in today’s competitive world.