Think about this! Can any business exist without management? Your answer is as good as mine. For one to run one’s business properly, there is a need to take cognizance of management accounting, which is usually done by an accountant. Let’s take a look at what exactly is Management Accounting
Management Accounting Definition
Management accounting is the process of identifying, analyzing, interpreting, and communicating information to managers to help achieve business goals. It also is known as managerial accounting and can be defined as a process of providing financial information and resources to managers in decision-making.
Importance of Management Accounting
#1. Helps In Making Plans
Management accounting assists organizations in making better plans for future activities. It thereby supplies all financial and non-financial data to management on a regular basis. Managers, through the availability of all this information, are therefore able to perform better analysis and forecasting, which enables them to frame proper plans.
#2. Assist In Decision Making
Efficient decision-making is one of the major roles played by management accounting. It collects and analyzes all financial information available within the organization and presents it in simplified charts, tables, or graphs. Management gets a better understanding regarding organizational affairs and is able to make correct decisions at the right time.
#3. Measures The Performance
Management accounting monitors and measures the overall performance of the organization. It uses various tools like variance analysis which measures the company’s performance with pre-established standards for finding out the deviations. Managers, by identifying all variations in the performance of the company, are able to take corrective measures accordingly to remove them.
#4. Increases The Efficiency
This accounting branch aims at raising the overall efficiency of business organizations. Management accounting sets target for each division in advance and checks whether they fulfill all targets. It ensures that all resources are fully utilized, which helps in improving efficiency.
#5. Better Service To Customers
Management accounting focuses on better service to customers by providing them quality goods at fair prices. It helps in controlling the prices of products by employing cost control devices. In addition to that, it sets various quality standards to be met by organization for producing their goods.
#6. Raises The Profitability
It has an efficient role in enhancing the profitability of organizations. It makes companies cost conscious and assist in avoiding all extra expenditures. Management accounting uses techniques such as budgetary control and capital budgeting for reducing the expenses which helps in earning better profits.
#7. Provides Reliability
Management accounting adds reliability to management decisions by providing them genuine information. It uses proper scientific tools and techniques for analysis purposes which helps managers in the proper management of business operations.
Functions of Management Accounting
# 1. Forecasting and Planning
One of the important functions of management accounting is to provide necessary information and data for making short-term and long-term forecasts and planning the operations of the business.
The management accountant uses techniques of statistics, like probability, trend study of correlation and regression; budgeting and standard costing; capital budgeting; marginal costing and cash funds flow statements etc.
# 2. Organising
The management accountant helps the management in organising the human and non-human resources of the business by analysing different functions and assigning specific responsibilities. He tries to organise the accounting and finance function of the business on the modern lines.
# 3. Coordinating
The management accountant increases the efficiency of organisation and maximise its profits by providing different tools of coordination as budgeting, financial reporting, financial analysis and interpretation etc. It helps the management by reconciling the cost and financial accounts, by preparing budgets and setting the standard costs and in analysing variances in costs to facilitate management by exception.
# 4. Controlling Performance
The management accountant helps in controlling the performance of the organisation by using standard costing, budgetary control, accounting ratios, cash and funds flow statements, cost reduction programmes and evaluating the capital expenditure proposals and return on investment.
# 5. Financial Analysis and Interpretation
The management accountant analyses the data and presents it before the management in non-technical manner along with his comments and suggestions so that the owners and the top personnel’s in the management may understand it and take decisions without any difficulty.
# 6. Communication
The management accountant prepares various reports to communicate the results to the superior, to motivate the employees, to exercise effective control on their activities and to enable the management to take sound decisions. He also communicates with the outside world about the progress of the business through published accounts and returns.
# 7. Special Studies
The management accountant tries to maximize the profits of the concern by conducting various cost and economic studies on regular basis. He tries to determine the needs of long-term and short-term capital, recommend appropriate capitalization for the enterprise, evaluation of alternative capital expenditure proposals and their impact on the return and profits of the concern.
# 8. Protection of Business Assets
The management accountant will be responsible for the protection of business assets. He is to see that sufficient funds are available for repairs, maintenance and replacement of fixed assets so that production capacity of the enterprise may not be badly affected. He is also to see that business assets are properly insured.
Objectives of Management Accounting
# 1. Planning and Formulating of Policies:
Management accounting assists management in planning the activities of the business. Planning is deciding in advance what is to be done, when it is to be done, how it is to be done and by whom it is to be done. In other words, it involves forecasting on the basis of available information, setting goals, framing policies, determining the alternative courses of actions and deciding on the programmed of activities to be undertaken.
Therefore, management accounting helps management in its function of planning through the process of budgetary control.
# 2. Helps in Coordinating Operations
Management accounting helps the management in co-coordinating the activities of the concern by getting prepared functional budgets in the first instance and then co-coordinating the whole activities of the concern by integrating all functional budgets into one known as master budget. Thus, management accounting is a useful tool in coordinating the various operations of the business.
# 3. Helps in the Interpretation of Financial Information
Accounting is a technical subject and may not be easily understandable by everyone till the user has a good knowledge of the subject. In other words, management may not be able to use the accounting information in its raw form due to lack of knowledge of accounting techniques.
Management accountant presents the information in an intelligible and non-technical manner. Consequently, this will help the management in interpreting the financial data, evaluating alternative courses of action available and guiding the management in taking decisions and having the most desired financial results.
# 4. Helps in Evaluating the Efficiency and Effectiveness of Policies
Management accounting also lays emphasis on management audit which means evaluating the efficiency and effectiveness of management policies. However, management policies are reviewed from time to time to make an improvement in them so that maximum efficiency may be achieved.
# 5. Helps in Organizing
Thus, management accountant recommends the use of budgeting, responsibility accounting, cost control techniques, and internal financial control. This all needs intensive study of the organization structure. In turn, it helps to rationalize the organization’s structure.
# 6. Helps in the Solution of Strategic Business Problems
Whenever there is a question of starting a new business, expanding or diversifying the existing business, strategic business problem has to be faced and solved.
Similarly, when in a particular situation, there are different alternatives as whether labor should be replaced by machinery or not, whether the selling price should be reduced or not, whether to export the item or not, etc., a management accountant helps in solving such problems and decision-making.
It provides feedback to the management, such as what businesses to engage in or diversify and how to run those businesses efficiently. This is the most important contribution that the management accountant has made.
# 7. Helps in Controlling Performance
Management accounting is a useful device of managerial control. The whole organization is divided into responsibility centres and each center is put under the charge of one responsible person. He will be associated with the planning and framing of the budgets and be required to execute the plans, and standards and deviations are analyzed in order to pinpoint the responsibility.
Thus, the management accountant helps in controlling the performance of the different responsibility centers and takes suitable actions in order to correct adverse deviations by revising the budgets if need be.
It assists management in the location of weak spots and in taking corrective action against such spots that are not in conformity with the budgeted performance. Thus, management accounting helps management discharge its control function successfully through budgetary control and standard costing.
Also read: MANAGING COST: 5 best keys for cost management
# 8. Helps in Motivating Employees
The management accountant, by setting goals, planning the best and most economical course of action, and then measuring the performance, tries his best to increase the effectiveness of the organization and thereby motivate the members of the organization.
# 9. Communicating Up-to-date Information:
Management accounting assists management in communicating the financial facts about the enterprise to the persons who are interested in these facts so that they may be guided to a line of action to be pursued. Therefore, management needs information for making decisions and for evaluating the performance of the business.
The required information can be made available to the management by means of reports which are an integral part of management accounting. Reports are means of communication of facts that should be brought to the notice of various levels of management so that they may be guided for taking suitable action for the purposes of control.
Management Accounting Example
Anderson is the CEO of a small consulting firm. He wants to hire a management accountant and a financial accountant. He has come up with a list of job tasks and he needs to break them up into those that should be performed by the managerial accountant and those that should be performed by the financial accountant. Here is the list of tasks that Anderson has come up with:
- Preparing cash flow statements
Example of a cash flow statement account
| Operating Cash Flow Net Earnings $10000 Plus: Depreciation & Amortization 8000 Less: Changes in working capital 5000 | |
| Cash from operations 13000 Investing Cash Flow Investments in property (7000) | |
| Cash from investing (7000) Financing Cash Flow Issuance (repayment of debt) (6000) Issuance (repayment of equity) 150000 | |
| Cash from Financing 144000 Net Increase (decrease) in cash 100000 Opening Cash Balance 20000 | |
| Closing Cash Balance $120000 |
2. Income statement reporting
3. Budgeting
4. Calculating changes in stockholder equity
5. Preparing taxes for the organization
In this example, the only tasks that would be assigned to the management accountant are budgeting and taxes. The financial accountant would handle the other tasks.
Management Accounting Books
In our quest for knowledge of Management Accounting, the role of textbooks cannot be overemphasized. In such textbooks is vast knowledge in this field of Accounting.
A number of Management Accounting Textbooks are below.
- Management and Cost Accounting; Book by Charles Thomas Horngren.
- Management Accounting: Principles and Applications; Book by David Ellis Jenkins, David Hobbs, and Hugh Coombs
- Management Accounting; Book by Greg Shields
- Cost and Management Accounting; Book by Colin Drury
- Cost and Management Accounting; Book by S.P Jain, K.I Narang
- Financial Policy and Management Accounting; Book by Bhabatosh Banerjee.
Cash Management Accounting
Cash management refers to the collection, handling, control, and investment of the organizational cash and cash equivalents to ensure optimum utilization of the firm’s liquid resources. Money is the lifeline of the business, and therefore it is essential to maintain a sound cash flow position in the organization.
#1. Receivables Cash Management
Any amount that the company has earned but not yet received, i.e., that is outstanding and expected to be received in the future, is known as receivables.
An organization must manage its receivables to maintain its surplus cash inflow. It helps the firm to fulfill its immediate cash requirements.
The cash receivables must be planned in such a way that the organization can realize its debts quickly and should allow a short credit period to the debtors.
#2. Payables Cash Management
The payables refer to the payment which is unpaid by the organization and is to be paid off shortly.
The organization should plan its cash outflow in such a manner that it can acquire an extended credit period from the creditors.
This helps the firm to retain its cash resources for a longer duration to meet the short-term requirements and sudden expenses. Even the organization can invest this cash in a profitable opportunity for that particular credit period to generate additional income.
#3. Management Accounting Institute
The Institute of Management Accountants (IMA) is one of the top associations for financial professionals. It offers the prestigious Certified Management Accountant (CMA) designation. The IMA’s mission is to promote education and development in management accounting and finance, advocate for the highest ethical standards and best business practices, and provide a forum for research.
#4. The Mission of The Institute of Management Accounting
The IMA’s mission is to promote education and development in management accounting and finance, the highest ethics, and best business practices.
#5. The Vision of The Institute of Management Accounting
The organization’s vision is to be the leading resource for certifying, supporting, maturing, and linking the world’s best financial professionals and accountants.
#6. The Core Value of The Institute of Management Accounting
The association’s core values include integrity and trust, passion, respect, innovation, and continuous improvement. It achieves these core values by providing access to career opportunities, building a network of industry professionals, and developing partner connections. It offers educational programs to increase leadership opportunities and expand professional knowledge. IMA provides a forum for members by promoting forward-thinking research and industry best practices and offering newsletters and journals.
Finance and Management Accounting
The difference between financial and managerial accounting is that financial accounting is the collection of accounting data to create financial statements, while managerial accounting is the internal processing used to account for business transactions.
Financial accounting intends to disclose the right information to the stakeholders so that they can make informed decisions, whereas management accounting is confidential and limited to the management of the company and is utilized by management to bring efficiency and effectiveness to the organization’s work.
Financial accounting and management accounting are used synonymously, but they are different from each other. Their function and scope are different, even though they are related to each other. Basically, management accounting uses financial accounting data apart from other economic and financial principles. Thus, the focus of financial accounting is mainly disclosure, whereas management accounting is concerned with informing the top management about the health of the business and suggesting improvements.
What is Management Accounting also Called?
Managerial accounting, also known as cost accounting or management accounting, focuses on the collection, organization, and interpretation of financial data for use in guiding business decision-making at the management level.
Why do we Study Management Accounting?
Owners and upper-level managers can benefit from management accounting’s in-depth analyses of the company’s status. With this information, they can determine how much money to allocate toward various initiatives and how to allocate that money to maximize the company’s profits. Insights from this data are used to make choices about the business’s operations and procedures.
What is Management as Profession with Example?
Management, by definition, is the process of leading and organizing people to accomplish a goal. The best way to achieve this goal is to devise strategies and manipulate the workforce in accordance with those plans.
Conclusion
Having read this article, you will see that it has comprehensive information on all you need to know about management accounting. Have a great read!
Related Article
