MANAGEMENT ACCOUNTING: A Comprehensive 2022 guide (updated)

Management Accounting

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 need to take cognizance of Management accounting which is usually done by accountant.

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 the managers in decision making.

Importance of Management Accounting

Helps In Making Plans

Management accounting assists organization in making better plans for future activities. It hence,supplies all financial and non-financial data to management on a regular basis. Managers through the availability of all these information are therefore able to perform better analysis and forecasting which enables them in framing proper plans.

Assist In Decision Making

Efficient decision making is a major role played by management accounting. It collects and analyses all financial information available within organization and present them in simplified charts, tables or graphs. Management gets better understanding regarding organization affairs and is able to take correct decisions at right time.

Measures The Performance

Management accounting monitors and measures the overall performance of organization. It uses various tools like variance analysis which measures the company performance with pre-established standards for finding out the deviations. Managers by identifying all variations in performance of company are able to take corrective measures accordingly for removing them.

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 the efficiency.

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.

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.

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 the intensive study of the organisation structure. In turn, it helps to rationalise the organisation 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 labour should be replaced by machinery or not, whether 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 business to engage in or diversify how to run that business efficiently. This is most important contribution which the management accountant has made.

# 7. Helps in Controlling Performance

Management accounting is a useful device of managerial control. The whole organisation is divided into responsibility centres and each centre 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 analysed in order to pinpoint the responsibility.

Thus, management accountant helps in controlling the performance of the different responsibility centres and take suitable actions in order to correct the adverse deviations by revising the budgets if need be.

It assists management in location of weak spots and in taking corrective actions against such spots which are not in conformity with the budgeted performance. Thus, management accounting helps management in discharging 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 economical course of action and then measuring the performance tries his best to increase the effectiveness of the organisation and thereby motivate the members of the organisation.

# 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 taking decisions and for evaluating performance of the business.

The required information can be made available to the management by means of reports which are an integral part of the management accounting. Reports are means of communication of facts which 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:

  1. 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 are 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 Barnejee. Also read,

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.

Receivables Cash Management

Any amount which the company has earned however not yet received, i.e. its outstanding and is expected to be received in future, is known as receivables.

An organization must manage its receivables to maintain the surplus cash inflow. It helps the firm to fulfil its immediate cash requirements.

The cash receivables must be planned in such a way that the organization can realise its debts quickly and should allow a short credit period to the debtors.

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.

 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 managetment accounting and finance, advocate for the highest ethics and best business practices, and provide a forum for research.

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.

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.

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 the management accounting is confidential and limited to the management of the company and it is utilized by management in bringing efficiency and effectiveness in the organization’s working.

Financial accounting and management accounting is 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 using other economic and finance 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.

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