Management accounting is one of the most important subjects for the students who are enrolled in the business management courses of different universities and colleges. It is actually a compulsory subject in different graduate and post graduate courses.
But has anyone wondered why it is so?
We’ll tell you all about the subject. You just have to read it to the end for getting the gist of the subject!
What is Management Accounting?
Management accounting is actually the process of identifying, analyzing, interpreting and representing the financial information that has been obtained from the financial and cost accounting reports of the organization. The mangers of the company with the help of management accounting reports are able to provide timely and accurate statistical and financial information that assist them in routine decision making. It is also an important tool for performance measurement of the business organization.
The management accounting is different from financial accounting as the financial reports are prepared on annual basis for the external stakeholders of the business while the management accounting reports can be prepared on weekly and monthly basis for internal audience like the CEO and the departmental managers.
Let us see what essential functions are performed by management accounting!
Management accounting basically performs 4 major functions which are as follows:
Planning: The manager with the help of management accounting can undertake future planning activity for their organization. This is mainly because budgets prepared under this are based on the accounting information that are provided by the financial reports and appropriates decisions are made for future profitability on the basis of the current position of the company.
Organizing: The management accounting with the help of management reports effectively organizes, regulates and make adjustments in the existing operations and activities for achieving the desired objectives of the organization.
Controlling: The performance reports and the variance reports, prepared under management accounting control the organizational performance. This is done with the help of variance analysis that highlights the difference between the actual and expected performance.
Decision making: The managers are able to make proper decisions that assist in future financial forecasting. The decision are made by analyzing the present financial and cost information that reveals useful results for the management and accurate decisions can be made.
What role does management accounting plays in an organization success?
The management accounting is considered to play essential role in the success of the company as it enables the management to undertake competitive decision making. This means the management can gather, process and effectively communicate information that is crucial for management planning, controlling and evaluating the organizational strategy and different processes of the business.
In addition to this, unlike financial accounting that majorly focuses over the future through financial results obtained in the past, the management accounting is futuristic and focuses on developing projection on the basis of budgets and other future financial projections.
The management accountant utilizes the financial results of the past period and can appropriately present the predictions for the coming year by developing an anticipated list of revenue and expenses that will be incurred in the future. This information can be easily used for formulating budgets along with making other future financial decisions.
Importance of management accounting cannot be denied in the dynamic business environment!
The few points in this respect are listed below:
Future Forecasting: The management accounting assists the management in future forecasting by analyzing the future trends and activities that would be essential to perform in future to survive in the competitive business world.
Analysis of performance variances: Management accounting with the techniques such as standard costing and variance analysis is able to identify the reasons for deviation between the actual and the budgeted performance. Thus, necessary steps can be taken by the management to avoid the chances of deviation and execution of the activities as per the planned budget.
Future cash flow determination: The management accounting by formulating required budgets and trend charts can easily predict the future requirements of cash. The correct and accurate estimation of cash enables the business organization to equitably allocate the scarce financial resources of the company among different departments of the business. The proper allocation of cash and other resources allow the company to achieve the projected revenue growth.
Nature of Management accounting: Science or Art?
The different scholars have regarded management accounting as both Science and Art. The science aspect is reflected through quantifying and summarizing nature of management accounting while art aspect is revealed from the interpreting nature of the accounting data.
Management accounting as a Science
The management accounting obtains its results from collecting, processing and objectively analyzing the accounting data in quantitative terms. It includes quantification and objectification of the accounting problems and the success. Thus, from this perspective management accounting is regarded as a Science.
Management accounting as an Art
It is considered as an art because it includes decision making on the basis of human judgment, whims, prejudices and impulses that can be observed in the form of deduction and conclusions that are received from the appropriate interpretation of the data. While deriving the accurate meaning of the data, subjectivity is considered as important. Apart from this, the interpretations and deductions of the data are potentially affected from the personal view point of the management accountant. Therefore, the management accounting is also referred to as an Art sometimes.
Surprised from the complex nature of management accounting!
Decision making: One of crucial aspect of management accounting
Of all the functions of the management accounting, the decision making function is considered as the most important function that directly affects the success and failure of the business.
There are a lot of reasons but few major reasons are as follows:
Decisions based on cost analysis: The management accounting information is mainly used by for making essential decision related to cost, price and profit. The manager can undertake proper cost analysis and can make suitable decision with respect to cost determination and price determination to earn the budgeted profit. Further, the decision regarding reducing the cost can also be taken on the basis of cost and management reports in segments which are incurring losses or where expenses are increasing at a faster pace.
Decision related to make or buy product: In case of manufacturing sector, the management accounting information assist the manager to make suitable decision regarding manufacturing or purchasing the component that is required for making the primary product of the company. The Make or buy analysis enables the management accountant to analyze both the situations and to choose the one that is more profitable for the business.
Decisions making for performance management: The management accounting with the help of performance measurement tools like balance score card and budgeting can effectively measure the performance of the entire organization and each of the department individually. The tools reveal useful information regarding the areas where inefficient performance is observed and necessary measures can be taken to improve the performance of the company as well as the employees.
Thus, it can be recommended that the businesses should implement an effective management accounting system for their long term success in future.