Management accounting is the process of preparing financial statements, internal reports, and documents which assists the management body to make better decisions related to performance of a business. The primary goal of this accounting is to provide relevant information to the management to frame the policies and help in the decision making process. Identification, measurement, accumulation, analysis, preparation, interpretation, and transmission of financial information are all steps in the management accounting process that help executives achieve company goals.
Management accounting aids management in carrying out all of its duties, including staffing, organizing, planning, and controlling. In other words, management accounting is the branch of accounting that offers economic and financial data to managers and other internal users. In simplest terms, management accounting is “decision-making” accounting.
Every decision making process of an organization involves management accounting practices. As discussed above, we use management accounting from making a company policy to selecting a vendor, from making a M&A decision to recording a simple business transaction. Management accounting is simple to explain yet crucial for any organization.
Objectives of Management Accounting
The major functions of a manager are planning, organizing, leading, directing, recruiting, controlling and reporting and the management accounting helps the managers to perform these functions efficiently. The following are the major objectives of management accounting.
The balance sheet and traditional profit and loss accounts are not analytical for making decisions. Through a variety of strategies, management accounting alters and rearranges data as necessary for decision-making. Management accounting presents data and information in the most effective, intelligible and no-technical manner. Such presentation of data or information is necessary for clear communication and understanding of various contents.
Planning and forecasting assistance
Through the use of budgetary control and conventional costing methodologies, management accounting aids in the planning process. In creating budgets and establishing standards, forecasting is frequently employed by the managers. This accounting helps in defining what is to be done, how is to be done and when is to be done.
Assist with organization
Organizing is involved with creating connections amongst various employees inside the company. It comprises assigning responsibilities and delegating authority. Through the creation of cost centers, profit centers, responsibility centers, budget preparation, etc., management accounting attempts to assist the management in organizing. These actions assist in creating an effective organizational framework.
Comparative data from management accounting is available for analysis and interpretation to help with successful policy development and decision-making.
Sharing management policy information
Accounting for management effectively communicates management policies to employees at all levels to ensure proper implementation. Different tools and techniques of this accounting assist during policy formation and help management to define an effective policy.
Management accounting includes both standard costing and budgetary control. With the use of these strategies, it is possible to set objectives, assess performance, and manage deviations.
Non-Financial Information Incorporation
Management accounting takes into consideration both financial and non-financial data to generate alternative action plans that result in effective and precise judgments.
Management accounting helps to maintain coordination in the organization by informing of the goals of various departments, and updating the management occasionally on their progress. The management is aided in organizing numerous activities by this ongoing reporting.
Characteristics of Management Accounting
Provides financial information
The main focus of management accounting is providing the necessary financial information to the management for preparing and analyzing the policies and decisions in the company.
Analysis of cause and effect
Income statements and balance sheets are the only things that financial accounting presents. Accounting for management examines the cause and effect of the underlying facts and numbers. If there are losses, the causes are looked into. If a profit is made, the factors influencing that profit are also examined. To determine how those factors affect profit, the quantity of profit is compared to expenditure, sales, capital utilized, and other factors.
Use of special techniques
To make accounting data more beneficial and usable to management, such accounting uses specialized techniques including standard costing, budgetary control, marginal costing, fund flow, cash flow, ratio analysis, responsibility accounting, etc. Each of these methods or ideas is a helpful tool for a certain analysis or interpretation task.
Making decisions for later execution is a focus of management accounting. This entails future projection and prediction. It is useful for setting goals and for planning. Managers consider all the accounting and decision making tools to effectively act in the present to make a desirable future of the organization.
No predetermined format
There is no predetermined format for the dissemination of information this accounting. Typically, management accounting delivers data in a way that is simple for managers and other users to grasp. The purpose of this accounting is to ease the decision making process, no matter the format.
The law does not mandate that management accounting be done. In fact, this accounting is carried out in accordance with the needs of the organization; as a result, it can be carried out on a weekly, monthly, quarterly, or half-yearly basis.
Scopes of Management Accounting
The following are the scopes of management accounting:
Management accounting covers cost accounting because it provides numerous ways for predicting and calculating the total cost of providing a service to the customer and aids in defining the overall budget for any company. Business analysts and managers also need to understand cost accounting because every business activity depends on the associated costs.
Financial Accounting is another scope of management accounting which includes calculating and analyzing company transactions such as costs, inventories, assets, and reporting. Different financial statements are frequently created at the conclusion of each fiscal year and are essential in financial accounting. The balance sheet of the business and its overall profit or loss for the most recent fiscal year are included in the financial statements.
Budgeting and forecasting
The management accounting discipline includes budget control and company forecasting trends as part of its scope. Systems for managing budgets are based on financial information and company performance. Budget control aids the analysis of the causes and weak areas that hinder coordination and reduce corporate performance.
Likewise, forecasting is a crucial management accounting function since it offers a business view from the standpoint of the stakeholders. Business forecasting and budgeting lay forth the company’s objectives, intentions, and anticipated results of the actions taken to assist in emergency planning.
Interpretation of data
Data interpretation is one of the important areas of management accounting. Management accounting comprehends the available data into meaningful facts and figures. Management uses such analyzed, consolidated and well interpreted data to make decision. Also, because it prevents shareholders from inferring incorrect conclusions from their business data, interpretation is just as important to the operation as financial reporting. A market business could be doomed if the data is not properly understood and assessed.
Every business management must provide reports. For managing business growth and resources, getting reports on time is essential. The timely report helps management make wise decisions and keeps management updated on how operations are progressing. Simple graphs, charts, and presentations are used to deliver data and reports to management.