Management Accounting - Definition, Objectives, Scope and Limitations - MBA Knowledge Base (2024)

DEFINITION OF MANAGEMENT ACCOUNTING

Management accounting is not a specific system of accounting. It could be any form of accounting which enables a business to be conducted more effectively and efficiently. It is largely concerned with providing economic information to mangers for achieving organizational goals. It is an extension of the horizon of cost accounting towards newer areas of management. Much management accounting information is financial in nature but has been organized in a manner relating directly to the decision on hand.

Management Accounting is comprised of two words ‘Management’ and ‘Accounting’. It means the study of managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formation of policy, control of execution and appreciation of effectiveness. Management accounting is of recent origin. This was first used in 1950 by a team of accountants visiting U. S. A under the auspices of Anglo-American Council on Productivity.

  • Anglo-American Council on Productivity defines Management Accounting as, “the presentation of accounting information in such a way as to assist management to the creation of policy and the day to day operation of an undertaking”
  • The American Accounting Association defines Management Accounting as “the methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances”.
  • The Institute of Chartered Accountants of India defines Management Accounting as follows: “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting”

From these definitions, it is very clear that financial data is recorded, analyzed and presented to the management in such a way that it becomes useful and helpful in planning and running business operations more systematically.

OBJECTIVES OF MANAGEMENT ACCOUNTING

The fundamental objective of management accounting is to enable the management to maximize profits or minimize losses. The evolution of management accounting has given a new approach to the function of accounting. The main objectives of management accounting are as follows:

  • Planning and policy formulation: Planning involves forecasting on the basis of available information, setting goals; framing polices determining the alternative courses of action and deciding on the programme of activities. Management accounting can help greatly in this direction. It facilitates the preparation of statements in the light of past results and gives estimation for the future.
  • Interpretation process: Management accounting is to present financial information to the management. Financial information is technical in nature. Therefore, it must be presented in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.
  • Assists in Decision-making process: With the help of various modern techniques management accounting makes decision-making process more scientific. Data relating to cost, price, profit and savings for each of the available alternatives are collected and analyzed and provides a base for taking sound decisions.
  • Controlling: Management accounting is a useful for managerial control. Management accounting tools like standard costing and budgetary control are helpful in controlling performance. Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets. Performance of each and every individual is controlled with the help of management accounting.
  • Reporting: Management accounting keeps the management fully informed about the latest position of the concern through reporting. It helps management to take proper and quick decisions. The performance of various departments is regularly reported to the top management.
  • Facilitates Organizing: “Return on Capital Employed” is one of the tools of management accounting. Since management accounting stresses more on Responsibility Centers with a view to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it is helpful in setting up effective and efficiently organization framework.
  • Facilitates Coordination of Operations: Management accounting provides tools for overall control and coordination of business operations. Budgets are important means of coordination.

NATURE AND SCOPE OF MANAGEMENT ACCOUNTING

Management accounting involves furnishing of accounting data to the management for basing its decisions. It helps in improving efficiency and achieving the organizational goals. The following paragraphs discuss about the nature of management accounting.

  • Provides accounting information: Management accounting is based on accounting information. Management accounting is a service function and it provides necessary information to different levels of management. Management accounting involves the presentation of information in a way it suits managerial needs. The accounting data collected by accounting department is used for reviewing various policy decisions.
  • Cause and effect analysis: The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; management accounting goes a step further. Management accounting discusses the cause and effect relationship. The reasons for the loss are probed and the factors directly influencing the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payables, share capital, etc.
  • Use of special techniques and concepts: Management accounting uses special techniques and concepts according to necessity to make accounting data more useful. The techniques usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.
  • Taking important decisions: It supplies necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taken into account.
  • Achieving of objectives: Management accounting uses the accounting information in such a way that it helps in formatting plans and setting up objectives. Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can be taken at once with the help of budgetary control and standard costing.
  • No fixed norms: No specific rules are followed in management accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most.
  • Increase in efficiency: The purpose of using accounting information is to increase efficiency of the concern. The performance appraisal will enable the management to pin-point efficient and inefficient spots. Effort is made to take corrective measures so that efficiency is improved. The constant review will make the staff cost — conscious.
  • Supplies information and not decision: Management accountant is only to guide and not to supply decisions. The data is to be used by the management for taking various decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management.
  • Concerned with forecasting: The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.

LIMITATIONS OF MANAGEMENT ACCOUNTING

Management Accounting is in the process of development. Hence, it suffers from all the limitations of a new discipline. Some of these limitations are:

  • Limitations of Accounting Records: Management accounting derives its information from financial accounting, cost accounting and other records. It is concerned with the rearrangement or modification of data. The correctness or otherwise of the management accounting depends upon the correctness of these basic records. The limitations of these records are also the limitations of management accounting.
  • It is only a Tool: Management accounting is not an alternate or substitute for management. It is a mere tool for management. Ultimate decisions are being taken by management and not by management accounting.
  • Heavy Cost of Installation: The installation of management accounting system needs a very elaborate organization. This results in heavy investment which can be afforded only by big concerns.
  • Personal Bias: The interpretation of financial information depends upon the capacity of interpreter as one has to make a personal judgment. Personal prejudices and bias affect the objectivity of decisions.
  • Psychological Resistance: The installation of management accounting involves basic change in organization set up. New rules and regulations are also required to be framed which affect a number of personnel and hence there is a possibility of resistance from some or the other.
  • Evolutionary stage: Management accounting is only in a developmental stage. Its concepts and conventions are not as exact and established as that of other branches of accounting. Therefore, its results depend to a very great extent upon the intelligent interpretation of the data of managerial use.
  • Provides only Data: Management accounting provides data and not decisions. It only informs, not prescribes. This limitation should also be kept in mind while using the techniques of management accounting.
  • Broad-based Scope: The scope of management accounting is wide and this creates many difficulties in the implementations process. Management requires information from both accounting as well as non-accounting sources. It leads to inexactness and subjectivity in the conclusion obtained through it.

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Definition of Management Accounting

Management accounting is a form of accounting that enables businesses to be conducted more effectively and efficiently. It provides economic information to managers for achieving organizational goals. It is an extension of cost accounting and focuses on newer areas of management. While management accounting is largely concerned with financial information, it is organized in a manner that directly relates to the decision at hand.

Objectives of Management Accounting

The fundamental objective of management accounting is to enable management to maximize profits or minimize losses. The main objectives of management accounting include:

  1. Planning and policy formulation: Management accounting helps in forecasting, goal setting, policy determination, and decision-making by providing statements based on past results and future estimations.
  2. Interpretation process: Management accounting presents financial information in a way that is easily understood by using statistical devices such as charts, diagrams, and graphs.
  3. Assisting in decision-making process: Management accounting collects and analyzes data related to cost, price, profit, and savings for each available alternative, providing a basis for sound decision-making.
  4. Controlling: Management accounting tools like standard costing and budgetary control help in controlling performance and costs.
  5. Reporting: Management accounting keeps the management informed about the latest position of the concern through regular reporting, enabling quick and proper decision-making.
  6. Facilitating organizing: Management accounting aids in setting up an effective and efficient organizational framework by emphasizing responsibility centers and cost control.
  7. Facilitating coordination of operations: Management accounting provides tools for overall control and coordination of business operations, with budgets playing an important role.

Nature and Scope of Management Accounting

Management accounting involves providing accounting data to the management for decision-making purposes. It improves efficiency and helps achieve organizational goals. The nature of management accounting can be summarized as follows:

  1. Provides accounting information: Management accounting is based on accounting information and provides necessary information to different levels of management.
  2. Cause and effect analysis: Unlike financial accounting, management accounting goes beyond finding the ultimate result and delves into the cause and effect relationship, probing reasons for losses and studying factors influencing profitability.
  3. Use of special techniques and concepts: Management accounting utilizes special techniques and concepts such as financial planning and analysis, standard costing, budgetary control, and project appraisal to make accounting data more useful.
  4. Taking important decisions: Management accounting supplies necessary information to the management for decision-making, studying historical data and considering the implications of various decisions.
  5. Achieving objectives: Management accounting uses accounting information to formulate plans and set objectives, comparing actual performance with targeted figures to assess departmental performance and take corrective measures.
  6. No fixed norms: Management accounting does not follow specific rules like financial accounting, and its use and conclusions depend on the intelligence of the management accountant and the needs of the concern.
  7. Increase in efficiency: Management accounting aims to increase the efficiency of the concern by pinpointing efficient and inefficient areas and taking corrective measures.
  8. Supplies information and not decisions: Management accounting guides management by supplying information, but the ultimate decisions are made by management itself.
  9. Concerned with forecasting: Management accounting helps in planning and forecasting by using historical information to guide future decisions.

Limitations of Management Accounting

While management accounting is a valuable tool, it also has certain limitations. Some of these limitations include:

  1. Limitations of accounting records: Management accounting relies on financial accounting, cost accounting, and other records, so its correctness depends on the accuracy of these basic records.
  2. It is only a tool: Management accounting is a tool for management and not a substitute for management itself. Ultimate decisions are made by management, not by management accounting.
  3. Heavy cost of installation: Implementing a management accounting system requires a significant investment, which may only be affordable for larger organizations.
  4. Personal bias: The interpretation of financial information in management accounting can be influenced by personal biases and prejudices, affecting the objectivity of decisions.
  5. Psychological resistance: Implementing management accounting involves changes in the organization setup, which may face resistance from personnel.
  6. Evolutionary stage: Management accounting is still in a developmental stage, and its concepts and conventions are not as established as other branches of accounting, relying on intelligent interpretation of data.
  7. Provides only data: Management accounting provides data to the management for decision-making but does not supply decisions itself.
  8. Broad-based scope: The scope of management accounting is wide, requiring information from both accounting and non-accounting sources, which can lead to inexactness and subjectivity in conclusions.

I hope this information helps you understand the definition, objectives, nature, scope, and limitations of management accounting. If you have any further questions, feel free to ask!

Management Accounting - Definition, Objectives, Scope and Limitations - MBA Knowledge Base (2024)

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