Accounting For Management: What is Management Accounting?

Accounting For Management: What is Management Accounting?


Management accounting also known as managerial accounting is the process of providing financial information to managers to enable them make short-term and long-term decisions. The accounting department share financial information and reports such as invoice, income statements with the company's managers.

It helps a business accomplish its aims through identifying, measuring, analyzing, interpreting and communicating information to managers.

Furthermore, we can also define Management accounting as the process of applying professional skills, competence and knowledge in preparing accounts in a way that will help the management in formulating policies, planning, and control of the operations of the organization.

The fundamental function of management accounting is to help the management make good decisions. Like the way accountants prepare income statement, balance sheet, etc, there is no fixed format for preparing management accounting.

Some tools and techniques used by management accounting are; financial accounting, costing, business analysis, economics, budgeting, etc

Users of Management Accounting

Business managers are the only user of management accounting, this is what makes it unique and different from financial accounting. They are not useful to government, shareholders, bankers, business analysts, investors etc.

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What Are The Advantages and Objectives of Management Accounting?

There are several objectives of management accounting but the main objective is to help a company's management improve on how they make decisions.

Other objectives of management accounting include;

1. Decision Making
2. Planning
3. Controlling business operations
4. Organizing
5. Understanding financial data
6. Identifying business problems
7. Strategic Management

Decision Making

Decision making is the most important objective of management accounting. Managers use techniques from all fields like costing, economics, statistics, etc to make decisions. It provides users with charts, tables, forecasts and various analysis that makes decision-making easier.

Planning

Managerial accounting is a continuous and ongoing process as long as the company is still in existence. The management receives information at regular intervals like weekly, monthly or sometimes even daily so they can plan the activities of the organization. For example, if the recent data shows that there is reduction in sales in a certain region, then the sales manager and other management team can work together to solve the problem.

Identifying Business Problems

If some products are performing poorly below expectations, or some departments are running into unexpected losses, etc., managerial accounting can help the company find the reasons for the poor performance and losses incurred.

Furthermore, if the company's management is diligent and their data and reports are frequent, they can quickly find the problem before it becomes big.

Strategic Management

Management accounting is not mandatory by any law. It has no format or rules. So it is structured according to the company’s requirements. If the company feels certain areas need in-depth analysis or investigation it can freely do so. This enables them focus on some core areas. The information available to them allows them to make strategic decisions.

In case the company wishes to launch a new product line, or stop an existing one, management accounting has a huge role to play in achieving the goals.

Also Read: The Role Of Accounting In Management Decision Making Process

What Are The Limitations Of Management Accounting?

While there are advantages of management accounting, it also has limitations or disadvantages. They are explained below;

Data based on Financial accounting

Decisions made by a company's management team are based on the data which was made available to them by Financial accountants. They have no data of their own and can only make decision based data given to them.

Insufficient knowledge

Since the management consists of people who are not trained or practising accountants, they will not be able to interpret some financial data provided by financial accountants. Management has insufficient knowledge of economics, accounting, finance, statistics, etc. They will still rely on the data provided by financial accountants.

Old data

Management receives historical data which occurred in the past. Sometimes, these information may change in the process of taking decisions. Examples of such data include: Price of raw materials in the market, exchange rate, season, etc.

Expensive to set up

Setting up a management accounting system requires a lot of investment. Small businesses cannot afford it due to lack of funds. Some of the small businesses are managed by one person who in most cases carryout accounting and bookkeeping functions.

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