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MEANING

Management accounting can be viewed as Management-oriented Accounting. Basically it is the


study of managerial aspect of financial accounting, "accounting in relation to management
function". It shows how the accounting function can be re-oriented so as to fit it within the
framework of management activity. The primary task of management accounting is, therefore, to
redesign the entire accounting system so that it may serve the operational needs of the firm. If
furnishes definite accounting information, past, present or future, which may be used as a basis
for management action. The financial data are so devised and systematically development that
they become a unique tool for management decision.

The term “Management Accounting”, observe, Broad and Carmichael, covers all those services by
which the accounting department can assist the top management and other departments in the
formation of policy, control of execution and appreciation of effectiveness. This definition points
out that management is entrusted with the primary task of planning, execution and control of
the operating activities of an enterprise. It constantly needs accounting information on which to
base its decision. A decision based on data is usually correct and the risk of erring is minimized.
The position of the management in respect of its functions can be compared to that of an army
general who wants to wage a successful battle. A general can hardly fight successfully unless he
gets full information about the surrounding situation and the extent of effectiveness of each of
his battalions and, to the extend possible, even the enemy's intentions.

ADVANTAGES OF MANAGEMENT ACCOUNTING

The important uses of management accounting are briefly explained

1. Planning
The management can prepare the plan and execute the same for effective operation of business.
In this context, various functional budgets are prepared and accounting information are
rearranged in department wise, product wise, section wise and the like for proper planning.

2. Controlling
The actual performance of every business activity is measured and compared with the standard
fixed or planned one. If the deviations are found that are controllable, the management can
decide the course of action to exercise control. Both standard costing and budgetary control
system are highly help the management in this aspect.

3. Service to Customers
Better and improved services by management to customers are assured by this system of
accounting.

4. Organizing
The scope of authority and responsibility of key executives are properly defined and explained
under management accounting system. Hence, everyone knows who is responsible for what and
to whom? It helps for proper organizing the work in an organization.

5. Coordinating
It is the process of integrating the various work performed in an organization to achieve the
objectives effectively. Thus, perfect coordination is required for among production, purchase,
finance, personnel, sales and the like departments. This is achieved through preparing
budgets and reports of performance.

6. Improvement of Efficiency
The management accounting system may eliminate various types of wastage, production,
defectives and other work thereby the workers efficiency may be improved.
7. Motivating
It helps to maintain high degree of morale among the employees. The reports of business
operation are periodically prepared and submitted before the top management periodically.
Based on the report, the management can find out whom to demote or promote or to reward or
penalize. In this way, the employees are motivated.

8. Communication
Two way communications is followed in an organization if management accounting system is
followed. Modified accounting information and reports regarding performance are sent to top
management for decision making. In another way, assignment of work and responsibilities over
employees are communicated to lower level executives.

9. Regulation of Business Activities


Proper planning, organizing, coordination and motivation can bring systematic regularity in the
business activities.

10. Maximization of Profit


There is a morale among the employees. Standards are fixed and measure the actual
performance to find the deviations. If the causes for deviations are reasonable and controllable,
proper action may be taken by the management. In this way, profit is maximized.

11. Reliability
The tools used in management accounting system are reliable. This procedure usually makes the
data supplied to management accurate and reliable

LIMITATIONS OR DISADVANTAGES OF MANAGEMENT ACCOUNTING


1. Based on Financial and Cost Records
Both financial and cost accounting information are used in the management accounting system.
The accuracy and validity of management account is largely based on the accuracy if financial
and cost records maintained. These records determine the Strength and weakness of
management accounting.

2. Personal Bias
The analysis and interpretation of financial statements are fully depending upon the capability of
the analyst and interpreter. Hence, personal prejudices and bias of an individual can affect the
objectivity and effectiveness of the conclusions and recommendations.

3. Lack of Knowledge and Understanding of the Related Subjects


Financial accounting, cost accounting, statistics, economics, psychology and sociology are the
related subjects of management accounting. The organization can derive more benefits of
management accounting if the management accountant has thorough knowledge over related
subjects. If not so, the success of management accounting system is questionable.

4. Provides only Data


Under management accounting system, many alternatives are developed to solve a problem and
submitted before the management. Out of the many alternatives available, the management can
select any one of alternatives or even discard all of them. Hence, management accounting can
only provide data and not prescribe any course of action.

5. Preference to Intuitive Decision Making


Scientific decisions can be taken with the help of using management accounting techniques.
But, majority of the management accountant and top level executives prefer their past
experience and intuition in making business decisions. The reason is that an intuitive decision
making is very simple and easy.
6. Management Accounting is only a Tool
The management accountant is using the management accounting system as a tool to give
advice and facilitate the management for decision making. The actual decisions, their
implementation and follow up action are the prerogative of the management.

7. Continuity and Participation


The decisions are taken by the management. Their implementation is vested in the hands of
management accountant. The continuous efforts of management accountant and full
participation of all levels of management are necessary for successful operation of management
accounting system.

8. Broad Based Scope


The scope of management accounting is very wide since it considers both monetary and non-
monetary transactions of the business organization. The limited knowledge and experience of
the management accountant can lead to prepare the data unreliable and undependable.

9. Costly Installation
The cost of installation of management accounting system is very high. Hence, a small business
organization can not bear the cost of such installation. Moreover, the utility of this system is
restricted only to big and complex organizations.

10. Resistance to Change


The installation of management accounting system brings some changes in the organizational
set up and accounting practice. The personnel concerned may resist such changes unless they
are getting confidence.

11. Evolutionary State


Management accounting is a recent development discipline. The utility of management
accounting is depend upon the intelligent interpretation of the data available for managerial use.
Hence, it is presumed that the management accounting stands in evolutionary stage.

12. Unquantifiable Variables


Management accounting seeks to interpret and evaluate an objective historical event on record
in terms of money. But, in practice, the business organization is facing many problems which
cannot be exposed

NEED OF COST ACCOUNTING:


1. To ascertain the cost per unit of the different products manufactured by a business concern;

2. To provide a correct analysis of cost both by process or operations and by different elements of
cost;

3. To disclose sources of wastage whether of material, time or expense or in the use of


machinery, equipment and tools and to prepare such reports which may be necessary to control
such wastage;

4. To provide requisite data and serve as a guide for fixing prices of products manufactured or
services rendered;

5. To ascertain the profitability of each of the products and advise management as to how these
profits can be maximised;

6. To exercise effective control if stocks of raw materials, work-in-progress, consumable stores


and finished goods in order to minimise the capital locked up in these stocks;

7. To reveal sources of economy by installing and implementing a system of cost control for
materials, labour and overheads;

8. To advise management on future expansion policies and proposed capital projects;


9. To present and interpret data for management planning, evaluation of performance and
control;

10. To help in the preparation of budgets and implementation of budgetary control;

11. To organise an effective information system so that different levels of management may get
the required information at the right time in right form for carrying out their individual
responsibilities in an efficient manner;

12. To guide management in the formulation and implementation of incentive bonus plans based
on productivity and cost savings;

13. To supply useful data to management for taking various financial decisions such as
introduction of new products, replacement of labour by machine etc.;

14. To help in supervising the working of punched card accounting or data processing through
computers;

15. To organise the internal audit system to ensure effective working of different departments;

16. . To organise cost reduction programmes with the help of different departmental managers;

17. To provide specialised services of cost audit in order to prevent the errors and frauds and to
facilitate prompt and reliable information to management; and

18. To find out costing profit or loss by identifying with revenues the costs of those products or
services by selling which the revenues have resulted.