MANAGEMENT ACCOUNTING NATURE AND SCOPE
In this post you will study management accounting nature and scope. Study and make the proper notes grabbing full understanding of this topic.
Management Accounting is the Identification, Measurement, Accumulation, Analyses, Preparation, Interpretation and Communication of information that assists managers in fulfilling organizational objectives. Management accounting is all about supplying right information to right people at the right time.
That part of accounting system which facilitates the management process is called management accounting. The focus of management accounting is towards internal use. It is basically the presentation of accounting information in such a way as to assist the management in certain of policy and day to day operation of an undertaking
ACCORDING TO AAA (AMERICAN ACCOUNTING ASSOCIATION):
“Management accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of any entity to assist management in establishing plans for reasonable economic objectives in the making of rational decisions with a view towards these objectives”.
ACCORDING TO J. BATTY
“Management accounting is the term used to describe the accounting methods, system and techniques which, coupled with special knowledge and ability, assist management in its task of maximizing profits or minimizing losses”.
ACCORDING TO ICMA, LONDON
“Management accounting is the application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formation of polices and in the planning and control of the operations of the undertaking”.
ACCORDING TO R L SMITH
“Management accounting is a more intimate merger of the two older professions of management and accounting wherein the informational needs of the manager determine the accounting means for their satisfaction”.
ACCORDING TO ROBERT N ANTHONY
“Management accounting is concerned with accounting information which is useful to management”.
NATURE OR CHARACTERISTICS
The basic objective of management accounting is to serve the needs of management. Management accounting is concerned with preparation, analysis and interpretation and communication of accounting in order to assist the managers in fulfilling organizational goals and objectives. It is concerned with presentation of accounting information which it to be used both by internal and external users according to their interest.
It is a service Function: Management Accounting is basically concerned with providing information to management gathered from financial records, for taking decisions, and satisfying the informational needs of the management.
It makes use of Historical Data: Management accounting system makes use of historic data provided by financial accounts for planning and decision making. It analyses and interpretate the information which is already recorded. So may if is a futuristic approach but it heavily depends upon the accounting information and accounting data recorded in the books
Management accounting is having Futuristic Approach: It highlights on future. The tools and techniques of management accounting like standard costing, budgetary control etc. all emphasis upon the futuristic nature of management accounting. It is concerned with planning and controlling and providing assistance to management for decision making in future.
Examines the Cause and Effect Relationship: It examines the causative relationship between different variables-It explains the reasons why the profit and loss increases or decreases in comparison with past periods. Financial accounting no doubt present the business operation but do not analyse Factors responsible for such results. It examines the effect of the different variables on the profitability of the concern.
No Prescribed Format: Like financial accounting, management accounting does not follow set rules and format. It is basically concerned with the problems of choice and decision making. In this process of choice and decision making it is quite essential that some modifications are brought in traditions, conventions and principles of accounting. The information is supplied to the users according to the need and manner easily understood by them.
Concerned with Analysis and Interpretation of Data: Financial accounting does not analyse the causes of low profitability or financial position but management accounting is concerned with analysis and interpretation of data to make it more meaningful and useful for management in the process of planning and decision making.
Management Accounting is Management Oriented: Management accounting is highly sensitive to management needs. It modifies analyses and interpretate the accounting data to satisfy the internal needs of the management.
Management Accounting Narrates Events both Monetary and Non-Monetary: Management Accounting takes into consideration both financial and economic variables. Economic measures are not always expressed in monetary terms. It not only considered the monetary transactions but non-monetary transactions are also collected and analysed for taking managerial decisions.
Not Bound by Accounting Rules: As in financial accounting the books are prepared inconformity with generally accepted accounting principles and it is meant for both internal as well as external users. But management accounting is used only internally therefore, it is not binding for management accounting to follow the set rules of general accounting system.
It assists in Decision Making but is not decision in itself: The information provided by management accounting assist the managers at different level but it is on the prudence of the management to use the information provided by management accounting.
Management accounting is both science as well as art: The nature of management accounting is always concerned with the collection, analysis and communication of accounting information. Data are always found by collection, processing and objective analysis of facts quantified in figure. To this extent, management accounting may be regarded as a science. But it also involves human impulses and human judgement. As such some sort of subjective judgement is quite often found in many decisions. The personal judgement of management accountant may greatly influence such decisions. As such, management accounting is also an art in nature.
SCOPE OF MANAGEMENT ACCOUNTING
Management Accounting is the process of measuring and reporting information about the economic activity within an organisation, for use by the managers in planning, performance evaluation and operational control. Management accounting information is financial in nature although increasingly it collects and reports the financial information as well.
Management accounting not only covers financial data but extend its boundaries to costing and requires the use of many disciplines and it is associated with economics, mathematics, finance, statistic and business laws etc. Only after getting a deep understanding of all these subjects, proper analysis by the management accountant can be made. The scope or areas of management accounting extends to following areas:
Financial Accounting: Financial accounting is a traditional system in accounting and records the transactions in a systematic manner and draw conclusions from the recorded data. It is concerned with Income Statement and position statement; income statement predicts the net results in the form of profit and loss and position statement show the assets and abilities on a specified date.
The accounting information contained in financial accounting is used by management for planning and decision making. Management accounting only contains tools and techniques to analyse and interpretate the data provided by financial accounting. Thus, without efficient financial accounting system management accounting becomes inoperative.
Cost Accounting: Cost accounting is considered to be back bone of management accounting. Cost accounting is a process of recording and analysis the expenditure relating to products and the services, and insuring management control over the same. It includes the determination of cost of every order, product, contract, etc. Management accounting makes use of cost data in general and in particular because any to activity of organization can be described by in cost.
The various tools of costing viz. marginal costing, standard costing, inventory controls operating costing, etc. are used by management to control the le operations of the enterprise. Cost accounting is indistinguishable from management accounting as the major purpose of providing information for formulating plans and policies are common to both.
Budgetary Control: Budget means drawing a systematic plan for utilization of resource of enterprise and budgetary control is a technique of comparing the actuals with budgeted figures, Ascertainment of variances and analysing their causes and taking corrective measures for their prevention in future. Budgetary control is considered to be important tool of management accounting. It helps in coordination and cooperation of various activities to achieve a common goal.
Interpretation and Analysis of Financial Statements: The primary responsibility of management accounting is to analyse and interpretate the data and to help the management decision making Management can gain meaningful insight and conclusions about the firm with the help of analysis and interpretation contained in financial statement. Various techniques have been developed which can be used for the proper interpretation and analysis of financial statement.
Inflation Accounting: Price level accounting attempts to identify the effects of rapidly changing prices on the financial results of the business. It may be a rational attempt to present the financial statements on historical cost basis and attract the attention accountants and professionals.
This situation demands the adjustment of historical accounting in the light of price level changes which is known as inflation accounting. Inflation accounting is an accounting technique which aims to record business transactions at current values and to neutralize the impact of changes in the price on the business transaction.
Reporting: It helps to communicate desired financial information through reports to the users of financial statements Management accounting is concerned with reporting function. To keep the management well informed about the operations of the business it is the responsibility of management accountant to present the information in form of clear reports. The reports are prepared monthly, quarterly, yearly or half yearly basis and presented in a systematic manner to management for analysis and decision making.
Tax Accounting: Tax is the charge on the profitability of the concern and the computation of tax is in accordance with income tax laws and rules. Tax planning is important to take the benefit of all deduction, exemptions and rebates, so that tax liability reduces to minimum.
Tax accounting and tax planning plays an important role in the profitability of the concern. The management accountant should have the complete knowledge of business taxation. The filing of tax return and the payment of tax shall be made in due time and this responsibility has to be discharged by management accountant.
Capital Budgeting: The term capital budgeting describes the long-term planning and decisions about capital investment and expansion. Every company need to describe where and how to spend its money on major projects that will affect company financial results for years to come.
Management accounting helps the management on the planning and controlling decision for programs or projects which require huge investment and effect financial results over a period longer than next year.
Inventory Control: Proper inventory control is of utmost important to meet the needs of production and sales with minimum cost. This responsibility has to be discharged by management account. The techniques to control the inventory are given by cost accounting.
Management Information System: In traditional times, the management accounting aims at presenting useful information manually, but with advancement in technology now information is supplied to the management with the help of computers. The information can be preserved in a mechanical way and supplied by the management accountant. So, now a days MIS plays a vital role in supplying the information in a simplest manner to the users of such information
Operational Research: Operational research is one of the quantitative aids to decision making. Management accountant makes the use of this technique for selecting best possible alternative. In fact, management decision making is simply the application of operational research technique. Operational research techniques attempt to resolve the conflict of various sections of organization and seeks the optimal solution which may not be acceptable to one department but is in the interest of organization as a whole.
Internal Audit: Management accounting makes the use of internal audit for performance appraisal of companies, various departments, internal audit makes ensure that operations of the business are carried on smoothly, efficiently and economically.
Management accounting makes the use of information supplied by internal audit department for effective management control. The management accountant must possess the knowledge of internal audit techniques to fix the responsibilities and measure the results.
Office Services: In order to discharge the responsibility of planning, controlling the management accountant has to use the office information. So, he must be well equipped to deal with filing, copying and duplicating systems and able to evaluate the utility of different office procedures and machines.