Tools and
Techniques of Management Accounting
Management accounting supplies information to the management so that
management may be able to discharge all its functions,i.e., planning,
organisation, staffing, direction and control sincerely and faithfully. For
doing this, management accounting uses the following tools and techniques:
1)
Financial planning: financial
planning is the act of deciding in advace about the financial activities
necessary for the concern to achive its primary objectives. It includes
determining both long and short term financial objectives of the enterprise,
formulating financial policies and developing the financial procedure to
achieve the objectives. Financial policies may relate to the determination of
the amount of capital required, sources of funds, act as a guide in the use of
debt and equity capital and determination of the optimum level of investment in
various assets.
2)
Analysis of financial statements: Analysis of financial statements is the main tool of
management accounting. It is the process of identifying the financial
strength and weakness of a firm from the available accounting and financial
statements. The analysis is done by properly establishing the relationship
between the items of balance sheet and profit and loss account. The techniques
of such analysis are comparative financial statements, trend analysis, funds flow
statement and ratio analysis. This analysis results in preparation of
information which will help the business executives, investors and creditors.
3)
Marginal costing: It classifies cost into fixed
and variable and only variable costs are charged to product. This type of
costing is useful in taking important decisions such as price decisions in time
of competition make or buy decisions, selecting profitable product mix etc.
4) Budgetory
control: This is that tool of management
accounting in which budgets are prepared for planning and control of fund. All
budgets are made with past historical accounting data and future expectations.
After this budgeted data is compared with actual recorded accounting data and
performance is calculated on the basis of deviation between actual and expected
performance.
5)
Standard costing: Standard cot is predetermined
cost. The costs are determined in advance of production. Standard performance
is set in terms of costs. Actual costs are compared with the standards and
variations are found. Then, reasons for variations are investigated and
remedial actions are taken. This system enables control of costs and also
measurement of efficiency of operations.
6)
Historical cost accounting:
Historical cost accounting provides past data to the management relating to the
cost of each job, process and department so that comparison may be made with
the standard costs. Such comparison may be helpful to the management for cost
control and future planning.
7)
Funds flow statement: The management
accountant uses the techniques of funds flow statement in order to analyse the
changes in the financial condition of a business enterprise between two dates.
Fund flow statement is prepared to
show the significant financial
change which have occurred between the beginning and the end of a company’s
accounting period. One of the important use of
this statement is that it evaluates the firm' financing capacity. The analysis
of sources of funds reveals how the firm's financed its development projects in
the past i.e., from internal sources or from external sources. It also reveals
the rate of growth of the firm.
8)
Cash flow statement: Cash Flow
Statement is a summary of cash receipts and payments whereby reconciling the
opening cash balance with the closing cash including bank balances in done. ash
Flow statement is very helpful to the management. The management can make its
future financial policies and is in a position to know about surplus or deficit
of cash.
9) Financial
Policy: Financial policy is that tool of management accounting
which is needed to make good structure of capital mix i.e. proportion of share
capital and loans in capital structure. Financial and operating leverages are
also its sub-tools.
10)
Working Capital Management: With
this tool of management accounting, short term assets and short term
liabilities are managed. All cash management, debtor management and inventory
management will include in working capital management. Working capital cycle
can be calculated to know the firm's ability to convert its resources into
cash. If there is low time for conversion of raw material into sales and then
cash from debtor, it is good indication.
11)
Revaluation accounting: The
management accountant through this technique asures the maintenance and
preservation of the capital of the enterprise. Its brings into account the
impact of changes in the prices of the preparation of financial statements.
12)
Statistical and graphical techniques:
The management accountant uses various statistical and graphical techniques in
order to make the information more meaningful.