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.