Friday, August 15, 2014

Management Accounting - Functions, Advantages and Limitations

Functions of Management Accounting

Main objective of management accounting is to help the management in performing its functions efficiently. The major functions of management are planning, organizing, directing and controlling. Management accounting helps the management in performing these functions effectively. Management accounting helps the management is two ways:

I. Providing necessary accounting information to management
II. Helps in various activities and tasks performed by the management.

I. Providing necessary accounting information to management:
(a) Measuring: For helping the management in measuring the work efficiency in different areas it is done on the past and present incidents with context to the future. In standard costing and budgetary any control, standard and actual performance is compared to find out efficiency.

(b) Recording: In management accounting both the quantitative and qualitative types of data are included and this accounting is done on the basis of assumptions and even those items which cannot be expressed financially are included in management accounting.

(c) Analysis: The work of management accounting is to collect and analyze the fact related to the managerial problems and then present them in clear and simple way.

(d) Reporting: For the use of management various reports are prepared. Generally two types of reports are prepared:-
a. Regular Reports
b. Special Reports.


II. Helping in Managerial works and Activities:
The main functions of management are planning, organizing, staffing, directing and controlling. Management accounting provides information to the various levels of managers to fulfill the above mentioned responsibilities properly and effectively. It is helpful in various management functions as under:-

(a) Planning: Through management accounting forecasts regarding the sales, purchases, production etc. can be obtained, which helps in making justifiable plans. The tools of management accounting like standard costing, cost -volume-profit analysis etc. are of great managerial costing, help in planning.

(b) Organizing: In management accounting whole organization is divided into various departments, on the basis of work or production, and then detailed information is prepared to simplify the thing. The budgetary control and establishing cost centre techniques of management accounting helps which result in efficient management.

(c) Staffing: Merit rating and job evaluation are two important functions to be performed for staffing. Generally only those employs are useful for the organization, whose value of work done by them is more than the value paid to them. Thus by doing cost-benefit analysis management accounting is useful in staffing functions.

(d) Directing: For proper directing, the essentials are co-ordination, leadership, communications and motivation. In all these tasks management accounting is of great help. By analyzing the financial and non financial motivational factors, management accounting can be an asset to find out the best motivational factor.

(e) Co-ordination: The targets of different departments are communicated to them and their performance is reported to the management from time to time. This continual reporting helps the management in coordinating various activities to improve the overall performance.

Advantages and Limitations of Management Accounting
The advantages of management accounting are summarized below:

a)      Helps in Decision Making: Management accounting helps in decision making such as pricing, make or buy, acceptance of additional orders, selection of suitable product mix etc. These important decisions are taken with the help of marginal costing technique.

b)      Helps in Planning: Planning includes profit planning, preparation of budgets, programmes of capital investment and financing. Management accounting assists in planning through budgetary control, capital budgeting and cost-volume-profit analysis.

c)       Helps in Organizing: Management accounting uses various tools and techniques like budgeting, responsibility accounting and standard costing. A sound organizational structure is developed to facilitate the use of these techniques.

d)      Facilitates Communication: Management is provided with up-to-date information through periodical reports. These reports assist the management in the evaluation of performance and control.

e)      Helps in Co-coordinating: The functional budgets (purchase budget, sales budget, and overhead budget etc.) are integrated into one known as master budget. This facilitates clear definition of department goals and coordination of their activities.

f)       Evaluation and Control of Performance: Management accounting is a convenient tool for evaluation of performance. With the help of ratios and variance analysis, the efficiency of departments can be measured which assists management in the location of weak spots and in taking corrective actions.

g)      Interpretation of Financial Information: Management accounting presents information in a simple and purposeful manner. This facilitates quick decision making.
h)      Economic Appraisal: Management accounting includes appraisal of social and economic forces and government policies. This appraisal helps the management in assessing their impact on the business.

Management accounting suffers from the following limitations:
a)      Based on Accounting Information: Management accounting derives information from past financial accounting and cost accounting records. If the past records are not reliable, it will affect the effectiveness of management accounting.

b)      Wide scope: Management accounting has a very wide scope incorporating many disciplines. This results in inaccuracy and other practical difficulties.

c)       Costly: The installation of management accounting system requires a large organization. Hence, it is very costly and only big concerns can afford to adopt it.

d)      Evolutionary Stage: Management accounting is still in its initial stages. Tools and techniques are not fully developed. This creates doubts about the utility of management accounting.

e)      Opposition to Change: Introduction of management accounting system requires a number of changes in the organization structure, rules and regulations. This rearrangement is not generally liked by the people involved.

f)       Intuitive Decisions: Management accounting helps in scientific decision making. Yet, because of simplicity and personal factors the management has a tendency to arrive at decisions by intuition.


g)      Not an Alternative to Management: Management accounting will not replace the management and administration. It is a tool of the management. Decisions are of the management and not of the management accountant.

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