Management Accounting - Functions & Nature/Characteristics

Management Accounting

Meaning:

Management Accounting is the mechanism for presentation of accounting information in order to formulate the policies to be adopted by the management and assist its day-to-day activities.

It can be said that, Management Accounting helps the management to perform all its functions including planning, organising, staffing, directing and controlling.

Management Accounting presents to the management the accounting information in the form of processed data which it collects from Financial Accounting, Cost Accounting including Statistics so that it will be very helpful on the part of the management to take proper decisions in a scientific manner as and when necessary.

Functions/ Objectives of Management Accounting:

The primary objective of Management Accounting is to present the accounting information to the management.

1. To assist Planning & Forecasting:

Management Accounting assists the management in planning as well as to formulate policies by making forecasts about the production, the selling, the inflow and outflow of cash etc., i.e., in planning a very wide range of activities of the business.

Not only that, it may also forecast how much may be needed for alternative courses of action or the expected rate of return therefrom and, at the same time, decide upon the programme of activities to be undertaken.

2. To assist Organisation:

By preparing budgets and ascertaining specific cost centre, it delivers the resources to each centre and delegates the respective responsibilities to ensure their proper utilisation. As a result, an inter-relationship grows among different parts of the firm.

3. To Motivate:

By setting goals, planning the best and economical courses of action and also by measuring the performances of the employees, it tries to increase their efficiency and, ultimately, motivate the organisation as a whole.

4. To Coordinate the activities:

It helps the management in coordinating the activities of the enterprise, firstly, by preparing the functional budgets, then coordinating the whole activity by integrating all functional budgets into one which goes by the name of ‘Master Budget’. In this way it helps the management by coordinating the different parts of the enterprise. Besides, overall coordination is not at all possible without ‘Budgetary Control’.

5. To Control the Variances:

The actual work done can be compared with ‘Standards’ to enable the management to control the performances effectively.

6. To Communicate:

It helps the management in communicating the financial information about the enterprise. For taking decisions as well as for evaluating business performances, management needs information. Now, this information is available with the help of reports and statements which form an integral part of Management Accounting.

7. To Interpret Financial Information:

It is not possible for all concerned to understand clearly the different treatments of accounting until and unless the users have acquired a sufficient knowledge about the subject since accounting is a highly technical subject.

And, for the same reason, management may not understand the implications of the accounting information in its raw form. But this problem does not arise in the case of Management Accounting as it presents the required information in an intelligible and non-technical way. This leads the management to interpret financial data, evaluate alternative courses of action and to take correct decisions.

Miscellaneous Objectives:

(a) To provide necessary help while evaluating the efficiency and effectiveness of different policies;

(b) To provide necessary help in locating uneconomic as well as inefficient place of business activities;

(c) To provide necessary help in solving business problems, e.g., to expand the existing business unit or not, etc.

Nature or Characteristics of Management Accounting:

The very purpose of Management Accounting is to serve the needs of the management by presenting relevant information so that the business may be conducted in a better way. Here, information—both economic and financial—is collected from internal as well as external sources.

The information so collected is analysed and processed accordingly in the prescribed manner. The results thus obtained are presented to the management for taking decisions. It may also be called an information system since it is concerned with the getting and giving of information.

1 • Management Accounting deals with the forecasts about the future. It helps the management to take decisions as well as to draw plans for future courses of action.

2 • It adopts a selective technique. Its technique is not in the nature of collecting and then sorting the data.

3 • It is analytical, i.e., it explains the reason why the profit or loss increases or decreases in comparison with the past periods. Besides, it tries to examine and analyse the effect of different variables on profit and profitability and thereby helps the management to adopt future plans of action.

4 • It does not provide information in a prescribed format like Financial Accounting. It provides information to the management in such a way that it may be more useful to them.

5 • It does not take any decision but helps the management in taking decision by supplying necessary data and information, i.e., it can recommend but cannot prescribe.