Definition of Management Accounting
Management accounting is also known as managerial accounting means to identify and provide financial information to the managers of the business organization. It only focuses on the internal management team to measure and analyze the information in order to make decisions properly.
The finance administration shares invoice, financial balance statements, and financial information with the management team of the company which helps them to make short-term and long-term decisions accurately.
What makes it different from financial accounting is that managerial accounting is only used by the team inside the organization.
In this article, we would like to explain the nature and scope of management accounting. The main goal of management accounting is to achieve a successful business performance which requires many steps in the process.
Nature of Management Accounting
- Provides Information
- Cause and Effect Analysis
- Special Techniques and Concepts
- Decision Making
- No Fixed Rules
As we have mentioned above, management accounting means to provide information to different levels of management. It’s necessary to represent the information in a proper way to meet the managerial requirements.
The accounting department is responsible for collecting the data that is used to evaluate some policy decisions and make changes if it is necessary.
The management team is interested only in the data from position state merit and income statement, which will be helpful for them to make accurate decisions on several aspects of the business.
Cause and Effect Analysis
One of the main distinctive features of managerial accounting from financial accounting is that it reviews the cause and effect relationship, while the financial accounting only focuses on determining the profit and loss.
Managerial accounting explores the reasons behind loss and profit and analyzes their effect. For example, profits are compared to current assets, sales, share capital, and so on. It gives the opportunity to the management team to make appropriate conclusions.
Special Techniques and Concepts
Management accounting utilizes special techniques and concepts in order to make accounting information more useful and functional for the management team.
These techniques include standard costing, marginal costing, financial planning and analyses, budgetary control, cash flow, and so on.
Generally, these techniques are considered to be very effective in representing the data and takin control over business operations.
We have already highlighted, that the main goal of management accounting is to provide the information to the management team in order to facilitate the decision-making process for them.
The managers carefully study the historical data in order to see its impact and make some predictions for the future. They are able to develop some alternative plans and choose the most advantageous course of action for the company.
It’s always extremely difficult for the managers to make decisions and management accounting made it a much easier process for them.
Managerial accounting is very useful in determining the objectives and forming plans for the future. It’s done based on analyzing the historical information and comparing it to the current situation.
The managers get the appropriate idea about the performance of several departments and they make some necessary changes if there are any deviations of actuals when they evaluate the past results.
This can be achieved by the above-mentioned special techniques such as budgetary control and standard costing. As a result, the managers are able to establish the objectives and improve their overall performance.
No Fixed Rules
Although financial accounting has various established rules and conventions in providing financial accounts there are no such norms for managerial accounting. The techniques and tools are the same for both of them, but how you use those techniques depends on the concern and situation.
The management team should be intelligent and experience enough to analyze the provided data and decide which technique should be utilized in a certain situation.
Every concern requires different actions and it should be selected carefully on how to present the information.
If the management accountant has enough knowledge and experience it should be easy to choose the right approach and technique for a certain concern in order to meet its requirements.
Scope of Management Accounting
- Enhance Efficiency
- Provides Data Not Decisions
- Financial Accounting
- Forecasting and Budgeting
- Cost Accounting
- Internal Audit
- Financial Management
The main objective of managerial accounting is to improve the overall efficiency of the business organization. The management team has the possibility to assess the current performance level of different departments and divisions by comparing it to old information.
They manage to review old deviations and make some corrections if there are negative ones. All the positive and negative deviations are analyzed properly which helps to form the future targets effectively.
This whole process ensures the team to keep the staff cost-conscious and improves overall efficiency.
Provides Data Not Decisions
Management accounting is responsible for providing the data and financial information to the management team and not decisions. It is only capable of informing and guiding the team to make decisions and form future plans.
The rest depends on the intelligence and experience of the management to properly utilize the provided information. The purpose of managerial accounting is to predict and forecast the future and plan the actions accordingly.
When the objectives are carried out the management team is able to make accurate decisions for the future.
Financial accounting is the process of collecting financial statements regularly and its main goal is to determine the profit and loss of the company. It records the business transactions immediately that are related to different subjects.
This is a basic process that is extremely important for every business organization to achieve successful business operations and future forecasting.
Forecasting and Budgeting
As we have mentioned above, some of the special techniques of management accounting are budgetary control and forecasting.
These are necessary techniques for every management accountant that helps to control the business activities precisely by comparing the old and current budgeted figures, analyzing and correcting any negative deviations, and taking important actions to avoid the mistakes in the future.
Management accounting provides different techniques of costing such as standard costing, marginal costing, differential cost analysis, and so on. The management team uses these techniques to analyze the data thoroughly and make high-quality decisions.
The management accountant is responsible for reporting to the management on the different aspects of the operation. Generally, there are two types of reporting – interim and external reporting.
Interim reporting means to provide the information to the internal management team of the company, while the external reporting is to inform outside parties such as banks, shareholders, and some institutions about the current financial situation of the organization.
The management accountant might use some statistical tools such as charts, graphs, and index numbers while presenting the information in order to make it more precise and concise.
The management accounting utilizes some internal control methods such as internal audit, office management, and so on.
The employee of the business organization who has tremendous knowledge in accounting conducts the internal audit and in order to make this process effective the management accounting system maintains all the relevant records.
The main goal of management accounting is to achieve successful financial management by using the proper tools. Every business owner wants a fair rate of return on investments and it is only possible by managing the finances precisely.
In this article, we have reviewed the nature and scope of management accounting. As you can see, it is a necessary process for every business organization in order to achieve successful financial management.
What makes it different from the financial accounting is that it only focuses on the internal part of the company and provides the financial information to the management team to make accurate decisions.