what is management accounting and its functions Leave a comment

It is the study of the differences between the standard, budgeted or planned figures and the actual figures. This site uses Akismet to reduce spam. But, all these decisions primarily depend on the quality of information provided to the management. This management accounting function gives management information in respect of nature of costs and impact of such costs on the profits of the business entity. Along with the accounting information, management takes into consideration or weighs other factors concerning actual execution. These primarily include trend analysis, common size statement analysis, comparative statement analysis, ratio analysis etc. It is rather highly personalized service. Further, management accounting helps the management in formulating plans and policies, analyse the accounting information, make decisions, control overall performance etc. This has meant increased uncertainty for the business enterprises and, therefore, made quality decision making more important than ever. It has indeed a ‘macro-economic approach’.

More reasonable the financial information provided to the management, the better the decisions undertaken by the management. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Another important function of management accounting includes Financial Statement Analysis. Objectives or functions of Management Accounting. It is nothing but a point where the volume of sales are such that they cover the fixed cost of the business entity. Fixed costs are the costs that do not change with the changing output.

However, like the other functions of management, measurement is critical to improving business performance. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities”, Advantages and Disadvantages of Accounting Standards, Cost Accounting - Definition, Objectives, Scope and Limitations, Financial Accounting and Management Accounting - Similarities and Differences, Importance of Financial Information to Stakeholders, Financial Accounting vs Management Accounting. Variance analysis is another important function of management accounting. Intuit and QuickBooks are registered trademarks of Intuit Inc. Management needs to examine and take investment decisions with regards to the acquisition of fixed assets. This information is then aggregated into a report to management. Since these activities affect the health of the business, it is necessary to record, measure, evaluate and report them to the management. Determining the amount of profit or cash flow that a business generates from a specific product, product line, customer, store, or region. 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It focuses on potential opportunities rather than opportunities lost. Management accounting helps in the performance of each of these functions in the following ways: Your email address will not be published. Constraint analysis. Further, these decisions give benefits to the business entity over a long period of time. Given the broad range of investigative and analysis activities noted above, we could state that managerial accountants act in an advisory role, to warn managers of impending issues and to direct their attention toward possibly profitable opportunities. It is with the help of statistics that this information is presented to the management in a form that can be assimilated. This is where management accounting plays its role. Information may be abridged and therefore incomplete. Management accounting involves forecasting in respect of sales, expenses, costs and the financial needs of the business. This is done to understand the overall performance of the business entity and take requisite control measures to fix the problems. It needs a thorough knowledge of the situation and the circumstances in which the firm operates. The task of management accounting involves furnishing accounting information to the management, which may base its decisions on it. It makes use of the historical information to understand trends and make informed judgments. The nature of data, the form of presentation and its duration are mainly determined by managerial needs. As it draws its raw material from several other disciplines like costing, statistics, mathematics, financial accounting, etc., it can be called an interdisciplinary subject, the scope of which is not clearly demarcated. Thus, once the management decides upon the company objectives, it needs to define a set of activities necessary to be implemented in order to achieve those objectives. However, it assists the management and does not replace it. An accounting system is maintained in an organization which should cover standards of costs, sales forecast, production planning, profit planning, allocation of resources, capital budgeting and short term and long term financial planning. Finally, it can be said that the management accounting serves as a management information system and so enables the management to manage better. Thus, the management of a business enterprise needs to undertake several key decisions for smooth running of the day to day operations. It is through management accounting that the management gets the tools for an analysis of its administrative action and can lay suitable stress on the possible alternatives in terms of costs, prices and profits, etc. This is to enable the management to analyse how its decisions are affecting the overall position of the enterprise and take requisite actions accordingly. Thus, capital budgeting is a process that involves evaluating the capital expenditures and their underlying returns so that investment in most profitable projects can be made. Thus, in contrast to financial and cost accounting, management accounting is termed as internal accounting. This provides useful economic data to the management that further helps in decision making process. There are various techniques used by the management to undertake financial statement analysis.

Thus, management accounting performs a number of functions to meet its objectives.

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Therefore, variable costs vary with the changing output. Reviewing the trend line of various costs incurred to see if there are any unusual variances from the long-term pattern, and reporting the reasons for these changes to management. That part of accounting system which facilitates the management process of decision-making is called management accounting. The subject of management accounting also encompasses the subject of law, knowledge  of which is necessary to find out if the management action is ultra-vires or not. The main objective of management accounting is to help the management to take quality decision for controlling the business activities effectively. The basic function of management accounting is to assist the management in performing its functions effectively. ‘Accounting’ forms an important part of any business organization regardless of its nature, size or structure. Since management accounting is managerially oriented, its data is selective in nature.

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