Management accounting can be viewed as ‘Management-oriented Accounting’. Basically it is the study of managerial aspect of financial accounting, "accounting in relation to management function". It shows how the accounting function can be re-oriented so as to fit it within the framework of management activity. The primary task of management accounting is, therefore, to redesign the entire accounting system so that it may serve the operational needs of the firm. If furnishes definite accounting information, past, present or future, which may be used as a basis for management action.
Managerial accounting is concerned with providing information to managers, that is, to those who are inside an organization and who direct and control its operations. Managerial accounting can be contrasted with financial accounting, which is concerned with providing information to stockholders, creditors and others who are outside an organization.
Managerial accounting is an activity that provides financial and nonfinancial information to an organization’s managers. Managers include, for example, employees in charge of a company’s divisions; the heads of marketing, information technology, and human resources; and top-level managers such as the chief executive officer (CEO) and chief financial officer (CFO). To do their jobs, such managers need more than just the general-purpose financial statements provided by the financial accounting system. This section explains the purpose of managerial accounting (also called management accounting) and compares it with financial accounting.
Management accounts will enable you to:
They should be used for the following:
Measurement of Performance: Managers have to compare the actual results of operations to budgeted figures to evaluate the performance of the business. They use managerial accounting techniques such as standard costing to evaluate the performance of specific departments. They then make necessary adjustments in those departments which are not performing well.
Managers use managerial accounting techniques to plan what to sell, how much to sell, what price is to be charged to reimburse the costs of production and also earn an optimal profit. Also they have to plan how to finance the operations and how to manage cash etc. This is very important to keep the business operations working smoothly. The capital budgeting and master budget are the two important topics in this area.
When managers have to decide whether or not to start a particular project, they need managerial accounting information to estimate the benefits of various opportunities and decide which one to choose. Mangers often use relevant costing techniques.
Management accountants can rely on causality and analogy as foundational principles as they are grounded in decision science – the laws of logic.
Causality principle — the relation between a managerial objective's quantitative output and the input quantities that must be, or must have been, consumed if the output is to be achieved.
Principle of Causality enables modeling the organization's costs based on the relationship between the inputs and outputs of the resources involved in the production of products and services it provides. Often this is straightforward when dealing with strong causal relationships (i.e. raw materials to make product A). However, where weaker causal relationships exist, costs need to be attributed according to the concept of attributability, which maintains the integrity of causality.
Analogy principle — the use of causal insights to infer past or future outcomes.
Principle of Analogy governs the user of management accounting information's ability to apply the knowledge or insights gained from the causal relationships modeled (e.g., in planning, control, what-if analysis) using inductive and deductive reasoning about past and future outcomes for continuous optimization efforts.
The following concepts serve as operational guidelines and modeling building blocks to the two main principles (causality and analogy) in developing a reflective cause & effect model and then using the information the model provides. These concepts are intended to cover a variety of assumptions that would make up a model, their characteristics, and relationships and to provide rational perspectives when modeling many managerial costing issues.
The first ten concepts support the Principle of Causality the modeling of Cause & Effect-based modeling principles, while the remaining four concepts are applicable to the Principle of Analogy and informational in nature and supports managers with decision making guidelines.
Though managerial accounting is helpful tool to the management as it provides information for planning, controlling and decision making, still its effectiveness is limited by a number of reasons. Some of the limitations of managerial accounting are as follows:
Managerial accounting is based on data and information provided by financial accounting and cost accounting. As such the correctness and effectiveness of managerial decisions will depend upon the quality of data provided by cost and financial accounts. So, effectiveness of management account is limited to the reliability of sources of information.
The use of managerial accounting requires the knowledge of number of related subjects. Deficiency in knowledge in related subjects like accounting principles, statistics, economics, principle of management etc. will limit the use of management accounting.
Decision taking based on managerial accounting that provide scientific analysis of various situations will be time consuming one. As such management may avoid systematic procedures for taking decision and arrive at decision using intuitive. And intuitive limit the usefulness of managerial accounting.
The tools and techniques of managerial accounting provide only information and not decisions. Decisions are to be taken by the management and implementation of decisions are also done by management.
Managerial accounting is still in a development stage and has not yet reached a final stage. The techniques and tools used by this system give varying and differing results. It is still named as internal accounting and/ or operational accounting.
The interpretation of financial information may differ from person to person depending upon the capability of the interpreter. Analysis and interpretation of data and information may be influenced by personal basis. As such, the objectivity of decision may be affected by personal prejudices and bias.
Changes in traditional accounting practices and organizational set up are required to install the managerial accounting system. It call for a rearrangement of the personnel and their activities and framing of new rules and regulations which generally may not be liked by the people involved.
Managerial accounting varies from company to company. Each managerial accounting system is also interacting with a unique business. Each business has its own estimates and traditions. Therefore, each managerial accounting system has its own flaws and challenges.