Q. What is meant by Management Accounting? Discuss its main tools and techniques.
Ans. MEANING OF MANAGEMENT ACCOUNTING: Management accounting is also known as Management-oriented Accounting, Management Accountancy, and Accounting for Management, etc. The term ‘Management Accounting’ represents a merger of two words ‘Management’ and ‘Accounting’. Management refers to the functions of planning, direction and control, etc. while ‘Accounting’ refers to record, compilation, analysis and presentation of various financial transactions. In this context that form or system of accounting may be called management accounting which provides all such accounting informations as are required by management for planning, direction and control of business activities.
DEFINITION OF MANAGEMENT ACCOUNTING:
1. “Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operations of an undertaking./ of the business.”
— Anglo-American Council on Productivity
2. “Management Accounting is concerned with the accounting information that is useful to management.”
— Robert N. Anthony
3. “Management Accounting is the term used to describe the accounting mehods, systems and techniques which, coupled with special knowledge and ability, assist management in its tasks of maximising profits or minimising losses.”
—J. Batty
4. “Management Accounting may be defined as the application of accounting techniques to the provisions of information designed to assist all levels of management in planning and controlling the activities of the firm.”
—John Sizer
5. “Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting.”
— The Institute of Chartered Accountants of England and Wales
Thus, when accounting information are collected, presented, analysed, interpreted and reported to help the management in taking various decisions, then it is known as Management Accounting. Management Accounting is the process of identification, measurement, presentation, analysis, interpretation and communication of accounting information that assists the management in planning, decision making and control to achieve the organizational objectives.
TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING: Some important tools and techniques are as follows;
1) Analysis of Financial Statements: Analysis of financial statements is a systematic process of critical evaluation of the financial information given in financial statements so that these informations may be understood properly. For the purpose of analysis individual items are studied, their relationship with other relevant figures is established, the data is sometimes re-arranged to have better understanding of the informa-tion with the help of various techniques or tools, such as (i) Comparative Financial Statement or Analysis, (ii) Common-size Statement or Analysis, (iii) Trend Analysis, (iv) Ratio Analysis, (v) Funds Flow Analysis and (vi) Cash Flow Analysis.
2) Cost Accounting Technique: Cost accounting and management accounting are closely related to each other. The data of historical costing available from cost records help in determination of costs of products, processes, job and operations and preparation of budgets.
3) Budgetary Control: It is a technique which uses budgets as a tool for planning and control. The budgets of all functional departments are prepared in advance, in which limits of expenditure and targets of functions are determined. The actual performance is recorded and compared with budgetary data and on this basis management can assess the performance of various departments and officers in the organisation.
4) Standard Costing: This costing occupies an unique place among the techniques of management accounting. Under this technique, standard cost of various elements of costs are determined in advance. Such determination is based on a systematic analysis of existing conditions. The actual costs are compared with standard costs. The variances, if any, are analysed, their reasons are ascertained and necessary corrective actions are taken.
5) Marginal Costing: Marginal cost is that cost which results in the form of changes in costs due to change in volume of production. Under marginal cost the total cost is divided into two parts— fixed cost and variable (marginal) cost. The management, on the basis of marginal costing, establishes relationship among cost, volume and profit and takes decisions in respect of various managerial problem, such as change in product mix, determination of optimum product mix, decision of make or buy, evaluation of sales promotion schemes, etc.
6) Decision Accounting: Decision-making is the core function of top management and for this purpose the technique of decision accounting is used in management accounting. Decision-making involves a choice of best possible option from various alternatives, viz., which model out of various models of machine should be purchased? Whether a particular item should be produced or purchased from the market? Whether a specific order received at a lower price should be accepted or not? Decision accounting considers financial implications of each alternative course of action and enables management to select the best course of action. Marginal Costing and Differential Costing are important components of decision accounting.
7) Revaluation Accounting: Revaluation accounting is used to denote the methods employed for overcoming the problems connected with fixed asset replacement in a period of rising prices. It is, therefore, also known as 'Replacement Accounting'. Under this method, fixed assets are shown at current prices also in addition to their historical cost so as financial statements may present true and fair view of the concern. The preservation of capital in the business is the main object of revaluation accounting and for this purpose the profits are calculated in such a way that capital is preserved in real terms.
8) Financial Planning: Financial planning involves management of finance according to objectives of the business concerned. This tool is applied to determine following financial policies— (i) amount of capitalisation, (ii) sources of capital, (iii) ratio of debt and equity, (iv) limits of short-term and long-term borrowings, (v) disposal of profit and retained earnings.
9) Control Accounting: Control accounting is not a separate accounting system but all those devices of accounting, which are used from the view of control, are collectively called as control accounting. In this context, standard costing and budgetary control both are the parts of control accounting. We can also include internal check, internal audit, statutory audit, responsibility accounting, etc. as a device of control accounting.
10. Managerial Reporting: It is an important tool of management accounting in which reporting is prepared from time to time on the basis of analysis of various informations and thereafter they are communicated to different levels of management. It may be mentioned that timely reporting and effective communication is the essence of management accounting.
11. Management Information System (MIS): With the development of electronic devices for recording, classifying and communicating data MIS has become an important technique in management accounting
12. Quantitative Techniques: Now-a-days many such quantitative techniques are also being used which are based on mathematics and statistics. Some of such techniques are: (i) Operational Research, (ii) Linear Programming, (ii) Games Theory, (iv) Queing Theory, (v) Network Analysis, (vi) Simulation Theory.
What is meant by Management Accounting? Discuss its main tools and techniques.
Management Accounting means accounting designed for the management, i.e. accounting which provides necessary information to the management for discharging its functions. It is basically concerned with presentation of accounting information in a manner which can assist the management in the creation of policy and in the day-to-day operations of an undertaking. Its aim primarily is to assist the management in performing its functions effectively.
