Management accounting as a discipline has grown as business has grown as a practice. While the name may bring to mind budgets, cost benefit analysis and costing the objectives of management accounting go far beyond those disciplines.
Table Of Contents
- 1 What Is Management Accounting?
- 2 Assistance in Planning and Formulation of Future Policies
- 3 Interpretation of Financial Information
- 4 Performance Measurement and Management
- 5 Organizing
- 6 Solution of Strategic Business Problems
- 7 Coordinating Operations
- 8 Motivating Employees
- 9 Communicating Up-To-Date Information
- 10 Evaluating the Efficiency and Effectiveness of Policies
What Is Management Accounting?
Management accounting is a distinct accounting branch that provides information for management primarily for decision-making purposes. Management accounting is not a regulated accounting branch as it provides purely internal information however it is guided by accounting principles in the treatment of some items. Management accounting produces information for decision making and decision support systems for management such as break-even analysis, budgets and variance analysis.
Assistance in Planning and Formulation of Future Policies
Management accounting primarily provides information for decision making. Therefore the primary management accounting objective is assisting the planning and policy formulation process of a business by providing adequate quantitative information to either make choices between options or to provide a benchmark for performance or another metric. The break-even analysis is a good example of both of these functions. It can be used to find a minimal profitable output level or to evaluate a specific special order. Standards for production levels, materials usage labour hours and even overheads are established through management accounting.
Interpretation of Financial Information
After setting up plans and policies the next management accounting objective is to interpret financial information about business operations. This objective of management accounting has a very broad scope because it goes the way from simply calculating the profitability of operations to evaluating variances and the reasons for those variances. There are various management accounting tools and frameworks used to interpret financial information of a business. The most popular are decision support systems such as cost-benefit analysis. You will also find many others in use depending on the nature of the business. Management accountants are constantly reporting to management with projections and interpretation of financial information on past performance.
Performance Measurement and Management
Performance measurement and management as a management accounting objective is critical to all businesses. It is, of course, important to have a measure of performance just as it is to have techniques to manage that performance to improve it. This is done through systems such as budgeting which set performance benchmarks, management accounts which measure the performance and variance analysis which measures the differences in performance as well as investigating the sources of the differences and hence identifying ways to improve performance where necessary or maintain it in other cases.
One of the major functions of management is organising the various resources organisations have at their disposal in the pursuit of profit maximisation. Another management accounting objective we can identify is assisting with the organisation of resources. In management accounting, many frameworks deal with matters such as scarce resource allocation which are designed for the very purpose of helping with organising. Other areas that are important for organising purposes such as product mix decisions are also contained within the scope of management accounting calculations.
Solution of Strategic Business Problems
Management from time to time will deal with issues of business strategy. The decisions are sometimes extremely complicated and involve large investment outlays. A prominent management accounting objective is helping to solve these strategic business problems through decision support systems. The make or buy decision is a good example of this. The make or buy decision compares the benefits to a business of manufacturing a component or buying it from another manufacturer. It compares whether production facilities are better-used availing capacity to a component of the finished product or rather availing that capacity to the manufacture of the finished product. The decision is not as simple as the cost of the production of the component versus buying it as it may lead to a reduction in finished product capacity. All of this must be considered.
Another management function is coordinating within a business and this gives us another management accounting objective helping with coordinating business operations. Let us look at a hypothetical example to understand how this works. A business buys and resells an item, the supplier takes a week to deliver their orders however customers can order online and therefore stocks can run out within a day. If they hold too much inventory warehousing costs increase. If they hold too little they risk a stock out and losing customers. Management accounting techniques can help calculate an economic order quantity that helps to make the best of the situation while minimising the three costs at play here.
Another key management accounting objective is assisting the motivating of employees. Performance-related pay is becoming a common feature of many workplaces through various schemes. Schemes such as performance bonuses, incentives and performance-related pay systems all use management accounting information to track and reward performance. To have an effective performance-related pay system management requires a measure of work or performance, a benchmark against which to measure and a system to calculate the remuneration due. On top of all this a good system also contains feedback to the employees that is easy for them to understand and hence motivates their performance.
Communicating Up-To-Date Information
Management is an ongoing exercise. Depending on factors like how active the business is or the complexity involved in the business information may change very frequently in the business and underlying assumptions may completely change. To this end, another management accounting objective is to assist with providing up to date information. Some circumstances may require reporting on fortnightly, weekly, even daily. Management accounting is a flexible discipline and allows the management accountant to vary reporting cycles based on the needs of the organisation. This allows management to be nimble and react to information promptly.
Evaluating the Efficiency and Effectiveness of Policies
We already looked at the management accounting objective of motivating employees. In this case, we looked at how management accounting systems are used to measure the performance of employees. Another management accounting objective that is related to this with a wider scope is the evaluation of management policies. The variance analysis exercise is the best example of this management accounting objective in practice. In variance analysis management accounting goes through the income statement for business and compares it to the budget. In each case variances between planned and actual performance are analysed and a source or cause of the variance, favourable or unfavourable is determined.
As we can see based on the objectives discussed management accounting is discipline that provides management with various information . The information can be used for planning, controlling, recording performance or evaluating performance.