Management accounting looks a very small discipline that is not important from the outside looking in. However to those within the organisation such as management and decision makers management account provides key information on business operations and is in some ways the most important discipline in the business from an accounting perspective.
Table Of Contents
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. While financial accounting is the most important accounting branch to investors and external stakeholders, management accounting is the most important branch for internal purposes. As we can see it has a very broad scope, let us look at the elements in the management accounting scope.
For management accounting to reach its major objective of assisting in coordinating and controlling the resources of the organisation, it requires a robust system of financial accounting to record, summarise and analyse the transaction data of a business. Therefore financial accounting is within the management accounting scope. A good financial accounting system is prerequisite for a good management accounting system.
Costing is a branch of accounting for current, standard and prospective costs. It involves the analysis and communication of cost data at all levels of management with the organisation. It is the process and technique of ascertaining cost. Planning, decision-making, and control are the basic managerial functions. The cost accounting system provides the necessary tools such as standard costing, budgetary control, inventory control and marginal costing for carrying out such functions effectively and efficiently. Cost accounting falls within management accounting scope as cost is one of the most important factors that management of an organisation must keep an eye on.
Budgeting and Forecasting
Budgeting means expressing the plans, policies, and goals of the enterprise for a definite period in the future. Creation and consolidation of budgets assist management personnel in translating operating plans into financial budgets. Management accounting scope includes budgeting and forecasting. Forecasting, on the other hand, is a prediction of what is expected to happen in a given set of circumstances. Targets are set for different departments and responsibility is fixed for achieving these targets. Forecasting is also within management accounting scope. Management accounting among many other objectives provides information for management decision making. Budgeting and forecasting are a big part of the task of management accounting as organisation benchmarks and performance are measured from information contained in budgets.
Data processing is also within management accounting scope as a large part of the job of management accountants is to provide reports and projections to management. As pointed out before management accounting provides information for decision. That entails the interpretation, manipulation, processing and analysing of financial data. The management accounting scope must include data processing for this objective of management accounting to be achieved. The break-even analysis processes cost and selling price data to arrive at a quantity of output that signals the start of profitability for a business. Variance analysis analyses planned versus actual performance to reveal the causes for variances. The cost-Benefit analysis determines the profitability of special orders or provides management with ranges for profitable and non-profitable special order prices.
Internal auditing also falls within the management accounting scope. Internal audit is an accounting branch that deals with the internal accounting policies of an organisation and assuring that transactions and events are recorded according to the procedure. This ensures that information contained in accounting records is reliable. Internal audit also looks at the procedures in an organisation designed to protect the business from loss due to fraud, theft or other misrepresentation by regularly assessing the validity and effectiveness of policies and safeguards put in place by management. This falls within the management accounting scope because management accounting regularly deals with both transaction data for business and setting up policies for loss prevention. Management accounting also is regularly involved in assessing the effectiveness of these policies by measuring performance in them and ascertaining the reasons behind variances as we pointed out earlier.
Management accounting scope also includes calculating taxes such as income tax and value-added or sales depending on government regulations in the territory. Management accountants will draw up trading profit statements and calculate, report and process payments on taxes based on the reports produced. Tax is a very important part of accounting as it is a very important source of revenue to the government. Penalties for incorrect tax calculations or under-reporting on tax liability are heavy and would better be avoided.
Financial data needs to be analysed and interpreted for it to make sense to management. Management has specific uses for information and some of their needs are not always addressed in the raw data or the accounts. Sometimes management accounting scope is broadened to include further analysis of financial data for it to be useful to management. This includes the production of bespoke analyses that focus on a particular element of the business. Businesses differ widely and management may require reports that analyse business financial data in a manner that is cognisant of the business’s idiosyncrasies.
Inventory control is one of the most important aspects under management accounting scope. Inventory represents a large investment for many businesses and this investment is made with the desire to be profitable. Inventory management techniques are designed to reduce inventory loss, optimise inventory management costs and maximise the efficiency with which inventory is availed where needed. Methods such as First in First Out inventory management in the businesses that have perishable inventories or inventories which have volatile prices is an example of management accounting at work in inventory control.
Management accounting is concerned with providing information. A part of this is presenting the information as well and this brings statistical methods into the scope of management accounting. The effective management accountant understands the information needs of the users of information produced and as such is also cognisant of the way they would like to see the data or how they understand the data. To show sales trends over the year a management accountant would use a time series whereas to display the market share a pie chart would be more appropriate. Knowing how to use different statistical methods and when to use them is well within management accounting scope.