Management accounting is a branch of accounting that has a vast scope and objectives. As the name suggests it is a function of accounting that serves the needs of management in a business. Management accountants perform many tasks that include cost accounting, financial accounting, cost-benefit analysis and producing information for decision making. Despite its wide scope and ubiquity, there are limitations of management accounting. These limitations of management accounting stem from the sources of data, wide scope, biases in decision making, management attitudes and an inability to quantify all variables that management has to deal with.
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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. With management accounting defined we can look at management accounting limitations.
Based On Financial And Cost Records
Management account produces information for decision making based on the financial and cost records within a business. The primary limitation of management accounting is that it depends on the accuracy of this information to provide accurate information for management. Inaccurate record-keeping systems will be detrimental to the accuracy of management accounting information. This is especially evident in businesses with volatile markets on both supply and demand sides.
Personal Bias
While management accounting does present some structure on the systems used, another limitation of management accounting is the existence of personal bias in the choice of systems to use. A management accountant or management itself may prefer a particular method even though the method may not be the most appropriate method use. In addition to this management accounting limitation, the systems are only as good as the management accountant or management itself.
Lack Of Knowledge And Understanding Of The Related Subjects
Lack of knowledge of related subjects is an important management accounting limitation. By no fault of their own, a management accountant may have little or no exposure to the industry in which a business operates. They will, therefore, be unaware of some of the hidden issues that must be considered in their management accounting setup.
Provides Only Data
Another limitation of management accounting is that it provides only data but cannot provide context on the data. Management accountants use the information they have at hand to determine a break-even point for example. While the information is useful it does not provide any context. Perhaps the break-even point should be lower by optimising fixed costs or adjusting pricing.
Preference For Intuitive Decision Making
Management accountants can only provide information for decision making, management still makes the decisions. This opens up the management accounting limitation of a preference for intuition in decision making. Even when presented with management accounting information that suggests otherwise management may still choose to go with intuition.
Management Accounting Is Only a Tool
Management accounting limitations also include the fact that it is only a tool. Management accounting can provide information for decision making but it cannot make the decision, management must. Even in make or buy decisions, management accounting is confined to providing decision support systems rather than pointing out clearly which decision should be taken. This is compounded by the fact that salient issues may mean a decision that seems appropriate may not be.
Continuity And Participation
A further management accounting limitation is its dependence on the continuous participation of management and the management accountant. The decisions pointed to by management accounting systems still need to implemented by management. This limitation of management accounting rears its ugly head where management accounting supports a decision that is contrary to the will of management.
Broad-Based Scope
Management accounting has a broad scope. The sheer scope is a limitation of management accounting because it requires the management accountant to possess a very broad understanding of business in general and the factors that specifically affect the business. For example, a management accountant in a retailer that also sells online may require a good understanding of the factors affecting eCommerce.
Costly Installation
Installing a solid management accounting system from scratch is costly in terms of time. Time is, of course, paid for so it’s understandable that many cite this as a limitation of management accounting. It is difficult to justify the cost where the benefits are not readily visible. Sometimes even when the benefits are visible the cost may still be deemed prohibitive.
Resistance To Change
In instances were a management accounting system is installed another evident limitation of management accounting may be management’s resistance to change. It is all very well and good to provide a new system and extol its benefits but management must be willing to change methods for the system to have a true impact.
Evolutionary State
Management accounting is not subject to regulation and is considered a somewhat new discipline. As such many believe it is a limitation of management accounting that it is subject to change in the way things are done unlike financial accounting which highly regulated and largely static only adjusting when it is so necessitated.
Unquantifiable Variables
Management accounting deals with processing data for decision making and this is largely done through calculation but not all variables that management has to deal with can easily be quantified. This acts as a limitation of management accounting as systems used cannot always give the right course of action or indication in a matter.
Management accounting, despite its virtues, has many limitations. These limitations of management accounting do not render it useless but they do pose vital questions on how useful management accounting can be to an organisation and also provide guidance on how to use it.