What is Management Accounting and Its Functions?

Management Accounting
Management Accounting

Management Accounting: It is important to make quality decisions for the organisation in this complex and competitive business environment.

To make better decision, the organisation need credible financial information.

This is where management accounting comes into the spotlight.

Management accounting is basically a branch of accounting that includes planning and controlling of business operation.

Management accounting helps the management in formulating policies by collecting information, processing it and making it useful for them.

So, let’s talk more about management accounting and its functions,

This Blog Post Is Divided Into Following Sections

Definition of Management Accounting

As mentioned in the Oxford dictionary, management accounting is a process of analyzing business operations and costs to prepare financial records in order to aid the decision-making process in achieving future business goals.

To put simply, it is the act of translating financial data into useful information for managers and key decision-makers.

Just as Management accounting, there is another branch of accounting that is Forensic accounting. To know the details visit our blog, what is forensic accounting.

So, What Is Management Accounting?

Management accounting provides up-to-date financial and non-financial data to the key decision-makers to effectively run the business.

By using this information, managers can perform all the business functions, including organising, planning, directing, controlling, etc.

While considering the needs of the business, management accountants analyse the events in and around the business, collects and estimates the data.

Management accountants take care of various facets of accounting, including capital budgeting, trends & forecasting, valuation, costing etc.

In short management, accounting helps senior management to find answers such as how much to spend on a product, what to produce, how much it will cost and what customers and products are profitable.

Let me drop an example here to give you a more specific idea,

For Instance,

Let’s suppose John is the management accountant in XYZ Company and deals with financial decisions that could make or break the company.

John advises the company from the perspective of its costs, cash standings and profit as well.

And when company leaders ask him to prepare a managerial accounting report, John must devise a quality report which helps leaders make educated decisions.

While compiling the financial report, John must choose the important variables related to their business operations.

These relate to two fields, online commerce and a new big client.

John decides to keep the report more relevant to his duties as a management accountant.

So, instead of including analysis of recently acquired client and the website, he focuses on how those operations make an impact on company finances and add only this information into the report.

Also, there is a somewhat out-of-the-ordinary term do exist in accounting which is called Creative accounting, visit our blog what is Creative accounting to know more.

Functions of Management Accounting

As mentioned above, business leaders make decisions by using the tools and techniques provided by management accounting.

Further, management accounting helps devise plans and policies, make decisions, control the business’s overall performance, and analyse the accounting information.

In order to meet these objectives, management accounting performs various functions which are listed below.

Planning

Proper planning can help to achieve the underlying objectives of an organisation.

That’s why, once the management formulates the business objectives, it needs to devise somewhat necessary activities to be implemented to achieve those objectives.

Management accounting is entwined in planning and forecasting so closely by providing reports and information for decision making.  

These reports and information provided by management accounting help business leaders estimate the effects of alternative actions to achieve the desired goals.

If your business determines a target profit for the coming year, it should also determine how to reach the targeted profit.

For Instance, the price of products or services business leaders wants to determine.

Here, management accountant will create a report which can help business leaders identify more profitable products and services, effects of alternative prices and selling efforts etc.

Management accountants also prepare budgeted financial statements as a part of the budgeting process.

Decision Making

Selecting among competitive alternatives in a business is Decision making.

To make the best decision for an organisation, statistical data and accounting information needs to be well furnished.

Management accounting applies analytical information regarding various alternatives to make it easy for management to make decisions. For example, variance analysis, comparing costs vs budget, computing burn rate, cashflow forecasts and projections, scenario building, what if analysis and list goes on.

Organising

In order to achieve business goals, it is important to have a proper organisational framework.

Not all businesses have the same organisational structure.

With the help of reports and information provided by management accounting, an organisation can regulate or adjust its operations and activities in the light of changing condition.

For Instance, a management accountant can provide  variable production costs and marginal sales reports to the manager for taking suitable steps related to production and sales.

Controlling

Controlling can include monitoring, measuring and correcting actual results to make sure that the goals and plans of a business are achieved.

The control and performance reports provided by management accounting can highlight actual and expected performances of a business.

These reports can be key components in making necessary corrective action to control operations.

If there comes out differences between budgeted and actual results, a manager will investigate to know what is going wrong and possibly.

Financial Statement Analysis

Financial statement analysis is another crucial function of management accounting.

It’s the process of evaluating financial data such as balance sheet, cash flow statement, income statement etc.

This helps in understanding the financial position and operating performance of an organisation.

It also helps in forecasting the future condition and performance of the organisation.

Communication

Management accounting is a crucial medium of communication.

Different levels of management need different types of information.

The top management requires information at long intervals, middle management requires it regularly, while lower management requires knowledge at short intervals but a detailed one.

Management accounting act as a communicating body within the organisation and with the outside world.

Coordinating

Management accounting provides various coordination tools such as budgeting, financial analysis, interpretation, financial reporting etc. to maximise profit and increase efficiency.

It helps the management by reconciling the cost and financial accounts, preparing budgets and setting the standard costs and analysing variances in costs to facilitate management by exception.

Management Accounting VS Financial Accounting

Management accountingFinancial Accounting
Management accounting plays a vital role in making effective decisions about the company.Financial accounting records, classifies, analyses, and summarises the financial affairs of a company.
Management accounting helps business leaders to take meaningful steps and device strategies.Financial accounting shows a fair picture of the financial affairs of a company.
Management accounting is not legally required.It is legally required to prepare financial accounts of a company.
All the information presented by management accounting is predictive and not immediately verifiable.The information presented by financial accounting mostly historic in nature and is verifiable.  
Management accounting takes help from financial accounting to make the right decisions.Financial accounting is not dependent on the results of management accounting.  

Final Thought

By the use of information and reports provided by management accounting, a business can drastically increase its productivity and efficiency. In short management, accounting acts as a very useful tool for the management of a business.