In this article, we’ll know what is Management Accounting? and Why is Managerial Accounting Information Prepared?
What is Management Accounting?
Accounting means recording, classifying, summarizing, and interpreting the monetary transactions in a business. Accounting helps to keep track of all the financial transactions occurring in a business. There are two kinds of accounting, one is Financial Accounting, and the other is Management Accounting.
Management Accounting is Management Oriented Accounting. Management accounting has been described by the National Association of Accountants (USA) as, “The process of identification, measurement, accumulation, analysis, preparation and communication of financial information used by management to plan, evaluate, and control within the organization and to assure appropriate use and accountability for its resources.”
Difference Between Financial Accounting and Management Accounting
Financial Accounting is used for providing information in the form of financial statements to external parties (shareholders, investors), whereas; Management Accounting is used for providing accounting information to the internal users (management). Financial Accounting shows the business’s financial position, whereas Management Accounting focuses on Internal Management of various departments, divisions, etc.
Financial Accounting is about past transactions, whereas Management Accounting emphasizes the present and future details. Financial Accounting is limited to monetary transactions, whereas Management Accounting includes both Monetary and Non-monetary transactions as it helps the management in decision making.
Why is Managerial Accounting Information Prepared?
Management Accounting is one of the important units in a business. Internal analyses have been done through management accounting, and an overall strategic plan is built for the business. In addition, management accounting is prepared for managers as it helps them in the decision-making process. Following is the reason why it is prepared:
- Formulating Strategy: Management accounting helps in predicting future results. The manager has monetary and non-monetary records to use data and analysis to design and execute the business activities. Hence helps in formulating a strategy for business activities. For instance, if a certain product doesn’t meet the desired sale, the designated manager can work with his team to bring out certain plans or ideas to push the sales.
- Controlling: Management accounting is required for managerial controls (budgetary control, standard costing, etc.) All the business activities are analyzed and monitored. If things don’t go according to the planned structure, management can take action and make necessary modifications to meet the demand.
- Organizing: The management accounting system has a proper description of the power and roles of the executives. This system helps the management to know the roles and duties that they need to perform. This helps in organizing everything in a firm.
- Profit Maximization: Using management accounting techniques can help in channeling expenses. This can help them strategize the expenditure, which can help earn more profit for the business.
- Interpretation of Financial Statements: Information from the financial statements is presented in pictorial forms like graphs, charts, etc. This makes the interpretation easy and helps management in decision-making.
- Coordinating: Management accounting system prepares reports of the performance of different departments. This helps to analyze the performance of each department, and if anything is off track, then timely supervision can be provided. In addition, perfect coordination of work in the entire department can help the business increase operational efficiency.
- Identifying Loopholes: Management accounting helps in finding out what is lacking in the business organization. So let it be for a product, management, service, etc. If Management has a timely record of all activities, it can help detect loopholes and their reason. This will help in the timely fixation of the problem and eventually, it will save time.
Drawbacks of Management Accounting
Since the management accountant follows the financial accounting data, there are certain limitations related to it:
- Firstly the accuracy is dependent on the financial records. So if any errors happen in the financial statement, then it will impact the management activity also.
- Secondly, the interpretation may vary from person to person, and this might lead to a discrepancy.
Management accounting setup requires more funding, and this might become difficult for budding or smaller firms. So this might limit to a bigger organization.
As a coin has two sides, similarly Management accounting practices have both advantages and disadvantages. But for a smooth and long run of the business, if reasonable accuracy of information and data is maintained, then management accounting will provide the business with proper insights, evaluation, and future business plans and suggestions.
Information about managerial accounting is intended to help managers make good business decisions within an organization. It not only helps in strategizing day-to-day work schedules but also helps in increasing the efficiency of the organization. As the business is evolving so rapidly, all these are required and it is vital for business growth. Therefore, despite certain drawbacks, management accounting remains an important key for a successful organization.