What Is Management Accounting? Definition, Objectives, Functions & Types Explained

1. Introduction

Every business is required to have accurate information to operate effectively, whether it is a small business or a large business. The owners and managers need to be made aware of the amount of money coming in, amount of money going out and where the improvements should be made. It is at this point that management accounting comes in very useful.

Management accounting assists business administrators to make superior judgments. It does not concentrate on records of the past alone. Rather it examines the current circumstances and prospects. It makes managers appreciate costs, profits, performance, and risks in an easy manner to enable them to plan ahead.

This paper describes management accounting in a simple and understandable way. You will know what management accounting is, what its definition is, what are its objectives, scope, its functions and along with its types.

2. What Is Management Accounting?

Management accounting refers to a system that presents useful information to the managers in order to enable them plan, control and make decisions on behalf of the business. It aims at assisting the management internally, not the outsiders.

It is worth noting that there is a slight distinction between management accounting and financial accounting:

• Financial accounting presents previous performances and is primarily made to the outside world such as investors and banks.
• Management accounting is done to accommodate the managers and is aimed at planning, decision making and future enhancement.

3. Management Accounting Definition

Management accounting could be described as the process of identifying, analyzing, interpreting and communicating financial information to managers in a manner that would assist them to plan, control and make better decisions.

There are some notable aspects about this definition:

• Analysis: Interpretation of data in order to know what is occurring in the business.
• Interpretation: A simple exposition of the meaning of numbers.
• Communication: Exchange of helpful information with managers.

4. Objectives of Management Accounting

Management accounting is utilized within an organization to serve various managerial needs by providing relevant financial and operational insights that aid planning, coordination, control, and informed decision-making.

Primary Objective of Management Accounting

Effective decision-making is the prime goal of management accounting. It gives correct and timely data to enable managers to select the best alternative to the business.

Secondary Objectives of Management Accounting

Additional significant goals are:

• Planning and forecasting
  The management accounting assists managers to organize future operations and forecast results through the budgets and estimates.
• Cost management and cost minimization.
  It assists in determining the unnecessary costs and coming up with methods of reducing expenses without compromising quality.
• Efficient use of resources.
  Management accounting also makes sure that money, labor, and materials are employed in the most appropriate manner.
• Performance measurement
  It assists in the measurement of the performance of departments, employees or projects.
• Increase of profitability and efficiency.
  Management accounting is used to increase profits and enhance efficiency by analyzing the costs and revenues.

5. Scope of Management Accounting

Management accounting scope refers to what the management accounting is doing in a business. It is extremely broad and incorporates numerous significant functions.

The spheres of management accounting.

• Cost accounting and cost analysis.
  Helps determine the cost of products and services and cost behavior.
• Budgeting and forecasting
  Helps in budget preparation and in the making of future forecasts of income and expenditure.
• Financial statement analysis.
  Research on the financial accounts to learn the strengths and weaknesses of the business.
• Decision-making techniques
  Relies on such tools as break-even analysis and cost comparison to justify decisions.
• Performance appraisal and management.
  Helps observes outcome and initiates corrective actions in case of performance that is below the expectation.

6. Functions of Management Accounting

Management accounting performs many important functions that support business operations.

• Planning and budgeting
  It assists in the goal setting and budget preparation to accomplish the goals.
• Organizing and coordinating resources
  Assures that various departments integrate efficiently in terms of resources.
• The regulation of operations by analysis and reports.
  Makes a comparison between the actual and the planned results and brings out differences.
• Engineering in managerial decision-making.
  Helps in making valuable information in areas like pricing, production and investment decisions.
• The performance appraisal and communication.
  Measures performance and reports the results effectively to the management.

7. Types of Management Accounting

Management accounting is available in various types and each of them has its purpose.

Cost Accounting
Cost accounting is aimed at identifying the cost of a product or a service. It assists in managing costs and adjusting appropriate prices.

Budgetary Control
Budgetary Control entails the preparation of budgets and actual results and comparison with budgeted value to control the operations.

Standard Costing
Standard costing establishes standard cost and compares them with the actual costs to identify differences and causes.

Marginal Costing
The marginal costing examines the cost of a single additional unit. It assists in decision making in terms of pricing and production.

Responsibility Accounting
In responsibility accounting, expenses, revenues or profits under the control of managers are charged to them.

8. Importance of Management Accounting

The significance of management accounting is that, it assists businesses to survive and expand in a competitive world.

• It enhances the quality of decisions.
• It helps control costs
• It favors the long-term planning.
• It enhances efficiency in general.

In the absence of management accounting, managers can make decisions that are founded on guesses rather than facts.

9. Conclusion

In business management today, management accounting has a major part to play. It also offers managers with valuable information that is used in the planning, controlling, and decision-making process.

This paper defined management accounting, its definition, purpose, scope, functions, and types in a clear and easy manner. Management accounting assists managers in resolution of resources, management of costs, performance measurement and future planning.

Effective use of management accounting in businesses in the long run makes it more likely that the businesses will grow, remain profitable, and overcome the challenges with confidence. Not only is it a support tool but a great backbone to business success.

FAQs

1.  Is management accounting mandatory for businesses?

   No, it is not legally obligatory, but it is highly helpful in the system of internal management and decision making.

2. . Who uses management accounting information?

   Management accounting information is utilized by managers, business owners, and internal decision-makers.

3. How does management accounting support strategic planning?

   It gives information to forecast and make budgets and also analyze various business strategies.

4. What is the role of management accounting?

   It is meant to assist managers in planning, controlling and making informed decisions.

5. What is the main objective of management accounting?

   The main objective of management accounting is to assist in good managerial decision-making.