Management Accounting

Definition: Management Accounting refers to the application of professional knowledge, techniques and concept in preparing the accounting information in such a manner, which helps the management of the organization in the formulating plans and policies, controlling the operations of the organization, decision making, optimising the use of resources, disclosure to management and safeguarding assets.

In finer terms, management accounting can be understood as the processing and presentation of accounting and economic data, so that it would help in the evaluating performance of the management, formulating strategies, making comparisons, budgeting, forecasting, etc.

Characteristics of Management Accounting

  • Decision-making system: The financial data provided by the management accounting, is helpful to the management in framing policies and assisting the day to day operations.
  • Future-oriented: Management accounting is future-oriented as it helps in planning and deciding the future course of action.
  • Qualitative and Quantitative Information: In management accounting, qualitative information relating to the performance of the managers and other staff is also considered, along with the other financial data.
  • No set format: There is no set format for the disclosure of the information. Management accounting usually presents information in the form which is easily understandable to the managers and other users.
  • Discretionary activity: Management accounting is not compulsorily required by the statute. Indeed, management accounting is done as per the requirement of the organization and hence, it can be done weekly, monthly, quarterly, half-yearly, etc.

Management Accounting Techniques

The following tools and techniques are used in management accounting for better decision making:

  1. Financial Planning: Financial Planning refers to the activity of deciding beforehand, what is to be done to reach the desired financial objectives, i.e. it is the process of managing the finances of the organization to get the maximum return. It includes cash flow planning, investment planning, tax planning, etc.
  2. Financial Statement Analysis: It refers to the process of analysing the financial data of the organization for rational decision making. This includes comparative statement analysis, ratio analysis, cash flow analysis, trend analysis, etc.
  3. Statistical and Graphical Techniques: Various statistical and graphical techniques are used by the management to make better economic decisions. These techniques include statistical quality control, linear programming, investment chart and so forth.
  4. Control Techniques: Standard costing and budgetary control are the techniques used by the management to keep a check on the utilization of resources.
  5. Reporting: The management accountant processes the data and presents it in reports to provide the relevant information required by the managers.

Therefore, the data available with the help of management accounting must be relevant and precise, presented in an understandable format, consistent and comparable, and it is available at regular time intervals.

For this purpose, the selection of information to be presented, an organization of information and the way in which it should be presented must be carefully chosen by the management accountant.

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