Management Accounting: Definition
Management accounting is concerned with preparing and presenting accounting information in such a way as to assist a firm’s management in designing policies, planning, and controlling the operations of the undertaking.
Management Accounting: Explanation
Management accounting uses both financial and cost information to advise managers in planning and controlling the organization. It provides information to persons inside the organization.
Management accountants produce dedicated reports to serve the needs of decision-makers. Past and current activities are reported to the extent that such information helps management to plan for the future.
Functions of Management
The functions of management are stated below:
- Laying down and classifying organizational objectives
- Defining policies to be pursued for achieving the objectives
- Prescribing strategies to be followed
- Planning business operations while keeping in view the company's objectives, policies, and strategy
- Coordination of all activities so as to avoid bottlenecks (e.g., machinery and equipment in the various production departments should be well balanced)
- Execution of production, sales, and other important functions, thereby ensuring that organizational objectives are achieved
- Control over actual performance
- This control is achieved by comparing actual performance with plans, measuring deviations, identifying the causes of variances, and taking suitable corrective actions to eliminate weaknesses
- Daily, weekly, or monthly control is also achieved by issuing suitable instructions and guiding subordinates in all matters necessitating such approaches
- Revision of plans, policies, and strategies if the situation so warrants
- Long-term planning (e.g., for the next five years), ensuring that executives are well aware of the long-term directions of the business activities
Management Accounting FAQs
Management accounting is the collection, analysis, interpretation, and communication of financial information to managers within an organization. The goal of management accounting is to provide information that will assist in making business decisions.
The major functions of management accounting are to record financial transactions, compute the cost of goods sold and other expenses, prepare periodic financial statements, measure the performance of business units over time, allocate resources to business units or activities according to profitability or some similar criteria, aid in planning future operations by projecting cash flows, plan for capital expenditures to replace assets that are being used up, help estimate the cost of completing proposed new projects, and provide data to be incorporated into the budgeting process.
The manager who uses management accounting information for making business decisions is accountable for it. If the information turns out to be incorrect or not useful, then the manager should be able to explain why it was wrong or why it was not helpful in making decisions.
The major objective is to provide timely, useful information for use in making business decisions, including plans and forecasts. Other objectives include measuring organizational performance over time so that managers can identify problems that are occurring in one or more business units.
Managers need to know what is happening in their organization when it comes to sales, costs, assets, liabilities, and profitability. For example, if a manager is interested in making decisions concerning inventory levels in several parts of the business, Management Accounting information is needed.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.