Evaluation of Management Accounting

Management accounting is a field of organizational activity of a business concern encompassed by different phases of evaluation.

In first stage, to 1950, the focus was on cost determination and financial control through the use of budgeting and cost accounting technologies.

In second stage (by 1965), the focus is shifted to the provision of information and data for management planning and control, through the use of such technologies as decision analysis and 

responsibility accounting.

In the third stage (by 1985), the focus was diverted to the reduction of waste in resource used in the business processes, through the use of process analysis and cost management technologies.

In the fourth stage (by 1995), attention was focused on the generation or creation of value through the effective use of resources, through the use of technologies which examine the drivers of customer value, shareholder value, and organizational innovation.

Like other resources, information (alone or combination with other resources) may have present strategic significance or may be a core competency used to create new organizational futures.  Strategically management of resources, including information, took place.

Highlights on Current Evolutionary Stage

1. Flattening Organizational hierarchical structures,
2. Removing functional specialization,
3. Value chains,
4. Information technology,
5. Non-dependence on remote forms of financial control,
6. Continuing investment in information and rationality, and
7. Processional specialization

 Many people confuse the offices of Controller and Treasurer.  The Financial Executive Institute, an association of corporate treasurers and Controllers, distinguish their functions as follows

Controllership	Treasurership
Planning for Control        Reporting and Interpreting        Evaluation and Consulting        Tax Administration        Government Reporting         Protection of Assets        Economic Appraisal	Provision of Capital        Investor Relations        Short-term Financing        Banking and Custody        Credits and Collections        Investments        Insurance

Management Accountants in any concern is concerned with the first three functions of a controller.  We can conclude that the terms Controller is a broader one than management accountant.

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Limitations of Management Accounting

             In order to understand the exact nature and importance of Management Accounting, it is necessary to understand the limitations under which it has to perform its functions.  Main limitation may be mentioned as under:
1.    Dependence on Historical Data:  Data provided by financial accounting and cost accounting form the basis of decision-making.  Accuracy of decisions arrived at on the basis of such data depends on the accuracy of data itself.  Thus the success of management accounting is governed by the efficiency and accuracy with which the financial and cost records are maintained in an organization.
2.    Lack of Desired Skill:  It has been generally observed that the management accountant or any other officer dealing with management accounting tools for decision purpose lack necessary skill and experience due to which a high degree of managerial efficiency cannot be expected.  We have yet to develop a cadre of professional management accountant who could better took after the management accounting processes in large-sized public companies.
3.    Scope for Subjectivity:  Though management Accounting attempts to replace intuition by objectivity and scientific reasoning yet it is not possible to do away with subjectively as the decision-makers utilize non-quantitative information’s which provide a lots of scope for subjectivity in decision-making.  This limitation can be overcome if the management uses personal judgment with great care and tries to remain as objective as possible.
4.    Management Indifference: Sometimes the indifference of management limits the use of management accounting.  Many managers do not like that there exists any formal system of accounting to guide them in decision-making.  Resistance and non-cooperation of labour also hinder the application of standard labour costing technique on the pretax of their exploitation.
5.    Costly Affair: Management Accounting is costly affair as its installation requires heavy investment in physical facilities and trained man-power.  It is quite unsuitable for a Small Scale  business enterprise.
6.    Imperfect Tool: Management Accounting is a growing subject.  Its tools and technique are not fool proof.  Two different management accountants while treating a similar problem may draw different conclusion from the same set of figures.  For example, the technique of accounting rations provides an indication towards a particular situation but it does not give precise answer to the problem.
7.    No Substitute for Management: Management Accounting is a means to an end; the end being the efficient business operations for achievements of business objectives.  It cannot replace management as it is simply a tool in the hands of management and the ultimate success in business depends upon the will and dedication of management.

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Management Accountant – Position and Status

The chief management accountant or the chief accounting executive of an organization is called the controller (often called comptroller, especially in the government sector).  The controller is in charge of the accounting department.  The controller’s authority is basically staff authority in that the controller’s office gives advice and service to other departments.  But at the same time, the controller has line authority over members of his or her own department such as internal auditors, book keepers, budget analysts, etc. 

The principal functions of the controller are:-

1. Planning for control.
2. Financial reporting and interpreting.
3. Tax administration.
4. Management audits, and development of accounting systems and computer data processing.
5. Internal audits.

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Functions of Management Accounting

Management accounting is assigned the functions of classifying presenting and interpreting data in such a way that it helps management in controlling and running the enterprise in an efficient and economical manner.  Some of the functions of management accounting are given as follows

1. Planning and Forecasting:  One of the important functions of the management accounting is to help management n planning for short-term and long term periods and also in making forecasts for the future.  Management accountants use various techniques such as budgeting, standard costing, marginal costing, fund flow statements, probability and trend ratios, etc. for fixing targets.  These techniques are useful in planning various activities.  So management accounting tools are useful in planning and forecasting.
2. Modifications of Data:  Management accounting helps in modifying accounting data.  The information is modified in such a way that it becomes useful for the management.  If sales data is required, it can be classified according to product, area, season-wise, type of customers and time taken for getting payments, etc.
3. Financial Analysis and Interpretation:  Management accountant undertakes the job of presenting financial data in a simplified way.  Financial data is generally collected and presented in a technical way.  Top managerial executives may lack technical knowledge.  Management accountant analyses and interprets financial data in a simple way and presents it in a non-technical language.  He gives facts and figures about various alternative courses of action so that it becomes easy for the management to take a decision.
4. Facilitates Managerial Control:  Management accounting is very useful in controlling performance.  All accounting efforts are directed towards control of the enterprise.  Performance evaluation is possible through standard costing and budgetary control which are an integral part of management accounting.
5. Communication:  Management accounting establishes communication within the organization and with the outside world.  The management accountant prepares reports for the benefit of different levels of management and employees.  The activities of the concern are communicated to outsiders such as bankers, investors, creditors, government agencies, etc.  The filing of various tax returns is also entrusted to the accountant.
6. Use of Qualitative Information:  The field of management accounting is not restricted to the use of monetary data only.  It collects and uses qualitative information also.   While preparing a production budget, management accountant may not only use past production figures, productivity reports, consumer surveys and many other business documents.  The use of qualitative information is as helpful as monetary information.  Management can assess various aspects of a plan before finalizing it.
7. Coordinating:  The coordination among different departments is essential for smooth running of the concern.  Management accountant acts as a coordinator among different financial departments through budgeting and financial reports.
8. Helpful in taking Strategic Decisions:  Management accounting helps in taking strategic decisions.  It supplies analytical information regarding various alternatives and the choice of management is made easy.  These decisions may be regarding seasonal or temporary stoppage of production, replacement decisions, expansion or diversification of works and a correct decision is taken.
9. Supplying Information to Various Levels of Management:  Every management level needs accounting information for decisions making and policy execution.  Top management takes broader decisions and leaves day-to-day decisions for the lower levels of management.  Management accountant feeds information to different levels of management so that further decisions are taken.  The supply of adequate information at the proper time will increase efficiency of the management.

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Characteristic Features of Management Accounting

Management accounting has certain unique features.  The important characteristic features of management accounting are explained below.

1. Accounting information which is useful to the management.
2. Management accounting supplements the financial accounting in order to serve the diverse needs of modern management.
3. Accounting designed for use in the operational needs of the business, i.e. to provide information regarding to the conduct of the various aspects of the business like cost, funds, profits, etc.
4. Efficiency is the key for management accounting system in the implementation.
5. Management accounting comprises accounting methods, system and techniques which coupled with special knowledge and ability assist management in its task of maximizing profits or minimizing losses.
6. The distinguishing feature of management accounting is its emphasis on the planning and control purposes.
7. Management accounting is an internal accounting.  It emphasizes the preparation of reports of an organization for its internal users such as presidents, top management, middle management, lower management, functional managers, etc.
8. Management accounting spreads over into related disciplines, such as economics, the decision sciences, and the behavioral sciences.
9. Management accounting provides a means of communicating management plans upward, downward and outward through the organization.
10. Management accounting supplies feedback reports for both attention getting and scorecard keeping purposes which is the most visible contribution within the organization.

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Scope of Management Accounting

The scope of Management Accounting includes

1. Formation, installation and operation of accounting, tax accounting and information systems.  Management Accountant has to construct and re-construct these systems to meet the changing needs of management functions.
2. The compilation and preservation of vital data for management planning.  The Management Accountant presents the past data in such a way as to reflect the trends of events to the management.
3. Providing means of communicating management plans to the various levels of organization.  This, on the one hand, ensures the co-ordination of various segments of the enterprise plans and on the other defines the role of individual segments in the whole plan and assists the management in directing their activities.
4. Providing and installing an effective system of feedback reports.  This would enable the management in its controlling function.  By pinpointing the significant deviations between actual expected activities, and by adhering to the principles of selectivity and relevance, such reports help in the installation and operation of the system of ‘Management by Exception’.
5. Analyzing and interpreting accounting and other data to make and understandable and usable to the management. It is only through such analysis and clarification that the management is enabled to place the various data and figures in proper perspective in the performance of its functions.  Such analysis assists management in the location of responsibilities and to effect necessary changes in the organizational  set-up to achieve the objectives of the enterprise in a more efficient manner.
6. Assisting management in decision making by (a) providing relevant accounting and other data and (b) analyzing the effect of alternative proposals on the profits and position of the enterprise.
7. Providing methods and techniques for evaluating performance of the  management in the light of the objectives of the enterprise, thus assisting in the implementation of the principle ‘Management by Objectives’.
8. Improving, modifying and sharpening the effectiveness of the existing techniques of analysis.  The Management Accountant would always think of increasing the practicability of existing techniques.  He should be on the look-out of the development of new techniques as well.

Thus, Management Accounting serves not only as a tool in the hands of management, but also provides for a technique evaluating the performance of the management itself.  It operates as a double-edged sword assisting the management in proper performance of its functions of planning, decision making and control, and at the same time, enabling the owners and other interested parties to evaluate and appraise the management of the enterprise. 

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Objectives of Management Accounting

         Management Accounting seeks to provide relevant accounting information for use in planning, decision-making and control for the different levels of management at the right time.  Its main objectives may be summarized as follows:

•  Formulating strategy;
• Planning and controlling activities;
• Decision talking;
• Optimizing the use of resources;
• Disclosure to shareholders and others external to the entity;
• Disclosure to employees;
• Safeguarding assets.

The above involves participation in management to ensure that there is effective:

• Formulation of plans to meet objectives (strategic planning);
• Formulating of short-term operation plans (budgeting / profit planning);
• Acquisition and use of finance (financial management) and recording of transactions (financial accounting and cost accounting);
• Communication of financial and operating information;
• Corrective action to bring plans and results into line(Financial Control);
• Reviewing and reporting on systems and operations (internal audit, management  audit).

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Difference between Cost Accounting and Management Accounting

Few number of differences can identified between cost accountingand management accounting, the line of difference is very thin. Because cost accounting, at present, comprises of some of the advanced techniques and systems of costing such as marginal costing, standard costing, responsibility accounting, etc. and therefore, it (i.e., cost accounting) tends to conform to management accounting. Consequently, no much difference can be found between the two. Further, both serve the internal parties(viz.,management). However, a very few minor differences that exist between the two are explained in the below table.

S.No.	Cost Accounting	Management Accounting
1	Primary Objective : Cost accounting aims at ascertaining the cost of goods and services. It layss emphasis on the stage by stage computation of costs.	Management accounting aims at the presentation of the cost data, to the extent required, whereever and whenever they are required together with other relevant information to the management for taking decisions.
2	Time Factor: It lays emphasis on the past but less emphasis on the future. That means, it reports about costs that have been incurred.	It predicts the future on the basis of the past events, present happenings and future estimates.
3	Information Coverage: Cost reports deal mainly with the costs-incurred or budgeted and standards, variances, savings, etc.	Cost data form a part of managerial reports but not the sole aspects.
4	Governing Principles, Rules, etc: Cost accounts and reports are tobe prepared as per certain rules, principles, procedures, etc., as specified by the appropriate authority (e.g., ICWAI) to the industry to which the company belongs to.	No such rigidity is there in the case of managerial reports. The procedure format, etc. Can be modified from time depending upon convenience as requirements.
5	Statutory Verification: Cost accounts and reports, in many cases, are subject to statutory audit(i.e., cost audit). Hence, they should be prepared, as far as possible, on objective manner.	Management reports are not subject to any statutory audit. Of course, there is a management audit. But, it is voluntary and it evaluats the managerial function decisions, etc. However, management reports included both the objective and the subjective data.
6	Utility of Reports: Though cost reports are meant for management, they are useful even to the external parties.	Management reports are useful only to the management but not to both internal and external parties.
7	Inter-dependence: Cost accountant provides voluminous data to the management accountant and therefore, acts as a source of information. Further, costing system can be installed in an organization without management accounting system.	Management accounting, for its reports, extracts the maximum information from cost accounting. And therefore, cost accounting is a necessity for the smooth functioning of management accounting. Because, management accounting cannot exist in the absense of a proper and systematic cost accounting sytem.

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Financial Accounting vs Management Accounting

Financial Accounting:- Financial accounting is concerned mainly with the historical aspects of external reporting, that is, providing financial information to outside parties such as investors, creditors, and governments. To protect those outside parties from being misled, financial accounting s governed by what are called generally accepted accounting principles(GAAP).

Management Accounting:- Management accounting, on the other hand, is concerned primarily with providing information to internal managers who are charged with planning and controlling the operations of the firm and making a variety of management decisions. Because of its internal use, management accounting is not subject to GAAP. More specially, the difference betweenfinancial and management accounting are summarized below.

Financial Accounting	Management Accounting
Provides data for external users	Provides data for Internal Users
Is required by the law	Is not mandatory by law
Is subject to GAAP(Generally accepted accounting principles)	Is not subject to GAAP(Generally accepted accounting principles)
Must generate accurate and timely data	Emphasizes relevance and flexibility of data
Emphasizes the past	Has more emphasis on the future
Looks at the business as a whole	Focuses on parts as well as on the whole of a business
Primarily stands by itself	Draws heavily from other disciplines such as finance, economics, and operations research
Is an end in itself	Is a means to an end

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