MANAGEMENT ACCOUNTING (Theory)

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NATURE AND PURPOSE OF MANAGEMENT ACCOUNT

Management Accounting is the application of professional knowledge and skill in the preparation and presentation of accounting information in such a way as to assist management in the formulation of policies in planning and control of the undertaking.

Management accounting is concerned with identifying, presenting and interpreting information used for planning and control of an enterprise operation.

Management accounting involves data gathering, analyzing, processing, interpreting and communicating the reporting information for effective planning decision marking and operations.

Management accounting uses data from the financial and cost accounting systems and Statistics.  Management accounting also uses statistics and operations research for analysis.

Management accounting produces information: which is relevant for the intended purpose.  Management accounting is concerned with helping management to run a business efficiently.

Purpose of Management Accounting

The main Purpose of management accounting is the provision of information used for:

a.       Formulating strategy

b.      Planning and controlling activities

c.       Decision making

d.      Optimization use of resources

e.      Disclosure to shareholders and employees

f.        Safeguarding the assets

Management accounting compared with financial accounting and cost account.  Financial accounting is concerned with stewardship function.  The emphasis is on financial record-keeping and preparation of financial accounts whereas management accounting provides information that is useful to the manager of an organization in taking decisions within the scope of their managerial responsibility.  Therefore, the main difference between management accounting and financial accounting lies in their purpose; financial accounting is for stewardship purpose while management accounting is essentially for internal purpose.  Management accounting and cost accounting are closely related.

There is no realistic guideline between cost accounting, management accounting with regard to the provisions of information for planning and control.  Cost accounting is concerned with the provision of information about costs while management accounting uses this information to plan, control or provide problem-solving analyzes.  Therefore cost accounting is the essential foundation for the development of management accounting system.

In general, management accounting is wider in scope and uses more advanced techniques than cost accounting.  A fundamental requirement for management accounting is the existence of a sound costing system to provide basic data.

 

Management accounting is activity base and is concerned mainly with the present, the future and sometimes the past.  Cost and management accounting provide an internal information system to assist the planning and control decisions by managers.

Financial, cost and management accounting from past of the financial information system of an organization and in many enterprises, the various facets are totally integrated with no artificial divisions between them.

MANAGEMENT ACCOUNTING AS A TOOL OF MANAGEMENT

Managers must be properly informed in order to carry out their responsibility for planning and controlling the resources of a business.  Thus management accounting as a tool of management is management information system which analyzes past, present and future data to fit the variety of different problems confronting managers.

Management accounting ensures that there is effective:

a.       Formulation of plans to meet objectives

b.      Formulation of short term operational plans

c.       Acquisition and the finance

d.      Communication of financial and operating information

e.      Corrective action to bring plans and results into line

f.        Reviewing and reporting on systems and operations.

Evolution of Management Accounting

Management accounting evolved out of industrial revolution and the challenges of modern business to meet the dynamic nature of environmental and industrial conditions.  Management accounting starts from where cost accounting stopped.