Management Accounting: Meaning, Limitations and Scope

In this article we will discuss about Management Accounting:- 1. Meaning of Management Accounting 2. Limitations of Management Accounting 3. Characteristics 4. Scope.

Meaning of Management Accounting:

Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking. Thus, it relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning, control and decision-making by the management.

Management accounting links management with accounting as any accounting information required for taking managerial decisions is the subject matter of management accounting.

Some leading definitions of Management Accounting are given below:

“Management Accounting is concerned with accounting information that is useful to management.” —R.N. Anthony

“Management Accounting is the term used to describe accounting methods, systems and techniques which coupled with special knowledge and ability, assists management in its task of maximising profits or minimising losses. Management Accountancy is the blending together into a coherent whole, financial accounting, cost accountancy and all aspects of financial management.” —Batty

“Management accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.” —ICWA of India

“Management accounting is the provision of information required by management for such purposes as formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those external to the entity (shareholders and others), disclosure to employees and safeguarding of assets.” —CIMA London

Management Accounting is “the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”. —American Accounting Association

From the above it is clear that management accounting uses all techniques of financial accounting, cost accounting and statistics to collect and process data for making it available to management so that it can take decisions in a scientific manner.

Limitations of Management Accounting:

The origin of management accounting can be traced to overcome the limitations of financial accounting and cost accounting.

Financial accounting is very useful to the different categories of persons but it suffers from the following limitations:

(i) Historical Nature:

Financial accounting is of historical nature. It does not provide the necessary information to the management for planning, control and decision-making. It does not tell how to increase the profit and maximize the return on the capital employed.

(ii) Recording of Actual Cost:

In financial accounting assets and properties are recorded at their cost. No effect of changes in their value is recorded in the books after its acquisition. Thus, it has nothing to do with their realizable or replaceable value.

(iii) Incomplete Knowledge of Costs:

In financial accounting data relating to cost is not available according to different products or jobs or processes in order to judge the profitability of each. Information regarding wastages and losses is also not available from the financial accounts. It is also difficult to fix the prices of the products without the availability of a detailed analysis of costs which is not available in financial accounts.

(iv) No Provision for Cost Control:

Costs cannot be controlled through financial accounting as there is no provision for corrective action because of expenses being recorded after their incurrence. No technique to check the reasonableness of any expenditure or no system for fixing definite responsibility on any authority for wastage or excessive expenditure is available in financial accounting.

(v) No Evaluation of Business Policies and Plans:

There is no device in financial accounting by which the actual progress can be measured against the targets in order to evaluate the business policies and plans, to know the reasons for deviations and how to correct them, if need be.

(vi) Not Helpful in Decision-Making:

As the data available is of historical nature, the financial accounting is not of much help to the management in selecting a profitable alternative. There are many situations where management is required to take decisions but information provided by financial accounting is not adequate.

(vii) Technical Subject:

Financial accounting is highly technical in nature. Financial accounts can be prepared and interpreted only by those persons who possess adequate knowledge of accounting concepts and conventions and are well conversant to the practice of accounting.

Though cost accounting came into existence to remove the limitations of financial accounting but its scope as compared to management accounting is limited as it deals primarily with the cost data. In actual practice, cost accountants are doing the jobs of management accountants.

Further, most of the techniques of management accounting are also being used by the cost accountants. That is why; management accounting is treated as extension of cost accounting. But for our purpose of study we treat the management accounting more broad as compared to cost accounting as management accounting, includes many more aspects of the study besides the cost accounting.

Thus, the science of accounting is not in a finished state. It is in the process of evolution. The role of accounting has changed after the Second World War.

Now, it is not a mere recording of business transactions in the books of original entry, then classifying them into the ledger and finally summarizing them by preparing the profit and loss account and balance sheet as is done in financial accounting or calculation and control of cost as is done in cost accounting.

Rather accounting helps in forecasting, planning and controlling the business events and taking managerial decisions. Keeping this in view a new branch of accounting known as Management Accounting has been developed to cope with the limitations of financial accounting and cost accounting.

Characteristics of Management Accounting:

Following points may be noted in this respect:

(i) Technique of Selective Nature:

Management Accounting is a technique of selective nature. It takes into consideration only that data from the income statement and position state merit which is relevant and useful to the management. Only that information is communicated to the management which is helpful for taking decisions on various aspects of the business.

(ii) Provides Data and not the Decisions:

The management accountant is not taking any decision bu.: provides data which is helpful to the management in decision-making. It can inform but cannot prescribe. It is just like a map which guides the traveller where he will be if he travels in one direction or another. Much depends on the efficiency and wisdom of the management for utilizing the information provided by the management accountant.

(iii) Concerned with Future:

Management accounting unlike the financial accounting deals with the forecast with the future. It helps in planning the future because decisions are always taken for the future course of action.

(iv) Analysis of Different Variables:

Management accounting helps in analysing the reasons as to why the profit or loss is more or less as compared to the past period. Moreover, it tries to analyse the effect of different variables on the profits and profitability of the concern.

(v) No Set Formats for Information:

Management accounting will not provide information in a prescribed proforma like that of financial accounting. It provides the information to the management in the form which may be more useful to the management in taking various decisions on the various aspects of the business.

Scope of Management Accounting:

The scope of management accounting is very wide and broad-based. It includes all information which is provided to the management for financial analysis and interpretation of the business operations.

Following field of activities are included in the scope of this subject:

(i) Financial Accounting:

Financial accounting though provides historical information but is very useful for future planning and financial forecasting. Designing of a proper financial accounting system is a must for obtaining full control and co-ordination of operations of the business.

(ii) Cost Accounting:

It provides various techniques of costing like marginal costing, standard costing, differential and opportunity cost analysis, etc., which play a useful role n t operation and control of the business undertakings.

(iii) Budgeting and Forecasting:

Forecasting on the various aspects of the business is necessary for budgeting. Budgetary control controls the activities of the business through the operations of budget by comparing the actual with the budgeted figures, finding out the deviations, analysing the deviations in order to pinpoint the responsibility and take remedial action so that adverse things may not happen in future.

Both the techniques are necessary for management accountant.

(iv) Cost Control Procedures:

These procedures are integral part of the management accounting process and includes inventory control, cost control, labour control, budgetary control and variance analysis, etc.

(v) Reporting:

The management accountant is required to submit reports to the management on the various aspects of the undertaking. While reporting, he may use statistical tools for presentation of information as graphs, charts, pictorial presentation, index numbers and other devices in order to make the information more impressive and intelligent.

(vi) Methods and Procedures:

It includes in its study all those methods and procedures which help the concern to use its resources in the most efficient and economical manner. It undertakes special cost studies and estimations and reports on cost volume profit relationship under changing circumstances.

(vii) Tax Accounting:

It is an integral part of management accounting and includes preparation of income statement, determination of taxable income and filing up the return of income etc.

(viii) Internal Financial Control:

Management accounting includes the internal control methods like internal audit, efficient office management, etc.

(ix) Interpretation:

Management accounting is closely related to the interpretation of financial data to the management and advising them on decision-making.

(x) Office Services:

The management accountant may be required to maintain and control office services in some organizations. This function includes data processing, reporting on best use of mechanical and electronic devices, communication, etc.

(xi) Evaluating the Performance of the Management:

Management accounting provides methods and techniques for evaluating the performance of the management. It evaluates the performance of the management in the light of the objectives of the organisation. Thus, it helps in the implementation of the principle of management by exception.

It, therefore, can be said that management accounting services not only as a tool in the hands of the management for evaluation; the performance of its subordinates, but also provides methods and techniques for evaluating the performance of the management itself.