Management accounting functions encompass the meticulous analysis of financial information, facilitating strategic planning and decision making. It assists in budgeting, performance evaluation, and cost management, ensuring optimal resource allocation and financial efficiency for organizational growth and sustainability.
Before making any decision, managers must be aware of the company’s financial position. Management accounting is that branch of accounting that provides all the necessary information for the same. The purpose of this article is to define management accounting and its nature. The main emphasis of this blog is on management accounting functions. Let’s know about them.
Table of Contents
- Definition of Management Accounting
- Nature of Managerial Accounting?
- Functions of Management Accounting?
Definition of Management Accounting
Definition of Managerial accounting by The Institute of Cost and Management Accountants London
“Management Accounting is the application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and the planning control of the operation of the undertakings.”
“It includes the methods and concepts necessary for effective planning for choosing among alternative business actions and for control through evaluating and interpreting performances”.American Accounting Association
A general definition of Management Accounting
The term management accounting is also referred to as Managerial Accounting. Management accounting involves identifying, measuring, evaluating, interpreting, and communicating financial information to the managers to accomplish the organization’s goals.
From the above definitions, we can say Managerial Accounting is that part of accounting that provides information to managers to make better and more informed decisions for the organization’s success.
The significant difference between financial and management accounting is that management accounting is for the internal purpose while financial accounting is for the external purpose of the company.
Nature of Managerial Accounting
Management accounting is formed to make effective managerial decisions out of the accounting information available. The nature and features of management accounting are listed as under:
- The technique of Selective Nature
- Helps in effective decision making
- Concerned with the future
- Studies cause and effect relation
- Not bound by Financial Accounting rules
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Functions of Management Accounting
The basic management accounting function is to help managers in decision-making. Let’s understand how the function of management accounting assists in the smooth performance of an organization.
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1. Forecasting and Planning
Forecasting in management accounting is like peeping into the future. It uses old data to predict upcoming trends. This insight helps in planning. Planning lays down a clear path. It allocates resources and sets realistic goals. Both functions guide a business towards growth, stability, and success, avoiding financial bumps.
It helps the company in organizing its human and non-human activities. Using data, they prepare budgets and ascertain individual cost centers and then delegate the budget to each different centre. It tries to improve the finance and accounting function of the business on modern lines.
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3. Performance Variances
Management accountants check work done with common goals to analyze whether it is accomplished. They control the organization’s performance by utilizing budgetary control, standard costing, fund and cash flow statements, accounting ratios, cost reduction programs, return on investment, and analyses of capital expenditure programs.
Management accounting offers various coordinating tools such as financial analysis, budgeting, financial reporting, analyses, interpretation, etc. These tools enhance the efficiency of the organization and increase its profits. It assists the management by analyzing the cost and financial accounts by preparing budgets, evaluating standard costs, and analyzing variances in cost.
Another important function of management accounting is communication. Different information types are required at various management (top, middle, and lower), and it is an essential communication medium. The top management requires precise information at a relatively long duration, whereas the middle needs data at regular intervals, and lower management is interested in comprehensive information at short- intervals. Apart from this, they also share the data and the company’s progress with external users and other parties by publishing accounts and returns on investment (ROI).
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6. Analyses and Interprets Data
Management accountant analyzes the information and presents it to management and top authorities. They also add suggestions and comments in a non-technical way so they can easily interpret and find results. Analyzing the data is to plan appropriately and make effective decisions for the same data presented in ratios, comparative statements, and projected trends.
7. Business Asset Protection
The management accountant is responsible for the funds required to maintain, replace and repair the fixed asset available in the organization. It is necessary for the smooth and uninterrupted flow of production, which may adversely affect the company’s profits. The finance required for fixed asset insurance also comes under the management accounting function.
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8. Tax policies
Another significant function of management accounting is tax policies. It is responsible for tax payment, whether a value-added tax, income tax, or any other tax to the state, local or federal government. They prepare accurate tax payment reports to show to various authorities. Moreover, maintain provisions for taxation and make timely payments of taxes as per Income Tax Act to avoid penalties of taxes.
9. Decision Making
Another management accounting function is to provide accounting data and statistical information. It aids in the effective decision-making required for the successful survival of the business. Using data, they determine the long-term and the short-term capital and suggest capitalization required for the business. Also, it evaluates additional capital expenditure proposals and their effect on the return on profit and losses.
10. Other Functions
Apart from the above functions, the management accountant provides helpful information to various functional authorities. They do not restrict their data to organizations’ financial information; they also use other sources such as surveys, engineering records, statistical compilations, etc. Additionally, data collected by them helps in the planning to formulate policies ad other decisions related to cash inflow, outflow, product launch, expansion, and so on.
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Managerial accounting is concerned with providing data to managers, i.e., the internal users of the organization that are in direct control of the operations. Above, we have discussed the essential functions of management accounting. It can be said that management accounting displays the complete financial information of the company to managers and other internal parties of an organization.
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What is the main purpose of management accounting?
Management accounting focuses on providing internal managers with the financial information needed to make informed business decisions. It aids in planning, controlling, and evaluating the performance of an organization, ensuring efficient resource allocation and goal achievement.
How does management accounting differ from financial accounting?
Unlike financial accounting, which targets external stakeholders, management accounting is for internal use. It offers detailed and forward-looking information to assist in planning, decision-making, and performance evaluation, whereas financial accounting provides a historical financial record for external reporting.
What are the key functions of management accounting?
Management accounting encompasses various functions including budgeting, forecasting, cost accounting, and financial analysis. It helps in evaluating business performance, planning future operations, and making strategic decisions to guide the organization towards its objectives.
How does management accounting assist in decision-making?
Management accounting provides comprehensive financial and non-financial data, offering insights into the organization's performance. This information helps managers make strategic decisions regarding budget allocation, cost-cutting, pricing strategies, and investment, contributing to the organization's growth and profitability.
Is management accounting mandatory for businesses?
No, management accounting is not legally mandatory, but it is essential for effective business management. It offers valuable insights and data that assist in making informed decisions, planning, and evaluating the performance and strategy of the organization.