Management Accounting – Meaning, Advantages & Functions

Last Updated at: February 04, 2020
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Management Accounting – Meaning, Advantages & Functions

What is Management Accounting?

Management accounting, also known as managerial accounting, can be described as the task of providing financial resources and information to the managers so as to help them in decision making. The internal teams belonging to an organization performs this task and this is what separates managerial accounting from financial accounting. In this process, the internal financial administration shares reports and information (such as balance statements and invoices) with the company management. The management uses these data and information to make informed and accurate decisions related to business activities, enterprise, and business development.

If you’re just looking around for related information on startups, government registrations, tax or legal documentation, check out the list of services we provide to make your interaction with government as smooth as is possible by doing all the legal documentation for you. We will also give you absolute clarity on the process to set realistic expectations.

Advantages of management accounting

The advantages of management accounting can be classified into the below-mentioned categories –

  1. Decision Making

This is the primary and most important benefit of management accounting. This process uses proven techniques from different fields of study (such as statistics and economics). And presents the findings to the management in the form of forecasts, charts, and tables. Such a detailed analysis makes the task of decision making more justified and easier for the management.

  1. Planning

Unlike financial accounting, management accounting is an ongoing and continuous process and does not adhere to any strict timelines. Therefore, information (both financial and non-financial) is presented at regular intervals for the management to plan the business activities. Such presentations may contain budgets, in-depth analysis and financial forecasts. For example, if such information shows a decrease in sales during a certain period for a certain region, the sales manager can plan some remedial actions to improve the situation and can direct his team accordingly.

  1. Identifying the Problem Areas

If an internal department is not performing to its true potential or a particular product is performing below the expected lines, the management will be well-served, if the underlying causes can be identified early enough. An efficient and diligent management accounting team can do this important task for the management. With timely reports and data, it can forecast and identify such issues well in advance and can help the management to plan for remedial actions accordingly.

  1. Strategic Management

Management accounting is very much an internal process and it doesn’t act according to any law. Hence, the company can mould the structure of the management accounting process to suit its requirements. If the company thinks certain business areas need more investigation and in-depth analysis, it can develop adequate strategies accordingly. Based on information received from management accounting, the management can take important decisions such as modifying the sales strategy, continuing/discontinuing a product/service, launching a new product, focusing on a certain target market and so on.

Get free legal advice now

Functions of management accounting

Management accounting performs the following functions in general-

  • Margin analysis

Management accounting determines the cash flow or profit generated by a business from a particular project, product, customer, product line and region.

  • Break-even analysis

It calculates the mix of contribution margin and determines the volume of units at which the organization breaks even. Based on this information, the management determines the price points for its services and products.

  • Target costing

It helps in designing new products by ascertaining the costs of these designs, comparing them to the targeted costs and informing the management of any deviations at any stage.

  • Constraint  analysis

It assesses the primary bottlenecks in the business and how they influence the ability of the company to earn profits

  • Variance analysis

It reviews the trend of various costs incurred to look for unusual variances. If management accounting spots any variance, it dives deeper and examines individual transactions as well. All such information is then accumulated and the reasons for these variances are reported to the management.

  • Inventory valuation

It determines the direct costs of inventory items and goods sold. It also allocates overhead costs to them.

  • Capital budgeting analysis

If a proposal to acquire fixed assets is received, it assesses the need for such an acquisition. And determines the most appropriate financial option required to acquire the asset.

While employing management accountants, an organization should also be mindful of its management accounting objectives & limitations.  It is clear from the above-mentioned facts that management accounting allows the management to have a better grip on the business. It also provides the management with the much-needed assurance and confidence to face regulators and auditors from time to time. However, it’s highly imperative for a management accountant to ensure the reliability and correctness of the data ascribed and reports generated.

 


When can the taxpayer claim refund from electronic cash ledger?

If the taxpayer has paid excess amount by mistake, they can request for refund from the electronic cash ledger.Understand the procedure for GST registration and GST returns here.

How do banks assess the working capital requirements of borrowers?

Methods such as cash flow mismatch are used by banks to assess the capital requirements that the borrowers seek from banks.More on Income Tax Return Filing.

What does the Aadhaar number have to do with filing of tax returns?

Aadhar card is mandatory for tax payers in India. Non-resident Indians, people aged more than 80 years are exempt from providing Aadhar card when applying for PAN card. Learn more about Aadhar Certification.

What is the purpose of ISO standards?

ISO international standards checks whether the services and products remain reliable, good quality and safe. There are certain tools that helps in increasing productivity. More info on ISO Registration in india.

What is the benefit of ngo?

An NGO has a major role in resolving the issues of the underprivileged by using financial assistance received from the Government or foreign bodies.More about NGO Registration.

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Management Accounting – Meaning, Advantages & Functions

844

What is Management Accounting?

Management accounting, also known as managerial accounting, can be described as the task of providing financial resources and information to the managers so as to help them in decision making. The internal teams belonging to an organization performs this task and this is what separates managerial accounting from financial accounting. In this process, the internal financial administration shares reports and information (such as balance statements and invoices) with the company management. The management uses these data and information to make informed and accurate decisions related to business activities, enterprise, and business development.

If you’re just looking around for related information on startups, government registrations, tax or legal documentation, check out the list of services we provide to make your interaction with government as smooth as is possible by doing all the legal documentation for you. We will also give you absolute clarity on the process to set realistic expectations.

Advantages of management accounting

The advantages of management accounting can be classified into the below-mentioned categories –

  1. Decision Making

This is the primary and most important benefit of management accounting. This process uses proven techniques from different fields of study (such as statistics and economics). And presents the findings to the management in the form of forecasts, charts, and tables. Such a detailed analysis makes the task of decision making more justified and easier for the management.

  1. Planning

Unlike financial accounting, management accounting is an ongoing and continuous process and does not adhere to any strict timelines. Therefore, information (both financial and non-financial) is presented at regular intervals for the management to plan the business activities. Such presentations may contain budgets, in-depth analysis and financial forecasts. For example, if such information shows a decrease in sales during a certain period for a certain region, the sales manager can plan some remedial actions to improve the situation and can direct his team accordingly.

  1. Identifying the Problem Areas

If an internal department is not performing to its true potential or a particular product is performing below the expected lines, the management will be well-served, if the underlying causes can be identified early enough. An efficient and diligent management accounting team can do this important task for the management. With timely reports and data, it can forecast and identify such issues well in advance and can help the management to plan for remedial actions accordingly.

  1. Strategic Management

Management accounting is very much an internal process and it doesn’t act according to any law. Hence, the company can mould the structure of the management accounting process to suit its requirements. If the company thinks certain business areas need more investigation and in-depth analysis, it can develop adequate strategies accordingly. Based on information received from management accounting, the management can take important decisions such as modifying the sales strategy, continuing/discontinuing a product/service, launching a new product, focusing on a certain target market and so on.

Get free legal advice now

Functions of management accounting

Management accounting performs the following functions in general-

  • Margin analysis

Management accounting determines the cash flow or profit generated by a business from a particular project, product, customer, product line and region.

  • Break-even analysis

It calculates the mix of contribution margin and determines the volume of units at which the organization breaks even. Based on this information, the management determines the price points for its services and products.

  • Target costing

It helps in designing new products by ascertaining the costs of these designs, comparing them to the targeted costs and informing the management of any deviations at any stage.

  • Constraint  analysis

It assesses the primary bottlenecks in the business and how they influence the ability of the company to earn profits

  • Variance analysis

It reviews the trend of various costs incurred to look for unusual variances. If management accounting spots any variance, it dives deeper and examines individual transactions as well. All such information is then accumulated and the reasons for these variances are reported to the management.

  • Inventory valuation

It determines the direct costs of inventory items and goods sold. It also allocates overhead costs to them.

  • Capital budgeting analysis

If a proposal to acquire fixed assets is received, it assesses the need for such an acquisition. And determines the most appropriate financial option required to acquire the asset.

While employing management accountants, an organization should also be mindful of its management accounting objectives & limitations.  It is clear from the above-mentioned facts that management accounting allows the management to have a better grip on the business. It also provides the management with the much-needed assurance and confidence to face regulators and auditors from time to time. However, it’s highly imperative for a management accountant to ensure the reliability and correctness of the data ascribed and reports generated.

 


When can the taxpayer claim refund from electronic cash ledger?

If the taxpayer has paid excess amount by mistake, they can request for refund from the electronic cash ledger.Understand the procedure for GST registration and GST returns here.

How do banks assess the working capital requirements of borrowers?

Methods such as cash flow mismatch are used by banks to assess the capital requirements that the borrowers seek from banks.More on Income Tax Return Filing.

What does the Aadhaar number have to do with filing of tax returns?

Aadhar card is mandatory for tax payers in India. Non-resident Indians, people aged more than 80 years are exempt from providing Aadhar card when applying for PAN card. Learn more about Aadhar Certification.

What is the purpose of ISO standards?

ISO international standards checks whether the services and products remain reliable, good quality and safe. There are certain tools that helps in increasing productivity. More info on ISO Registration in india.

What is the benefit of ngo?

An NGO has a major role in resolving the issues of the underprivileged by using financial assistance received from the Government or foreign bodies.More about NGO Registration.

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