The meaning and functions of management accounting

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All students enrolled in business management courses in different universities and colleges necessarily need to study management accounting as a compulsory subject. So what exactly is management accounting?

Management accounting is the process of identifying, analyzing, interpreting and then representing the financial information of a firm. This financial information is obtained from the cost accounting and other related reports of an organization, and with the help of the management accounting reports that are prepared from these, managers of the company are able to provide timely and accurate statistical information, that helps them in the decision making process. Thus, management accounting is a really important tool for measuring the performance of any business organization.

Management accounting, however, is different from financial accounting, since financial reports are prepared on annual basis for the external stakeholders of a company, while management accounting reports can be prepared weekly or monthly, for an internal audience, such as the CEO or the departmental managers.

Management accounting plays four basic roles in an organization, which are as follows:

1.     Planning

The manager, using management accounting, is able to think about future plans for the organization. This is because budgets are prepared under management accounting, and then these budgets are used to appropriate decisions for the future profitability of the business, based on the current position of the company.

2.     Organizing

Management accounting also helps to effectively organize, regulate and make adjustments in the existing operations of the business and also helps to organize other business activities that will help the organization to achieve its goals.

3.     Controlling

The performance reports, variance reports and other related reports that are prepared under management accounting help to control and regulate business performance. This is done with the help of variance analysis, that helps to highlight the difference between the expected and the actual performance of the firm.

4.     Decision making

Managers are able to make proper decisions that assist them in future financial forecasting. These decisions are made by analyzing the present financial and cost information that gives useful results for the management and thus helps in making accurate decisions.

The role of management accounting in an organization’s success

Management accounting is believed to play an important role in the success of an organization since it enables the management to undertake competitive decision making. Thus, the management is able to gather, process, and communicate information, which is helpful in planning, controlling, and evaluating the strategies of the organization. Additionally, unlike financial accounting that focuses on the future through the financial results of the past, management accounting is futuristic and focuses on developing projection, on the basis of budgets and other financial projections.

Thus, management accounting utilizes past financial results of the past period and appropriately presents the predictions for the coming year. This is done by anticipating a list of revenues and expenses that will be incurred in the future.