Management Accounting is concerned with the accounting to management. Management accounting aids managers in a company make decisions. Management accounting is the application of professional skills and knowledge in the preparation of financial and accounting information in a way in which it will help internal management in the formulation of policies, planning, and control of the operations of the firm.
The result of management accounting is periodic reports for the company’s department managers and CEO. Management accounting reports usually include details of the company’s available cash, recent generation of sales revenues, the current state of the organisation’s accounts payable and receivable, and more.
Advantages and Disadvantages of Management Accounting
Advantages of Management Accounting
Increases Efficiency of the company
Businesses choose Management accounting because it improves the efficiency of the company in performing operations. It contributes in striving for better performance by evaluating and comparing.
Management accounting makes it simpler to achieve various results. This ultimately motivates the employees to focus on better performance. Because of this, they receive rewards in the form of promotions. Thus, management accounting indirectly increases the efficiency of the organization.
Better Decision Making
Management accounting helps in effective decision making for a business. It provides all necessary information in the form of charts, tables, and forecasts to the management professionals. All this information helps managers in carrying out comprehensive analysis and taking correct decisions.
Identifying Problem Areas
If some product is not performing well, or some division is experiencing unexpected losses, etc. management accounting can help to identify the main cause.
Actually, if the management is diligent and their data and reports are regular, they’re able to identify the problem very early on. This will certainly enable the management to get ahead of the problem.
Cost transparency
In a business, the majority of the costs come from the Information Technology (IT). The job of management accounting in the firm is to work with the IT department closely. This step ensures within budget actions and offers cost transparency to the organization.
Motivates Employees
Management accounting functions as a tool for motivating workforce. It prepares and provides regular reports regarding operations of the business to the management personnel. Managers are easily able to study the performance of workers and take decisions pertaining to promoting or demoting them accordingly.
Assists in goal completion
The aim of the report presented by the management accountant is to help in achieving a long-term goal. It becomes possible to achieve the goal because of the comprehensive information of the management accountant, which shows the strong and weak points of the corporation. Furthermore, this information helps to discover the weakness and takes measures to overcome them.
Improved Communication
Two-way communication is followed in a company if management accounting system is adopted. Improved accounting information and reports regarding performance are delivered to top management for decision making. In another way, assignment of work and responsibilities over employees are communicated to lower level executives.
Disadvantages of Management Accounting
Management Accounting is just a tool.
Management accounting must not be regarded as an alternative or substitute for management. The tools and techniques of management accounting give only information and not decisions. Decisions should be taken by management, and implementation of decisions is also carried out by management.
Persistent Efforts
The conclusions and decisions drawn by the management accountant will not be implemented automatically. Thus, there is a need for continuous and coordinated efforts of each management level to execute such decisions.
Not Cost Effective
Management accounting can exist only in those companies which are operating a sound and appropriate system of cost accounting. While the introduction of a system of cost accounting is in itself costly, introduction of a management accounting system may not be beneficial when cost-benefit analysis is made.
Uncertain
Management accounting is linked to the future since it gives data for management and planning of future activities. But, the future is uncertain and management accounting may not provide effective results.
Broad-Based Scope
Management accounting has a very broad scope incorporating various disciplines. Management requires information from both accounting as well as nonaccounting sources.
This causes numerous problems and brings a degree of subjectivity in conclusion obtained through it.
Resistance to Change
Management accounting requires a break away from traditional accounting practices. It demands rearrangement of the employees and their activities, which is commonly a cause of resistance.
Biased interpretation
Personal interpretation is important with regards to decision making. The preparation of these reports by the management officer is dependent on the capability of interpretation and understanding. Prejudices and biased knowledge of the subject make it hard for the business to arrive at an accurate decision. Therefore, it becomes difficult to get effective results at the end of the day.
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