Management accounting: meaning, nature and scope

Meaning

Management accounting is the application of accounting knowledge and techniques to provide information that helps management plan, control and take decisions. It identifies the information a manager needs, measures it, analyses and interprets it, and communicates it in time for action. It presents financial, cost and other data in a form suited to the needs of managers at every level, so that resources are used efficiently and the organisation's objectives are achieved. In short, it is accounting for management rather than accounting for outsiders.

Nature of management accounting

1. Decision-oriented. Its purpose is to help management choose between alternatives: which product to make, what price to charge, whether to make or buy.
2. Future-oriented. It deals mainly with plans, forecasts and budgets, though it uses past data as a base.
3. Selective. It provides only the information relevant to a particular problem, not every recorded figure.
4. Uses cause-and-effect analysis. It explains why results differ from plans (variance analysis) and how costs behave with volume.
5. No fixed rules or formats. Unlike financial accounting, it is not governed by accounting standards or statutory formats; it uses whatever concepts suit the purpose, such as opportunity cost or relevant cost.
6. Provides information, not decisions. It supplies data and analysis; the decision is management's.
7. Interdisciplinary. It draws on cost accounting, financial accounting, statistics, economics and management science.
8. Serves internal users. Its reports are for managers, not shareholders or tax authorities.

Scope of management accounting

1. Financial accounting: the basic records from which much of its data come.
2. Cost accounting: costing methods, standard costing with variance analysis, marginal costing and cost control.
3. Budgeting and forecasting: functional budgets, master budget, flexible budgets and budgetary control.
4. Analysis and interpretation of financial statements: ratio analysis, cash-flow and funds-flow analysis.
5. Decision-making tools: cost-volume-profit analysis, relevant costing, capital budgeting.
6. Responsibility accounting and performance evaluation: cost, profit and investment centres; ROI and residual income.
7. Inventory control: order levels and economic order quantity.
8. Management reporting: timely reports to different levels of management.
9. Tax planning and internal audit, in so far as they affect management decisions.
10. Statistical and quantitative methods: forecasting, sampling, linear programming.

An illustration

When a company considers dropping a loss-making product, financial accounting reports the product's past loss. Management accounting goes further: it separates the product's variable costs from fixed costs that would continue anyway, measures the contribution that would be lost, considers other uses of the freed capacity, and so shows whether dropping the product would raise or lower total profit.

Conclusion

Management accounting is a forward-looking, decision-oriented information system. Its scope is wide because it serves every management function, drawing on all branches of accounting and on other disciplines.