This article discusses the importance of Management accounting in any business organization. It shows how management accounting is used as a valuable tool for a business management.
The importance of management accounting may be clearly understood if one goes beyond the definition: “Accounting is recording of transactions and preparation of financial statements.”, while considering what lies more than that has been defined; which may be clearly apparent in these words, “Accounting is the science of recording and classifying transactions and events, primarily of financial character, and the art of making significant summaries, analysis and interpretations of those transactions and events, and communicating the results to persons who must make decisions or form judgments.” Thus, it sheds light on the aspect that accounting is not confined to the interrelated activities and involved in just recording the transactions and preparing of financial statements, while giving rise to the need for management accounting enlightening its significance to a business management.
Though management accounting is concerned with providing information to mangers – inside the organization, yet it entails quite a lot of scopes. Management sets up the plans and executes them after having selected the best of the alternatives that may yield highest probable benefits. After the plans are put into practice there may be restricted access or bottlenecks resulting in weakening the performance and creating deviations in the activities of an organization. In such cases, management needs to identify and strive to set them right through the process of controlling. In all the above roles of management, such as, planning, decision making and controlling, management accounting is of much value and significance.
Management accounting is interconnected with financial accounting. It is required by management in order that the related activities can be planned and the performance can be evaluated on timely basis.
It provides the information which is useful to management internally while highlighting the importance on the establishment of internal controls.
It focuses not only on present but also on future while presenting future-looking information to managers that the information may facilitate planning and controlling functions. It furnishes the information in accordance with the requirement of management.
In contrast to financial accounting which is useful for external users and available publicly, management accounting is particularly purposive for management and inside the organization while maintaining confidentiality. It is obvious that management is keen to know about the figures pertaining to profit and loss and the current status of economic benefits and obligations (Assets & Liabilities), yet management accounting exceeds in providing the information to the management which is of great assistance to decision making process and simultaneously related to planning and controlling function emphasizing on necessary measures to be taken for corrections.
What planning function involves is the selection of the organizational objectives. After having decided how to attain them and communicated to the entire organization, it takes actions to implement the planning decisions; whereas the controlling function involves the establishment of standards of performance, so that the corrective actions can be taken while ensuring if the planned objectives are being achieved. Similarly, through the process of management accounting, plans are established and coordinated with the preparation of budgets, standards, capital investments etc. As regards controls, standards are fixed so as to analyze the variance between the actual and fixed variables by variance analysis relating to all the elements of cost. This will facilitate ensuring performance, controlling and taking corrective measures.
The process of management accounting involves analysis of financial statements and interpreting them to present to the management in a simple and understandable manner so as to smooth decision making process. Besides, it's through management accounting that the information related to effectiveness, efficiency and growth of a business organization is presented to the management. This way, management accounting provides the relevant and other necessary data which is helpful in proper understanding the problems while enabling management to take required correctives.
It thus would not be an exaggeration if it's said that management accountant should be regarded as an asset, for he creates value to a business organization. He throws all the force of his vigorous activities and extremely strong skills gained through knowledge, experience and educational qualifications. He holds a key position while executing his duties as the head of the department. He is required by the board of directors for periodical reports and necessary data. His role is largely advisory in nature since he needs to be consulted with as and when needed in order that he may provide the necessary information pertaining to the strength and performance of a business, its objectives and efficiency and effectiveness.
Ratio, in general, shows a proportional relationship between two different numbers or quantities. It may be a relationship between two amounts that is represented by a pair of numbers showing how much greater one amount is than the other, that is, the ratio of something to something.
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