Management accounting is a branch of accounting which concerns with providing reliable, useful, and concrete information to the management to assist in decision making process. In other words management accounting is helpful for internal users or stakeholders of accounting information usually managers to make informed decisions based on tangible financial information related to an organization or its segment.
Chartered Institute of Management Accountants (CIMA) defines the management accounting as
“the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources”.
Users of accounting information
It is appropriate to brief the readers about users of financial or accounting information to help them better comprehend the role of management accounting. The users of the accounting information can be broadly categorized into two segments i.e. internal users and external users. To deal with the requirements of external users the branch of accounting combating with is financial accounting. External users are shareholders, lenders, creditors, and Governments and they require a true and fair view of financial position and operational performance of an organization. To ensure protection of the rights of external users a formal system of financial reporting exists under the authoritative control of Internal Financial Reporting Standard Board which ensures uniform financial reporting through out the world under the sound mechanism of Generally Accepted Accounting Principals. However any further description on the subject of external users, requirements and disclosures, and system in place to ensure true fair financial reporting is out of the scope of our commentary.
The focus of this article is management accounting which deals with the specific requirements of second segment of the users of accounting information called internal users. In internal users the managers are the biggest stakeholders of the information produced by management accounting system. Managers have to make decisions, prepare projections, budgets, plans, forecasts, conduct reviews, and articulate management reports on daily basis. It is pertinent to mention that the performance of an organization mainly depends on the soundness and effectiveness of the decisions made and strategies adopted by the managers. Therefore, external show of the firm fundamentally depends upon well-organized internal organisms and the internal efficiency is something a dream of blind without a reliable and proficient management accounting system.
Purposes served by management accountants
Though confined traditionally but in recent times the role of management accounting and the responsibilities of the professionals in this meadow is extended towards the key receptacles and included the underneath broadly explained functions in the mainstream of management accountancy.
Cost accounting – allocation of costs among cost centers for internal and external reporting.
Strategic management and decision making – acting as strategic partners to devise alternative strategies in view of the internal strengths or weaknesses and external opportunities and threats. Management accountants play a responsible role in internal decision making process.
Planning and control – management accountants act as key associates in planning process and in devising measures to ensure sound internal controls.
Performance management: evaluation and comparison – active partners in formulating benchmarks for organizational performance as well in measurement and comparison of the organizational maneuvers in various dimensions.
Business development and continuous improvement – with a brighter insight into the organization’s internal and external environment, management accountants serve as key individuals understanding the organizational strengths and weakness internally and threats and opportunities externally. They better recognize and report the opportunities to be exploited and weaknesses to be improved.
Risk exposures – management accountants contribute towards developing skeletons for risk management. Through their imminent approach they help in identification, measurement, and mitigation of risk exposures.Forecasting and budgeting – an important distinctiveness of management accounts is to forecast the revenues and profitability for future more realistically and