Define Management Accounting. What are its objectives?
Management Accounting is the process of analysis, interpretation and presentation of accounting information collected with the help of financial accounting and cost accounting, in order to assist management in the process of decision making, creation of policy and day to day operation of an organization. Thus, it is clear from the above that the management accounting is based on financial accounting and cost accounting.
Following are the objectives of Management Accounting:
1) Measuring performance: Management accounting measures two types of performance. First is employee performance and the second is efficiency measurement. The actual performance is measured with the standardized performance and a report of deviation from the standard performance is reported to the management for the effective decision making and also to indicate the effectiveness of the methods in use. Both types of performance management are used to make corrective actions in order to improve performance.
2) Assess Risk: The aim of management accounting is to assess risk in order to maximize risk.
3) Allocation of Resources: is an important objective of Management Accounting.
4) Presentation of various financial statements to the Management.
What are the limitations of Management Accounting?
Limitations of Management Accounting:
1) Management Accounting is based on financial and cost accounting, in which historical data is used to make future decisions. Thus, strength and weakness of the managerial decisions are based on the strength and weakness of the accounting records.
2) Management Accounting is useful only to those people who are in the decision making process.
3) Tools and techniques used in management accounting only provide information and not ready made decision. Thus, it is only a supplementary service.
4) In Management Accounting, decision is based on the manager’s institution as management try to avoid lengthy courses of scientific decision making.
5) Personal prejudices and bias affect the decisions as the interpretation of financial information is based on personal judgment of the interpreter.