Management Accounting, Goals and Objectives, Components of Managerial Accounting, etc.

Management Accounting
The process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day to day and short time decisions is called Management Accounting.

Unlike financial accounting, which produces annual reports mainly for external stakeholders, management accounting generates monthly or weekly reports for an organization's internal audiences such as department managers and the chief executive officer. These reports typically show the amount of available cash, sales revenue generated, amount of orders in hand, state of accounts payable and accounts receivable, outstanding debts, raw material and inventory, and may also include trend charts, variance analysis, and other statistics. Also called managerial accounting.

Goals and Objectives
A basic objective of managerial accounting is to improve the effectiveness of both the management planning and control functions. Plans should be developed on the same information base as the mechanisms of control. Planning depends on the same reporting and control mechanisms that make central oversight possible and decentralized management feasible. Building the mechanism of control on one data base (financial accounting) and the planning process on another (program analysis) places too great a burden on the management system as the intermediary. Managerial accounting involves in the formulation of financial estimates of future performance (the planning and budgeting processes) and, subsequently, the analysis of actual performance in relation to those estimates (program evaluation and control).

Components of Managerial Accounting
1. Experimentation and innovation are encouraged in the types of management information provided.
2. Information generated for planning and programming purposes to establish a better balance with the control function of accounting.
3. Cost consciousness is increased among operating units through the identification of cost and responsibility centers and the use of performance standards.
4. Cost analyses facilitate the linkages among management control, program budgeting, and performance auditing.
5. Emphasis on cost estimation for planning or control purposes, rather than on financial reporting.
6. Costs are monitored to determine if they are reasonable for the activities performed.
7. Performance standards (workload and unit cost data) added to traditional accounting control mechanisms by which legal compliance and fiscal accountability are evaluated.
8. Crosswalks of financial data are accommodating various external and internal reporting needs.

Scope of Management Accounting
The scope or field of management accounting is very wide and broad based and it includes a variety of aspects of business operations. The main aim of management accounting is to help management in its functions of planning, directing, controlling and areas of specialization included within the admit of management accounting. The scope of management accounting can be studied as follows:

1. Financial Accounting
Financial accounting forms the basis for analysis and interpretation for furnishing meaningful data to the management. The control aspect is based on financial data and performance evaluation, on recorded facts and figures. So, management accounting is closely related to financial accounting in many respects.

2. Cost Accounting
Cost accounting is the process and techniques of ascertaining cost. Planning, decision making and control are the basic managerial functions. The cost accounting system provides the necessary tool for carrying out such functions efficiently. The tools include standard costing, inventory management, variable costing etc.

3. Budgeting and Forecasting
Budgeting means expressing the plans, policies and goals of the firm for a definite period in future. Forecasting on the other hand, is a prediction of what will happen as a result of a given set of circumstances. Forecasting is a judgment whereas the budgeting is an organizational object. These are useful for management accounting in planning.

4. Inventory Control
Inventory is necessary to control from the time it is acquire till its final disposal as it involves large sum. For controlling inventory, management should determine different level of stock. The inventory control technique will be helpful for taking managerial decisions.

5. Statistical Method
Statistical tools not only make the information more impressive, comprehensive and intelligible but also are highly useful for planning and forecasting.

6. Interpretation of Data
Analysis and interpretation of financial statements are important part of management accounting. After analyzing the financial statements, the interpretation is made and the reports drawn from this analysis are presented to the management. Interpreting the accounting data to the authorities in the management is the principal task of management accounting.

7. Reporting To Management
The interpreted information must be communicated to those who are interested in it. The report may cover Profit and Loss Account, Cash Flow and Funds Flow statements etc.

8. Internal Audit and Tax Accounting
Management accounting studies all the tax matters to assist the management in investment decisions vis-a-vis tax planning as a resource to enjoy tax relief.
Internal audit system is necessary to judge the performance of every department. Management is able to know deviations in performance through internal audit. It also helps management in fixing responsibility of different individuals.

9. Methods of Procedures
This includes maintenance of proper data processing and other office management services. It may have to deal with filing, copying, duplicating, communicating and management information system and also may have to report about the utility of different office machines.

Why Management Accounting is helpful in Decision Making?
Managerial accounting information provides data-driven input to these decisions, which can improve decision-making over the long term. Small business managers can leverage this powerful tool to help make their business more successful by understanding how management accounting benefits common business decision contexts.

Relevant Cost Analysis
Managerial accounting information is used by company management to determine what should be sold and how to sell it. For example, a small business owner may be unsure where he should focus his marketing efforts. To evaluate this decision, an accounting manager could examine the costs that differ between advertising alternatives for each product, ignoring common costs. This process is known as relevant cost analysis and is a
technique that is taught in basic managerial accounting courses. The same process can be used to determine whether to add product lines or discontinue operations.

Activity-based Costing Techniques
Once the company has determined what products to sell, the business needs to determine to whom they should sell the products. By using activity-based costing techniques, small business management can determine the activities required to produce and service a product line. Embedded in this information is the cost of customers. Deciding which customers are more or less profitable allows the business owner to focus advertising toward the consumers who are the most profitable.

Make or Buy Analysis
A primary use of managerial accounting information is to provide information used in manufacturing. For example, a small business owner may be considering whether to make or buy a component needed to manufacture the company's primary product. By completing a make or buy analysis, she can determine which choice is more profitable. While this technique is certainly useful, small business owners should only use these analyses as a factor in the decision. There could be other non-financial metrics that are important to consider that would not be part of the analysis.

Utilizing the Data
Managerial accounting information provides a data-driven look at how to grow a small business. Budgeting, financial statement projections and balanced scorecards are just a few examples of how managerial accounting information is used to provide information to help management guide the future of a company. By focusing on this data, managers can make decisions that aim for continuous improvement and are justifiable based on intelligent analysis of the company data, as opposed to gut feelings.

Difference between Management Accounting and Financial Accounting
The differences between management accounting and financial accounting include:
1. Management accounting provides information to people within an organization while financial accounting is mainly for those outside it, such as shareholders
2. Financial accounting is required by law while management accounting is not. Specific standards and formats may be required for statutory accounts such as in the I.A.S International Accounting Standard within Europe.
3. Financial accounting covers the entire organization while management accounting may be concerned with particular products or cost centers.
Managerial accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be "future looking" and have forecasting value to those within the company.
Financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company. Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Such reports may include:
 Sales Forecasting reports
 Budget analysis and comparative analysis
 Feasibility studies
 Merger and consolidation reports
Financial Accounting, on the other hand, concentrates on the production of financial reports, including the basic reporting requirements of profitability, liquidity, solvency and stability. Reports of this nature can be accessed by internal and external users such as the shareholders, the banks and the creditors.
Financial Accounting
Management Accounting
Format:
Financial accounts are supposed to be in accordance with a specific format by IAS so that financial accounts of different organizations can be easily compared.
No specific format is designed for management accounting systems.
Planning and control:
Financial accounting helps in making investment decision, in credit rating.
Management Accounting helps management to record, plan and control activities to aid decision-making process.
External Vs. Internal:
A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors.
A management accounting system produces information that is used within an organization, by managers and employees.
Focus:
Financial accounting focuses on history.
Management accounting focuses on future.
Users:
Financial accounting reports are primarily used by external users, such as shareholders, bank and creditors.
Management accounting reports are exclusively used by internal user’s viz. managers and employees.
department:
Preparing financial accounting is the work of finance department.
Managerial accounting is not specific task of particular department. Co-ordination of all department creates management accounting.
report frequency:
well defined - annually, semi-annually
Whenever needed - daily, weekly, monthly.
Mandatory Vs. optional:
Preparing financial accounting reports are mandatory especially for limited companies.
There are no legal requirements to prepare reports on management accounting.
Time span:
Financial accounting statements are required to be produced for the period of 12 months.
No specific time span is fixed for producing financial statements.
Monetary Vs. non-monetary:
Most financial accounting information is of a monetary nature.
Management accounting information may be monetary or alternatively non monetary.
Objectives:
The main objectives of financial accounting are to disclose the end results of the business and to depect the financial condition of the business on a particular date.
The main objectives of Management Accounting are to help management by providing information that used by management to plan, evaluate, and control.
Legal/rules:
Drafted accounting GAAP - General Accepted Accounting Procedure.
Drafted according to management suitability.
Accounting process:
Follows a full process of recording, classifying, and summarizing for the purpose of analysis and interpretation of the financial information.
Cost accounts are not preserved under Management Accounting but analyses necessary data from financial statements and cost ledgers.
Center of importance:
The financial accounting, the origin of preservation of knowledge gives emphasis on recording keeping on a whole firm basis for the purpose of decisions by all the users of accounting information, both external and internal.
Management accounting uses cost data for provision of information for strategic management decisions. It is mainly concerned with the provision of help to the managers to asses them in the process of decision making and design business strategies.
segment reporting:
Describe whole organization.
Only covered part of organization (dept) - production department.
Management Accounting is useful in Banking Operation- Comment on it.
General
1. Forecasting
2. Planning
3. Organization
4. Motivation
5. Coordinating
6. Controlling
7. Communication
8. Decision Making
Banking
1. Collection, Classification, Analysis and Presentation of Financial data
2. Systematic and reliable planning
3. Ascertainment, Reduction and Control of cost
4. Product Pricing
5. Measurement of work performance
6. Preparation of statement of cost and other necessary statement
7. Preparation of Master Plan of Development of Industry
8. Role of Financial Management in Industry
9. Forward looking
10. Efficiency Analysis
11. Helping in decision making
Limitations of Management Accounting
Though management accounting is helpful tool to the management as it provides information for planning, controlling and decision making, still its effectiveness is limited by a number of reasons. Some of the limitations of management accounting are as follows:
1. Based On Accounting Information
Management accounting is based on data and information provided by financial accounting and cost accounting. As such the correctness and effectiveness of managerial decisions will depend upon the quality of data provided by cost and financial accounts. So, effectiveness of management account is limited to the reliability of sources of information.
2. Lack of Knowledge
The use of management accounting requires the knowledge of number of related subjects. Deficiency in knowledge in related subjects like accounting principles, statistics, economics, principle of management etc. will limit the use of management accounting.
3. Intensive Decisions
Decision taking based on management accounting that provide scientific analysis of various situations will be time consuming one. As such management may avoid systematic procedures for taking decision and arrive at decision using intuitive. And intuitive limit the usefulness of management accounting.
4. Management Accounting Is Only a Tool
The tools and techniques of management accounting provide only information and not decisions. Decisions are to be taken by the management and implementation of decisions is also done by management.
5. Evolutionary Stage
Management accounting is still in a development stage and has not yet reached a final stage. The techniques and tools used by this system give varying and differing results. It is still named as internal accounting and/ or operational accounting.
6. Personal Prejudices and Bias
The interpretation of financial information may differ from person to person depending upon the capability of the interpreter. Analysis and interpretation of data and information may be influenced by personal basis. As such, the objectivity of decision may be affected by personal prejudices and bias.
7. Psychological Resistance
Changes in traditional accounting practices and organizational set up are required to install the management accounting system. It calls for a rearrangement of the personnel and their activities and framing of new rules and regulations which generally may not be liked by the people involved.
MBO
Management by objectives (MBO), also known as management by results (MBR), is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization in order to achieve them. The term "management by objectives" was first popularized by Peter Drucker in his 1954 book The Practice of Management.
The essence of MBO is participative goal setting, choosing course of actions and decision making. An important part of the MBO is the measurement and the comparison of the employee’s actual performance with the standards set. Ideally, when employees themselves have been involved with the goal setting and choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities.
According to George S. Odiorne, the system of management by objectives can be described as a process whereby the superior and subordinate jointly identify its common goals, define each individual's major areas of responsibility in terms of the results expected of him, and use these measures as guides for operating the unit and assessing the contribution of each of its members.
Unique features and advantages of the MBO process
Behind the principle of Management by Objectives (MBO) is for employees to have a clear understanding of the roles and responsibilities expected of them. Then they can understand how their activities relate to the achievement of the organization's goal. Also places importance on fulfilling the personal goals of each employee.
Some of the important features and advantages of MBO are:
1. Motivation – Involving employees in the whole process of goal setting and increasing employee empowerment. This increases employee job satisfaction and commitment.
2. Better communication and coordination – Frequent reviews and interactions between superiors and subordinates help to maintain harmonious relationships within the organization and also to solve many problems.
3. Clarity of goals
4. Subordinates tend to have a higher commitment to objectives they set for themselves than those imposed on them by another person.
5. Managers can ensure that objectives of the subordinates are linked to the organization's objectives.
6. Everybody will be having a common goal for whole organization. That means, it is directive principle of management
Limitations
1. It sometimes ignores the prevailing culture and working conditions of the organization.
2. More emphasis is being laid on targets and objectives. It just expects the employees to achieve their targets and meet the objectives of the organization without bothering much about the existing circumstances at the workplace. Employees are just expected to perform and meet the deadlines. The MBO Process sometimes does treat individuals as mere machines.
3. The MBO process increases comparisons between individuals at the workplace. Employees tend to depend on nasty politics and other unproductive tasks to outshine their fellow workers. Employees do only what their superiors ask them to do. Their work lacks innovation, creativity and sometimes also becomes monotonous.
Planning
Planning (also called forethought) is the process of thinking about and organizing the activities required to achieve a desired goal.
Planning involves the creation and maintenance of a plan. As such, planning is a fundamental property of intelligent behavior. This thought process is essential to the creation and refinement of a plan, or integration of it with other plans; that is, it combines forecasting of developments with the preparation of scenarios of how to react to them.
An important, albeit often ignored aspect of planning, is the relationship it holds with forecasting. Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like. The counterpart to planning is spontaneous order.
Planning in organizations
In organizations, planning is a management process, concerned with defining goals for company's future direction and determining on the missions and resources to achieve those target. To meet the goals, managers may develop plans such as a business plan or a marketing plan. Planning always has a purpose. The purpose may be achievement of certain goals or targets.
Main characteristics of planning in organizations are:
 Planning increases the efficiency of an organization.
 It reduces the risks involved in modern business activities.
 It facilitates proper coordination within an organization.
 It aids in organizing all available resources.
 It gives right direction to the organization.
 It is important to maintain a good control.
 It helps to achieve objectives of the organization.
 It motivates the personnel of an organization.
 It encourages managers' creativity and innovation.
 It also helps in decision making.
The planning helps to achieve these goals or target by using the available time and resources. The concept of planning is to identify what the organization wants to do by using the four questions which are "where are we today in terms of our business or strategy planning? Where are we going? Where do we want to go? How are we going to get there?

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