What do you mean by managerial accounting? Write down its importance and limitations.

What do you mean by managerial accounting? Write down its importance and limitations.

To Understand better managerial accounting we need to understand business organizations so In early days the business organisations and transactions were small and easily manageable by the owners of the business themselves. The businessmen used to remember the transactions by memorizing them. In those days accounting developed as a result of the needs of the business to keep relationship with the outsiders, listing of their assets and liabilities.

The advent of industrial revoluation and technological changes have widened the market opportunities. Most of the business concerns in these days are run by company type of organisation. The business concern has constantly enter into transactions with outsiders. A transaction involves transfer of money or money’s worth (goods or services) from one person to another. In addition to the transactions with outsiders, there are also events requiring monetary record. It is not possible for a human being to keep in memory all the transactions.

Therefore, it is necessary to record all these transactions properly to get required financial information. With the help of accounting records the businessman would be able to ascertain the profit or loss and the financial position of his business at the end of a given period and would be able to communicate the results of business operations to various interested parties. It is, therefore, necessary to record all the transactions systematically from time to time irrespective of the form of business organisation. The accounting information is useful both for the management and the outside agencies. What do you mean by managerial accounting? Write down its importance and limitations.

The management needs it for the purpose of planning , controlling and decision making. The outsiders like banks, creditors etc. also require itfor assessing the financial solvency of the business and the tax authorities use it for determining the amount of tax liability. Infact accounting is necessary not only for business organisations but also for non-business organisations like schools, colleges, hospitals, clubs etc.

Accounting as said earlier, involves the collection, recording, classification and presentation of financial data for the benefit of management and outside agencies such as shareholder, creditors, investors, government and other interested parties. Accounting has been defined in different ways by different authorities on the subject. The following are some of the important definitions of accounting:

According to the Committee on Terminology of American Institute of Certified Public Accountants (AICPA), “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the results thereof”. Do you mean by managerial accounting? Write down its importance and limitations.

Eric L. Kohlen (A Dictionary for Accountants) defines accounting as “the procedure of analysing, classifying and recording transactions in accordance with a preconceived plan for the benefit of : (a) providing a means by which an enterprise can be conducted in orderly fashion, and (b) establishing a basis for reporting the financial condition of enterprise and the results of its operations.”

Managerial Accounting

To Know Cost accounting helps the internal management by directing their attention on inefficient operations and assisting in a day-to-day control of business activities. The costing data needs to be arranged, re-analysed and processed further for effective role in managerial process. In addition to costing and accounting data, managerial functions need the use of socio-economic and statistical data (e.g., population break-ups, income structure, etc.). What do you mean by managerial accounting? Write down its importance and limitations.

Cost and financial accounting do not provide such information and this limitation pave the way for the emergence of Managerial Accounting. Managerial Accounting is a systematic approach to planning and control functions of management. It generates information for establishing plans and controls. It provides for a system of setting standards, plans, or targets and reporting variances between planned and actual performances for corrective actions.

Thus, Managerial Accounting consists of cost accounting, budgetory control, inventory control, statistical methods, internal auditing and reporting. It also covers financial accounting. Managerial Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and accumulation of financial information used by management to plan, evaluate, and control within an organisation and to assure appropriate use of and accountability for its resources.

Managerial Accounting also comprises the preparation of financial reports for management groups such as shareholders, creditors, regulator agencies and tax authorities.Thus itis the application of professional information to assist the management in the formation of policies and in planning and control of the operations of the business enterprise.

Thus Managerial Accounting helps an organisation to accomplish its goals in the following ways :

1) It provides a way to communicate expectations to managers throughout the organisation.

2) It provides feedback which enables a manager to monitor the day to day operations of the company for which he is responsible. If actuals differ significantly from targeted results, the manager is alerted, can look for causes for deviation and can take corrective actions.

3) It provides a set of prescribed tools and techniques for use in decision making.

Limitations of Managerial Accounting

Though Managerial Accounting is a useful tool for planning, directing and controlling functions still it suffers from the following limitations :

1) Based on Cost and Financial Information: Managerial Accounting derives information from financial and cost accounting and other records. The accounting statements and records suffer from certain limitations as they are prepared on the basis of certain accounting concepts and conventions.

The correctness and effectiveness of managerial decisions will depend upon the quality of data on which these decisions are based. If financial data is not reliable then Managerial Accounting will not provide correct analysis. The limitations of financial statements and records may be transmitted to the Managerial Accounting system. This may limit its effectiveness and make the information a substandard one.

2) Persistence of Intuitive Decision Making: Managerial Accounting provides facts and figures of various situations and assists management in taking decisions scientifically. It includes decision tools such as marginal costing, differential costing and OR techniques like linear programming, decision theory, etc.

Despite the facilities provided, the management mostly resorts to simple methods of decision making by intuition. Intuitive decisions limit the usefulness of Managerial Accounting.

3) It has a very Wide Scope: For taking decision, management requires information from both accounting as well as non-accounting sources and also quantitative as well as qualitative information. This creates many problems and brings a degree of inexactness and subjectivity in the conclusions obtained through it .

Role of Managerial Accounting

The term Managerial Accounting has been applied to any one who performs accounting work within a firm and it encompasses persons performing activities which range from :

i) Posting customers’ receivable accounts,

ii) Doing financial analysis for decision making, and

iii) Making high-level decisions in a large scale organisation. There is no particular academic or professional accomplishments have been associated with the term. He plays a significant role in the decision making process of an organisation. The positional status of Managerial Accounting in an organisation varies from concern to concern depending upon the pattern of management system in the concern. He plays a significant role in the decision making process of the organisation heading the accounting department.

In large organizations he is known as Financial Controller, Financial Advisor, Chief Accounts officer etc. He is responsible for installation, development and efficient functioning of the Managerial Accounting system. He plays an important role in collecting, compiling, reporting and interpreting internal accounting information. He prepares the financial and cost control reports to satisfy the requirements of different levels of management. He computes variances by comparing the actuals with the standards and interprets the results of operations to different levels of the organisation and to the owners of the business.

Thus, the Managerial Accounting occupies an important position in the organization. He performs a staff function and also has line authority over the accountants. If he participates in planning and execution of policies, he is equal to other functional managers.

In most of the organisations, Managerial Accounting performs staff functions. He supplies information and gives his views about the data and leaves the final decision making to functional heads. If Managerial Accounting provides the facts accurately and are presented in a manner which allows proper analysis and interpretation then he cannot be held responsible for any wrong judgment by the management. 

On the other hand, if the information provided by the Managerial Accounting is biased, inaccurate and is not presented properly then he is responsible to the management for wrong decision making.


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