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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