Nature and Purpose of Management Accounting Essay

? The primary role of management accounting is to information in a timely manner to the company’s provide relevant management to help them plan and control the activities of the organization and with which optimal and sound decisions can be made. All the topic areas examined relate to this primary role. Although this role and its related topics covered are clearly understood by most, if not all candidates or even managers in the organizations, different types of relevant information are needed for different organizations at different times for different situations and purposes.

Therefore business skills and sense are often required when tackling organizational problems along with good analytical and writing skills. Management accounting deals with information that is not generally disseminated outside a company, such as salary cost, profit targets and cost of materials per unit produced. Whereas the general purpose financial statements of financial accounting are assumed to meet the basic information needs of most external users, managerial accounting provides a variety of specialized reports for division managers, departmental heads, project directors, section supervisors and other managers within the company.

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NATURE OF MANAGEMENT ACCOUNTING Management accounting includes financial accounting and extends to the operation of a system of cost accounting and financial management. While meeting the legal and conventional requirements regarding the presentation of financial statements(Profit and loss account, balance sheet and fund flow statement)it stresses upon the establishment and operation of internal controls. The nature of management accounting can be well understood by comparing management accounting with financial accounting.

It should be clear that management accounting is intended for internal use by managers and employees who make decisions that affect the organizations future. In contrast financial accounting is intended primarily for external use by investors, creditors, and financial analyst who evaluate the firms past performance. Financial Accounting and Management Accounting both appear to be similar in as much as both study the impact of business transaction and events of the enterprise , report and interpret the results thereof. Both provide information for internal as well as external use, but Management ccounting although having its root in financial accounting differs from latter in the following respects. •Financial accounting studies the business transactions and events for the enterprise as a whole. It does not trace the paths of events within the enterprise. Management accounting in addition to the study of events in relation to the enterprise as a whole, takes organization in its various units and segment and attempts to trace the impact and effect of the business transactions and events through these divisions and sub-divisions.

Thus, while the financial statements profit and loss account , balance sheet and flow statement reveal the overall performance and position of the enterprise. Management accounting reports emphasis on the details of operational costs, inventories products, processes and jobs. It traces the effect and impact of the business transactions and events on costs, inventories, processes, jobs and products. •Financial accounting is necessary historical. It records and analysis business events long after they have taken place.

Management accounting analyses the events as they take place and also anticipate such events for the future. Thus ,it uses data which generally has relevance to the future. •Since financial accounting data is historical in nature, it is more precise than the Management accounting data which generally reflects the expected future and hence could only be an estimation. This provides the necessary rapidity to management accounting data which generally reflects the expected future , and hence could only be an estimation. This provides the necessary rapidity to management accounting information.

The periodicity in reporting financial accounts is much wider than in the case of management accounting. In financial accounting, generally results are reported on year to year basis. In management accounting, weekly, fortnightly and even monthly reporting is used. PURPOSE OF MANAGEMENT ACCOUNTING The purpose of management accounting is to provide managers with financial and statistical information which will help them carryout their responsibilities. The accounting system is the major quantitative information system in almost every company and it should provide information for three broad purposes. . Internal reporting to managers , for use in planning and controlling routing operations. 2. Internal reporting to managers ,for use in making non-routine decisions and in formulating majors plans and policies. 3. External reporting to stockholders, government and other outside parties for use in investors decisions, income tax collections, and a variety of other applications. The third purpose, external reporting, emphasizes the historical custodial and stewardship aspects of accounting. This area is usually called financial accounting.

Financial accounting is concerned with identifying, measuring , recording , and communicating the economic transactions of companies. On the other hand , internal reporting, the first two purposes, focuses on management planning and control. This area is usually called management accounting. Management accounting is identification, measurement, accumulation, analysis, preparation, and communication of information that assist executives in fulfilling organizational objectives. Accounting cuts across all facets of a company.

The study of modern cost accounting which is often called management accounting yields insight and breadth regarding both the accountant’s role in a company. A management accountant is concerned with identifying why the information is required so that the most appropriate technique can be used to supply information to managers which will be of value. Management needs this information to enable them to plan the progress of the company, control the activities and see the financial implications of any decisions they may take.

Financial accounting aims to present a true and fair view of business transactions and is conducted within a regulatory framework. This means that there are certain legal and other obligations which different companies must adhere to. Management accounting is concerned with providing financial information which is of value to managers. It therefore offers a number of general advantages, such as helping the organisation to be more profitable. Not all companies employ a management accountant.

In a very small company the owner may keep the financial records and employ a firm of accountants to draw up the financial statements and sort out tax matters at the year end. In larger companies an accountant is more likely to be employed. In large companies it is normal to employ some staff who specialize in financial accounting and some who specialize in management accounting. The purpose of management accounting is to provide managers with financial and statistical information which will help them carry out their responsibilities.

The responsibilities of managers in any organisation can be classified as planning, controlling and decision making. Therefore the financial information they require should help them to control the resources for which they are responsible, plan how those resources can be most effectively used and decide what course of action they should take when a number of options are open. A major purpose of management accounting is to accumulate the costs of an organisation’s products and services. This product-costing purpose helps managers. For instance, managers can use product costs to guide the setting of selling prices.

In addition, these product costs are used for inventory valuation and income determination. Management accountants and financial accountants are often members of professional accountancy bodies, usually the Chartered Institute of Management Accountants (CIMA), the Association of Chartered Certified Accountants (ACCA), Institute of Chartered Accountants (ICA) etc. Members of these noble professional bodies would have trained as accountants in industry and passed a number of rigorous examinations. After the examinations they are also entitled to use letters like FCA, FCCA, ACMA, FCMA, CMA, and CPA.


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