In a layperson’s language, we can define management accounting as providing financial and non-financial decision-making information to managers. Managerial accounting is the process of assessing, interpreting and conveying financial information to the organisation’s executives.
The process entails the use of accounting software or ERP systems that provide financial reports, budgeting, and forecasting information which helps managers to analyse the variances between actual results from budgets. The job of a management accountant is to collaborate in decision-making and devise plans to assist the management in formulating and implementing an actionable strategy.
A] Characteristics of Management Accounting
Now that we know the definition of management accounting, let us look at some of its characteristics.
- Provision of financial information: The primary focus of management accounting is to provide financial information to an organisation’s management at different strata for policy reviewing and decision-making.
- Emphasis on future activities: One of the most distinguishing features of management accounting is an emphasis on future activities. The decision-making aspect of management accounting entails using past results and figures and extracting future implications from the same.
- Provision of qualitative information: Management accounting focuses on qualitative information, and its premises are based on the quality of the underlying data required within an organisation.
- Focus on cost: It also focuses on costs. The department is given responsibilities such as controlling and reducing the existing expenses incurred, establishing product and other types of costs, and so forth.
- Usage of special techniques: The use of special techniques like standard costing, marginal costing, budgetary control, ratio analysis, cash flow, responsibility accounting, etc, to make accounting much more helpful and relevant to the management.
- Does not involve standards or conventions: Another critical characteristic of management accounting is that it does not follow standards or conventions. The absence of standards or conventions makes the managerial accounting department stand out from the rest. Almost all branches of an organisation have to stick to specific standards. However, the same is not the case with managerial accounting. Flexibility is a crucial component of management accounting that fosters decision-making.
- Focus on internal users: Another salient feature of management accounting is its focus on internal users. More specifically, management accounting is all about making vital information available to managers.
Now that we have discussed in detail the characteristics of management accounting, let’s check out the importance of managerial accounting.
B] Why Managerial Accounting Is Important?
Decision-making in businesses is based on facts and figures. Unfortunately, most of the daily transactional information of an organisation is too minute and meticulous to assess at a glance. It is in such a context that management accounting becomes essential.
One can gauge the importance of managerial accounting from the fact that it extracts reports and insights from the actual data to provide solutions to pressing questions. By studying trends and the implications of erstwhile decisions, management accounting can help make decision-making easy and fruitful.
1. It facilitates cost analysis
How a company spends its money directly affects the bottom line. The enhancement of profit margins entails a better cost analysis that entails comparing different suppliers, products, services, and other factors to determine the one that would be the most advantageous and profitable. Expenditure decisions based on reports are more likely to be fact-driven and help a company plan out its expenditure better.
2. It supports the implementation of activity-based pricing strategies
The importance of managerial accounting centers on analysis based on profit-centrism at a customer and product level against an organisational level. Activity-based costing allows a company to examine the information available from multiple departments to improve business processes. With activity-based costing, organisations can identify activities, processes, and cost objects to calculate the total and unit costs by utilising a cost-effect relationship.
In today’s highly competitive market and dynamic business environment, companies should utilise the fact-based competencies of managerial accounting to identify the most profitable customers and create a pricing strategy based on their needs.
3. It helps you decide whether to purchase and manufacture your product
Manufacturing industries have a colossal amount of data to analyse and optimise at every production stage. While some companies are involved in production at every level, others may prefer to source some elements from outside. As such, it may be more cost-efficient to manufacture the necessary components internally rather than to source from a vendor and vice-versa. In such a context, management accounting decision-making comes to the rescue.
A company’s management accounting department can curate a comparison report on the relative costs of manufacturing in-house vis-à-vis external sourcing, helping the decision-makers to understand what the ideal strategy is.
For instance, if a company determines that they have a more significant advantage with in-house manufacturing, they can also offer estimates on how quick the recovery process of change will be, the rate of return, and likewise.
4. It assists in defining the budget
Needless to say, company budgets that are decided at random are often wasted or insufficient. Here, management accounting helps determine the budget forecast for the upcoming period through a thorough study of the historical expense data. By analysing past data and predicting future trends, the management accounting department of a company can facilitate the creation of an achievable and profitable budget.
5. It facilitates better management
Management accounting is flexible, so a company can have its own structure as per its Management accounting is flexible, so a company can have its structure as per its requirements. If an organisation feels that certain areas require more in-depth analysis, then the managerial accounting department can focus more on that area. The information presented by the management accounting department helps a company to focus on certain core areas that facilitate better management, which is in-tuned with its requirements.
6. It facilitates efficient planning
The management of a company entails driving the current operations of a company and making future plans to further the overall organisational goals. Planning that is based on data has a higher chance of success. By examining the historical and current patterns in the industry and company, management accounting helps forecast future trends.
The importance of management accounting can be drawn from the fact that it allows the extraction of the readily available information in the market to foster better decision-making. Generating reports through the use of accounting software like TallyPrime can provide the company with the bigger picture and drill down the finer details, helping improve the planning efficiencies of the company.
So, there you have it, the top six reasons why managerial accounting is essential. From the definition of management accounting to the management accounting examples, we have discussed everything here.
It would not be incorrect to assert that management accounting decisions are indispensable for a company’s development. Whether it is an already-established corporate bigwig or a newly formed small enterprise, the fact-driven decision-making facilitation of accounting management can help every organisation in critical judgements.
In today’s day and age, several top-notch management accounting software packages are also available to assist companies. Software like TallyPrime is efficient, reliable, affordable, and the best alternative to conventional accounting management.