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Management accounting is the accounting process which concerned with the provision of both financial and non-financial information to the organization’s management team for their use in planning, decision making, performance evaluation, control, management of costs, and cost determination for financial reporting. Management accounting not only helps in decision making and monitoring risk but also helps to improve the effectiveness and efficiency of the existing operation.
There is a statutory requirement for business firms to have financial accounting to produce annual financial accounts while on the other hands, management accounting is entirely optional. Therefore, people might think that management accounting is not necessary in the business. However, management accounting provides adequate and useful information regarding different segments or divisions of the firm. Although financial accounting is significant for management as it helps them to direct and control the firm activities but it has several limitations which have been responsible for the emergence of cost and management accounting.
The following limitation are:
(1) Financial accounting does not provide detailed cost information for different departments, processes, products, jobs in the production divisions while management accounting separate cost data are available for different services and functions in the administration division. These information about different products, sales territories and sales activities is significant for management in making better decision and evaluate existing operations.
(2) Financial accounting is unlikely to identify the behaviour of costs as expenses are not assigned to the product at each stage of production. Management accounting classified expenses into direct and indirect and therefore can be classified as controllable and uncontrollable. Control of cost is an important objective of all business enterprise, which cannot be achieved with only financial accounting alone.
(3) Financial accounting does not provide sufficient information to analyse losses due to various factors, such as seasonal fluctuations in volume of business. It is unlikely to help management in the process of decisions making regarding the business future, such as expansion of business, dropping product line, starting new product, using alternative methods of production, improvement in product, and other more. It is also not possible to prepare reports for comparison and analysis between two periods of time within the firm and inter-firm comparison.
(4) Financial accounting does not provide day-to-day information about costs and expense as it only contains historical cost information which is accumulated at the end of the accounting period. The historical cost is only relevant but not a reliable basis for predicting future earnings, solvency, or overall managerial effectiveness.
(5) Financial accounting does not set up a proper system of controlling materials and supplies. A proper system of controlling inventories and supplies can avoid losses on account of misappropriation, misutilisation, scrap, defectives, etc.
(6) Financial accounting, unlike management accounting, does not record and account wages and labour for different jobs, processes, products, departments. Therefore, management will have difficulties in analysing the cost associated with different activities. It also does not possess an adequate system of standards to evaluate the performance of departments and employees working in departments. A firm cannot compare the work of labourers without standards developed for materials, labour and overheads.
In conclusion, management accounting is not an unnecessary luxury for business establishment. Management accounting is useful for planning and decision making which helps companies to improve their efficiency and effectiveness. However, companies also need to wisely select the collection of information as too much unnecessary information not only increase the cost but also confuse the decision maker.
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