Management Accounting: Benefits and Limitations

Management Accounting: Benefits & Limitations

Benefits/Advantages of Management Accounting

Management accounting measures the cost of significant activities, identifies non-value-added costs, and identifies activities that will improve organizational performance. The application of a management accounting system will save and reduce costs with the following benefits:

• Measuring costs of resources consumed in performing the organization’s significant activities,
• Eliminating non-value-added costs, which are the costs of activities that can be eliminated with no deterioration in product quality, performance, or perceived value,
• Determining efficiency and effectiveness of all major activities performed in the enterprise,
• Evaluating new activities that can improve the future performance of the organization,
• Implementing a cost management system with an emphasis on the organization’s activities that focus on the goal of producing quality goods and services at the lowest possible cost,
• Implementing activity-based costing for determining the costs of producing goods or services in accordance with how the activities are used in the production of those goods and services. An ABC system helps management to understand the causal linkages between activities and costs,
• Implementing activity-based management to improve the operations of an organization.

Limitations of Management Accounting

Despite the fact that the development of an effective discipline in management accounting is one of the most significant steps to improve management performance, it has had to face conditions, which limit the effectiveness of management through accounting. Though management accounting is a helpful tool for management as it provides information for planning, controlling, and decision-making, still its effectiveness is limited by a number of reasons. Some of the limitations of management accounting are listed below:

Based on assumptions and estimates:

Management accounting relates to a future time which is uncertain. Moreover, business variables are too dynamic. While making business plans and decisions under a condition of uncertainty one has to make assumptions of a future state of events. These assumptions may not exist when the time comes. If the assumptions do not exist, the plan does not give the expected result. No matter how carefully we plan, unwanted events cannot be prevented.

Based on historical accounting information:

Management accounting is based on data and information provided by financial and cost accounting. As such the correctness and effectiveness of management decisions will depend upon the quality of data provided by financial and cost accounting. So the effectiveness of management accounting is limited to the reliability of the source of information.

Lack of knowledge:

The emergence of management accounting has been the result of the fusion of a number of subjects like statistics, accounting, management theories, economics, etc. The use of management accounting requires knowledge of all these related subjects. Deficiency in knowledge and inadequate grounding on the part of management in any one or more of these related subjects will limit the use of management accounting creating an unfavorable effect on the consideration and solution of the problems relating to
management performance.

Intensive decision:

Making decisions based on the concept and technique of management accounting provides a scientific analysis of various situations. But it will be time-consuming. As such, management may avoid systematic procedures for making decisions, and arriving at a decision using one’s intuition limits the usefulness of management accounting.

Management accounting is only a tool:

The tools and techniques of management accounting provide only information and not decisions. Decisions are to be taken by the management, which implements them as well.

Evolutionary stage:

Management accounting is still in a developmental stage and has not yet reached a final stage. The techniques and tools used by this system give varying and differing results. It is still named internal accounting and or operational accounting.

Subjective:

The interpretation of financial information may differ from person to person, depending upon the capability of the interpreter. Analysis and interpretation of data and information may be influenced by personal biases. As such, the objectivity of a decision may be affected by personal prejudices and biases.

Psychological resistance:

Changes in traditional accounting practices and organizational setup require installing the management accounting system. It calls for a rearrangement of the personnel and their activities and the framing of new rules and regulations, which generally may not be liked by the people who involve. Moreover, there is always a temptation to take an easy course of arriving at decisions by intuition rather than taking the torturous path of scientific decision-making. The adoption of a system of management accounting brings about a radical change in the established pattern of the activity of management personnel. This is bound to encounter opposition from some quarter or the other.

Costly structure:

The installation of a system of management accounting requires a very elaborate organization with a clearly distinguished responsibility accounting system. It requires additional staff experts and the corresponding extra budget to serve the experts and other infrastructures. This becomes quite costly.

The desirability of any particular management accounting technique or information must be determined in the light of its cost-benefit analysis. The cost of providing management accounting information includes the cost of compensation for the controller and accounting department personnel, the cost of purchasing and operating computers, and the costs of the time spent by the information users to read, understand, and utilize information. The benefits include improved decisions, more effective planning, greater efficiency of operations at lower costs, and better directions and control of operations.

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