Objectives and Functions of Management Accounting

Objectives and Functions of Management Accounting

Objectives of Management Accounting

The main objective of management accounting is to provide relevant economic information to the top-level management to make strategic plans and decisions more competitive. This objective comes true by;

1. Providing information for planning and decision-making:

Virtually all major plans and important decisions made by internal users (i.e., managers) rely largely on management accounting information. This information includes financial and non-financial data to help managers with strategic planning and decision-making (e.g., the cost of products, budgets, and cash flows).

2. Budgeting:

One means of achieving goals is through budgeting. The budget indicates the desire of top management, allocates resources, and emphasizes certain activities.

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3. Assisting in daily operations:

Directing and controlling day-to-day operations require a variety of data bout the process of providing a good or service. The attention-directing function of management accounting information directs a manager’s attention to issues that need their attention (i.e., it highlights successful or problematic areas).

Read Also: Nature & Scope of Management Accounting

4. Controlling:

The management team needs data about the cost of providing goods or services in order to set fees and prices. Management compares actual costs incurred with those specified in the budget (e.g., analyzing and comparing actual performance to budget plans). When actual operations do not conform to the budget, managers will be asked to explain the reasons for the deviation. This creates both an incentive to conform to the budget and possible negative consequences.

5. Motivating managers and employees:

A key purpose of management accounting is to motivate managers and other employees to direct their efforts toward achieving the organization’s goals. This motivates managers to achieve the organization’s goals by communicating the plans, providing a measurement of how well the plan was achieved, and prompting an explanation of deviations from the plan. Another way to motivate employees to assist in achieving the organization’s goals is through empowerment. Employee empowerment is the concept of encouraging and authorizing workers to take the initiative to improve operations, product quality, and customer service and to reduce costs.

6. Measuring the performance of managers and sub-units within the organization:

One way of motivating employees toward the organization’s goals is to measure their
performance in achieving their goals.

In addition to measuring the performance of people, management accountants measure the performance of an organization’s sub-units, such as divisions, product lines, geographical territories, and departments. Such measurements help top management decide whether a particular sub-unit is a viable economic investment.

Many large corporations compensate their executives, in part, on the basis of the profit achieved by the subunits they manage.

1. Assessing the organization’s competitive position:

A crucial role of management accounting is to continually assess how an organization compares with the competition, with an eye toward continuously improving.

2. Monitoring:

This allows the firm to evaluate its financial and internal performance, customer satisfaction, and innovation compared to its goals, its own past records, and that of
other similar firms.

Functions of Management Accounting

The functions of management accounting that satisfy the various needs of management for arriving at appropriate business decisions may be described as follows:

1. Collection of data:

Management accounting information system (MAIS) has to procure and store data relating to the internal operation of a company and the external environment. Internal data include the capacity available, current utilization of capacity, cost structure, past results of operation, etc. Data relating to the external market include the competitors’ position, socio-political movements, market characteristics, globalization, etc.

2. Identification and modification of relevant information:

Accounting data required for the decision-making and planning process are supplied by management accounting through a process of classification and combination, which enables to relevant of only the relevant information.

3. Analysis and interpretation of data:

Management accounting is concerned more with records of past achievements, maintenance of values, fixation of responsibilities, and basis for assessing future developments. It is more concerned with the analysis and interpretation of data, which has opened up new directions for its use by management.

4. Providing information for planning and decision-making:

Planning, which is a creative aspect of a management job, is carried out by management accounting through the process of budgeting. Business decisions are based on relevant economic information provided by management accounting.

5. Facilitating management control:

Management accounting enables all accounting efforts to be directed toward control of the destiny of an enterprise. This is made possible through budgetary and standard costing, which are integral parts of management accounting.

6. Use of qualitative information:

Management accounting does not restrict itself merely to financial data for helping management in the decision-making process and frequently draws upon sources, other than accounting, for such information as is not capable of being readily convertible into monetary terms.

7. Satisfaction of informational needs:

Management accounting has a system of processing data in a way that yields concise information covering the entire field of business to the top management.

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