Management accounting is a process of identifying, measuring, analyzing, interpreting, and communication information for management decision making and pursuit of organizational goals.
Manager will make decision making based on the variety of report such as financial statement, cost-profit volume, etc. The main functions of management accounting to ensure company accomplish its objective are planning, directing, control, communication and decision making (Coombs, Hobbs and Jenkins, 2005). Planning is important that to identify where’s the organization wants to be in the future and how to accomplish it. The relevant data and qualitative information that are provided by management accounting for the purpose to assisting management to forecasting the short-term and long-term plans in the future. Important part of planning is to select the best strategy among the alternatives which fits to the company objectives (Madegowda, 2007).
Coordinating is one of the important functions of management accounting in the management process because planning without human to directing is just a planning and its cannot helps company to accomplish its objectives. Managers has to ensure that the coordinating between of the human resources and the diverse activities of a company to produce the organization functioning smoothly. For example, the managerial accounting data such as daily sales reports are the reports that to directing the activities in the organization to implement the planned objectives. Other than planning and directing, controlling is important in the management process as controlling is the process of monitoring employees’ activity to ensure the plan is being followed and identify any improvement needed to apply in the activities. Control usually achieved with the use of feedback such as standard costing, budgetary control, and performance report.
Performance report is the report that compares budgeted to actual results (Edmonds, Tsay and Olds, 2009). For example, in the beginning of the year, the manager sets a sales target and profit for the new branches. After the year progresses, performance reports will compare the actual sales with the targets that managers set in the beginning of the year. If the results fall below the target, the manager has to alert that the new branches require more attention. Communication is an essential functions of management accounting in management process and its needed to treated with care. Communication is the process of presenting the information to various level of management. Management accounting gather the information and establish the reports which show the performance of the business.
Communication needed as manager require to show the performance to the top management through presentation to ensure the activity is operate smoothly and in the track of achieving the organization’s objectives (Arora, 2009). For example, a project is passed to a sales department. The employees who in charge of the project require to communicate with each other to ensure they are kept informed of the status of the project. After the project is done, manager of the sales department is required to present the performance of the project to the top management for reporting purpose. Not to overlooked, one of the important functions of management accounting in the management process is decision making. Decision making is the process of comparing of the budgeted cost and expected revenue received among each of the alternatives.
Management must make decision between the alternatives that gives values and benefits to the organization and accomplish the organization’s objectives. Management accounting has certain techniques such as marginal costing, payback period, and differential costing which help management in short-term and long-term decision (Khan and Jain, 2010). For example, organization received Project A and Project B investment proposal, management use several techniques to calculate that Project A has RM500,000 return and Project B has RM400,000 return in 5years.
Project A has greater return compare to Project B. Therefore, management choose to invest in Project A as its gives more value to the organization. (b) Limitation of Management Accounting Development of management accounting is to enhance the managerial performance, however, there are some limitation of management accounting which limit its effectiveness. The limitation includes of limitation of financial and cost accounting, high cost for the installation and operation, lack of wide knowledge, lack of objectivity, and not a substitute for management. Management accounting gathers the information from financial accounting, cost accounting, and other records, summarize the information to management in helping them to make decisions for the future. Hence, any error, mistakes or inaccuracy information occur during the preparation of the financial accounting and the cost accounting will weaken the quality of the reports that prepared by the management accounting. The quality of the reports is depended upon the strength and weakness during the preparation of the basic records.
The accuracy of the records in resulted will limit the dependence of the management accounting for the decision making and may misleading the decisions. Therefore, the limitations of financial and cost accounting are considered as the limitations of management accounting (Madegowda, 2007). For example, the expenses should be recorded as RM50,000 but there is a human error that recorded as RM500,000. It affected the profit for the year and affected the management accounting who make decision based on the information of the financial accounting. Management accounting may suggest wrong decision for the future planning.
Besides that, high cost is one of the limitation of management accounting that limit its effectiveness. In order to install the management accounting system, it is necessary to has a wide network of management accounting system, rules and regulations, and costly. The installation of the management accounting requires a heavy investment and high operating expenses. The majority of the small and medium organization cannot afford the heavy investment and costly expenses. Therefore, management accounting system can be adopted only by big organizations (Arora, 2009). For example, the management system cost RM300,000 and has to regularly maintenance it.
A small company has only RM50,000 profit every year. Although the company acknowledged that the management accounting system can enhance the company decision making but since the investment is too costly, small company could not afford to install a management accounting system. In order to have a good decision for the future, the management accountant should have a wide knowledge that not only has the knowledge about the financial and cost accounting.
It also requires management accounting to have the knowledge of various field like management, economics, marketing approach, taxation, production and so on. There are such wide scope and difficult to develop a management accounting as not all the management accountant have all the knowledge about those subjects. Therefore, the quality of the management accounting is limit by the lack of wide knowledge of those subject on the part of management accounting. For example, in a sausage production company, the management accountant only has the knowledge about the financial and cost accounting. The decision made by management accounting may not be quality as it do not have the knowledge about the production and could missed out any specific detail in the production and may misleading the decision.Furthermore, lack of objectivity also one of the limitation of management accounting that limit its effectiveness. The management accounting reports should include the prediction about the future based on the data from the financial and cost accounting and its estimation for the future.
But normally the management accounting relied upon the data interpreter, this action may losses the management accountant objectivity. Hence, the objectivity and the effectiveness of the management accounting will be affected by the personal bias and the prejudices of an individual. For example, cost of the product is estimated by the cost accounting, but the relationship between the cost accountant and the raw material supplier are close to each other. The cost accountant may bias towards the supplier and provide more profit for it. Further, the management accounting received the data from the cost accounting that had included of the personal bias. Therefore, the reports of the management accounting affected by the personal bias of the data interpreter and limits the effectiveness of the management accounting (Horngren, 2009). Not to be overlooked, the effectiveness of the management accounting is limited as management accounting is not a substitute for management, it can define as a tool in the hands of the management. Management accounting’s function such as planning, directing, control, and communication by gather information and prepare reports to the management for decision making but not to replace the management.
It performs as a supplement that provide advice and facilitate to management and administration. The final decisions are always decided by the management not the management accounting. Hence, the effectiveness of the management accounting is limited that it not a substitute for management (Arora, 2009). For example, after the management accounting gather all information and prepare the reports to management that to advice invest in Project A rather than Project B. At the end, the management decided to invest in Project B rather than Project A. Although the management accounting advice to invest in Project A, but the management has the final decision that to invest in Project B.