The Importance of Management Accounting

The administrative and economic functions of management include planning, counseling, directing and decision making. Management accounting plays the following roles in ensuring the effective performance of those functions:

Planning: An essential part of planning is the forecasting and budgeting process. Management accounting makes relevant contributions to the company’s cash forecasting and long range of financial planning by supplying information on future costs and revenue. Management accounting also helps in coordinating the budget preparation, monitoring and control process in line with agreed policies and procedures. The techniques used include standard costing and budgeting

Controlling: Management accounting systems help in setting standard of performance and company standards with actual results and analyzing such variances if any. This is done through a technique known as Variance analysis. Variances are attributed to managers responsible for them. This is achieved through responsibility accounting.

Decision making: The functions of management accounting in decision making cannot be over emphasized as it is a fundamental part of management. First, management accounting produces relevant information for the purpose of decision making. The information derived from the management accounting process helps management become well informed to make relevant decisions. Another important purpose management accounting serves is assisting management in assessing the alternative courses of action open to management in decision making. Techniques used for the analysis include marginal costing, cost volume analysis, profit analysis and so on. Types of decisions management accounting helps management make include:

Non-routine decision making: Non routine decision making of an organization include delete or retain a segment, accept or reject a special order etc. Cost analysis is needed in order to help management choose between the available alternative courses of action.
Pricing decisions: In making decisions about the selling price of a product either in the short run or in the long run, information derived from management accounting is needed to help management ascertain the optimal selling price that would benefit the organization as a whole while still making their product’s price attractive to potential buyers.

Feasibility studies: A feasibility study is an assessment of the practicality of a proposed project. A feasibility study generally aims to answer three questions which are: a) is it technically feasible? B) is it feasible within the estimated cost C) will it be profitable? Management accounting can help in feasibility studies. Through the use of a cost-benefit analysis, management can determine the possibility of success of a proposed project. Cost-benefit analysis is a systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business. The cost- benefit analysis has two purposes which are to help management determine if the proposed project is a sound investment decision, and to help in the cost analysis for comparing proposed projects. The cost-benefit analysis makes projections of the total expected cost and total expected benefits, and it compares them to determine if the total expected benefits outweigh the total expected costs.

Recommended Readings

Colin Drury., Management Accounting for Business

Jae sim., Joel siegel., Schaum’s outline of managerial accounting