That part of accounting system which facilitates the management process of decision-making is called management accounting. It presents accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking. Management accounting has the ability to communicate a great variety of facts in a systematic and meaningful manner. The task of management accounting is not to make decisions; rather it facilitates the process of decision-making. Management accounting is a systematic approach to planning and control functions of management. It generates information for establishing plans and controls.
Management accounting provides for a system of setting standards, plans, or targets and reporting variances between planned and actual performances for corrective actions. Management accounting thus encompasses the systems of cost accounting, budgetary control, statistical analysis and reporting. Reporting covers both internal reporting and external reporting. It helps to evaluate future as it becomes present. The use of standard costs and budgets facilitates this evaluation.
Management accounting is the process of:
- Identification – the recognition and evaluation of business transactions and other economic events for appropriate accounting action.
- Measurement – the qualification including estimates of business transactions or other economic events that have occurred or may occur.
- Accumulation – the disciplined and consistent approach to recording and classifying appropriate business transactions and other economic events.
- Analysis – the determination of resources for and the relationships of the reported activity with other economic events and circumstances.
- Preparation and Interpretation – the meaningful coordination of accounting and/or planning data to identify a need of information, presented in a logical format, and, if appropriate, including conclusions drawn from those data.
- Communication – the reporting of pertinent information to management and others for internal and external uses.
Management accounting is used by management to:
- Plan – to gain an understanding of expected business transactions and other economic events and their impact on the organization.
- Evaluate – to judge the implications of various past and or future events.
- Control – to insure the integrity of financial information concerning an organization or its resources.
- Assure accountability – to implement the system of reporting that it closely aligned to organizational responsibilities and that contributes to the effective measurement of management performance.