Management accounting information should comply with a various number of characteristics including verifiability, objectivity, timeliness, comparability, reliability, understandability and relevance if it is to be useful in planning, control and decision-making.
The first characteristic of management accounting information are verifiability .Verifiability means observable to outsiders, in the context of a model of information. It refers to the ability of accountants to ensure that accounting information is what it purports to be. It also means that the selected method of measurement has been used without error or bias. The outsiders cannot see them and so references to those variables in a contract between the two parties cannot be enforced by outside authorities. An example of verifiability is that of two accountants looking at the same information like inventory valuation and coming to similar conclusions.
Objectivity is also one of the characteristics that useful in planning and making decision. Accountant reliance on verifiable evidence such as delivery notes, invoice, orders, physical counts or paper in the measurement of financial result. Objectivity makes it possible to compare financial statements of different firms with an assurance of reliability and uniformity. For instance, management accountant should not alter or change when provide the information to top level managers so that the manager can make the accurate decision without being influenced.
Besides that, timeliness is one of the important parts for management may need to balance the relative merits of timely reporting and the provision of reliable information. More accurate information may take longer to produce. Therefore, to provide information on a timely basis it may often be necessary to report before all aspects of ma transaction or other event are known thus impairing reliability. For example, a company may test-market a potential new product in a particular city. However, a long wait for the accurate marketing report may unduly delay management’s decision to launch the new product nationally and the information will be of no avail to the decision making process. Thus, the managerial accountant’s primary role in the decision-making process which is decide what information is relevant to each decision problem and provide accurate and timely data, keeping in mind the proper balance these often-conflicting criteria.
The next characteristic of management accounting information will be comparability. Comparability helps to make compare the financial statements of an entity through time in order to identify trends in its financial position and performance. Besides that, it also helps to compare the financial statements of different entities in order to evaluate their relative financial position, performance and changes in financial position. Hence, the measurement and display of the financial effect of like transaction and other events must be carried out in a consistent way throughout an entity and over time for that entity and in a consistent way for different entities. By giving an example, management accountant prepare the accountant information is a consistent way for every year, it is much easier for company to make comparison with the past accounting information or related entities.
Next, reliability is the quality of information that allows those who use it to depend on it with confidence. The reliability of an item is the probability that the item will perform a specified function under specified operational and environmental conditions, at and throughout a specified time. The best way to specify the reliability of an item depends upon how the item is expected to function. Here, our focus among the above four demand times is on the “interval” and “continuous” time demand cases. In the interval case, we are concerned with mission reliability or simply reliability. This is defined as the probability that an item will operate without failure throughout a specified interval. For example, where we are scheduling the next week’s production, the equipment reliability or probability that the equipment will operate throughout the week is our concern. However, if we want to evaluate the performance of a piece of equipment with a continuous demand, for instance, within the last two years, the focus should be on the expected mean time between the failures events that cause the equipment to go down. In this case we may also focus on the availability of the equipment, which can be defined as the fraction of time that the equipment was actually operating.
The next criterion of management accounting information is understandability. Understandability is assumed users to have a reasonable knowledge of business and economic activities and accounting and a willingness to know more the information with reasonable diligence. Information about complex matters that should be included in the financial statements because of its relevance to the economic decision making needs of users should not be excluded merely on the grounds that it may be too difficult for certain users to understand. For the example, management accountant should prepare the accounting information or summarize of the report and analysis that easily understood to the decision maker in order to let them easy to make final decision.
Lastly, relevance is also one of the important parts in planning, control and decision-making. To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decision of users by helping them evaluate past, present or future events or confirming, or correcting there past evaluations. Different decisions typically will require different data. The primary objective is how to decide what information is relevant to various common decision problems. For example, an analysis on a project should not have any information on indirect costs because it is not relevant for making decision of the project and should include any prime cost because it is relevant cast for the decision-making.
Conflicts Between Management Accounting Information Characteristics
Each criteria of management accounting information is to satisfy the management needing for information useful for planning, controlling and decision making. However, these criteria also face conflict amongst one another. Conflict simply refers to the incompatibility or interference of one’s idea, event, or activity with another. In this case, the conflict between criteria will happen when satisfying a criterion affects another criterion being difficult to fulfill as they are in collision with each other.
Accounting information should be useful for decision-making, must have relevance and reliability of these two main qualitative characteristics. However, these qualities often can conflict, requiring a trade-off between various degrees of relevance and reliability. A forecast of a financial variable may possess a high degree of relevance to investors and creditors. However, a forecast necessarily contains subjectivity in the estimation of future events. Therefore, because of a low degree of reliability, generally accepted accounting principles do not require companies to provide forecasts of any financial variables.
For example, accounting information requirements associated with the timeliness, predictive value and feedback value, while the predictive value of accounting information may be due to a lack of verification, so that the reliability of damage; on the contrary, if always insisted truthfully, then wait until the conditions are ripe when the accounting information may have lost its predictive value. As the reliability and relevance cannot have both, one can only depending on the degree of emphasis by choosing one of the two, leading to a different accounting treatment. One of the most typical is the right choice of accounting measurement attributes.
Besides that, another conflict can be a result of the criteria of timeless and verifiability. Information is useful when it is timely. To be timely, the information must be available when needed to define problem or to be begin to identify possible solutions. Those criteria might conflict with verifiability. It is because when needed verifiability information, it may take time to calculate or to get it after production process is end. Verifiability is the useful information when it is accurate. Before relying on information to make decisions, it is important to ensure that the information is correct.
For example, a production manager has to decide the actual amount of pineapple to be used in produce of 10000 units of pineapple juices. But, because of the time given is limited, he has to prepared the report to top management by forecast the amount of pineapple will be used. Although he is meet the criteria of timeliness, he is might not meet the criteria of verifiable. He do not used the actual amount of pineapple will be used. It is because there are some problems may occur during the production process: cost of pineapples is lower or others factors. When the production is end, he will able to know the actual amount of pineapple will be used. So, the criteria timeliness is conflict with the criteria verifiability.
Another conflict is between timeliness and reliability of information. Information is said to be reliable when they incorporate all aspects of a transaction as well as other events in order to facilitate users in deciding on any issue regarding the latter. However, most of the times in providing timely reporting, those aforesaid transactions or events are never taken into account as it occurs after the report is prepared and thus impairing reliability. In interest of timeliness, the reliability of the information is sacrificed, every loss of reliability diminishes the usefulness of information and as time pass, and either the reliability of the information drops or increase accordingly.
For example, the material supplier decides to supply only one of the Material A. Company Y is very interested and is capable to buy the Material A. The supplier is interested on selling the Material A to Company Y, but there is no contract signed between them. As time passes, the supplier received an offer from Company Z’s, with a higher price and shorter time compared to Company Y. Therefore, Material A is selling to Company Z and Y loses the Material A. Company Y is reliable on material supplier to get the Material A yet the supplier needed to sell the Material A in a shorter time to get the profit. So, supplier decides to sell it to Company Z. Thus, the criterion of timeliness is conflict with criteria of reliability.