What is Management Accounting and its Importance
Management accounting is the practice of preparing accounts and management reports that provide timely and accurate financial and statistical data to managers to make long-term and short-term decisions. It identifies, measures, evaluates, interprets, and make available information to enable an organization to meet its goals.
Management accounting is often confused for financial accounting. While financial accounting make available information to most significantly people outside and, people inside the organization, management accounting is mostly designed for helping managers of the organization to make sound decisions.
The Role of Management Accounting in an Organization
For Future Forecast:
Forecasting aids policymaking and answering questions, like: what type of product should a company produce? What type of equipment should be use? Can the company diversify into other products? Management accounting provides answers to these critical questions and projecting the future leanings in business.
Helping in Make-or-buy Decisions:
Is it economical to acquire materials or a product from a supplier or produce them with company assets? Cost and production accessibility are the determining factors in making this type of decisions. Using management accounting, there is development of insights which will permit decision-making at both strategic and operational levels.
Forecasting Cash Flows:
One very essential thing in business is the prediction of cash flows and possible impact of cash flows. What is the future expenditure the company would have? How will it generate revenue and will the incomes rise or decrease in future? Management accounting encompasses the design of financial plan and trend charts, and administrators use such information to decide how to distribute money and assets to create the estimated revenue growth.
Help in Understanding Performance Variances:
The variances between projections and actual results are known as Business performance discrepancies. The use of analytical mechanisms to aid the management on advancing the positive results and managing the undesirable ones are possible with management accounting.
Evaluating the Rate of Return:
Before starting projects especially those that entails substantial investments, the business establishment would as a matter of necessity need to analyze the likely rate of return (ROR). With two or more investment opportunities available, what are the factors to use in choosing the most profitable one? How many years would it take to break even on the project? The estimated cash flows? These are crucial questions that the study and use of management account provides.
Tools of Management Accounting
- Management accounting employs various tools to forecast business trends:
- Skills and capability to read and analyse financial statements
- Management information systems (MIS)
- Key performance indicators (KPIs)
- Financial modelling
- Game theory
- Balance scorecards, and other group of data that the organisation can produce might be used to finish the analysis.
Management accounting is the use of activity-based costing to make crucial decisions on what to produce, how to produce, the cost of producing a unit and how to satisfy customers without sacrificing profit. These are questions that must be addressed to improve corporate viability.
Information overflow has changed how businesses operate. Companies are not to make important decisions without factoring the effects and outcomes.
The importance of management accounting cannot be overemphasised and this has reflected in how businesses take crucial the role of management accountants nowadays.