Management accounting is defined as: „The application of professional knowledge and skill in the preparation and presentation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of operations of the undertaking’. The provision of information required management for such purposes such as:
- Formulation of policies
- Planning and controlling the activities of the enterprise
- Decision taking on alternative courses of action
- disclosure to those external to the entity
- Disclosure to employees
- Safeguarding assets
Management accounting uses both financial and cost information to advise management in planning and controlling the organization. The objectives of the various facets of accounting have been given above and differences. And the differences discussed. However, it must be realized that all form part of the financial information system of an organization and in many organizations the various facets are totally integrated with no artificial divisions between them.
Purpose of Cost Accounting
The main purpose or advantages of cost accounting are
- Cost ascertainment. The costs of producing different goods or services must be ascertained accurately. These costs consist of material cost, labour costs and overheads.
- Controlling. This is the process which management makes sure that intended and desired results are consistently and continuously achieved. This consists of; establishing of standards, comparison of results against standards and correction of deviations.
- Disclosure of waste. Costs incurred for the production of any commodity can be determined in advance in view of the past experience. If actual costs are higher than the expected or standard costs then this excessive costs can be analyzed. These excessive costs may be due to wastage of raw materials or idle labour time.
- Decision making management is responsible for decisions regarding what goods/services should be produced and in which quantity. Cost accounting information provides information for making these decisions.
- Cost control this is an important function of management. Material cost, labour cost and overheads must be maintained at desirable levels. Cost accounting principles are used to eliminate unnecessary costs.
- Evaluation of alternatives Management is frequently confronted with decisions involving choice from different alternative courses of action e.g., whether to make or buy a product, whether to continue or discontinue a product/service etc. Cost accounting provides information as to how future costs and revenues will be affected under each alternative thus assisting management in taking an appropriate selection.
- Planning is the process of setting objectives and then determining the steps required to attain them. It is the activity which managers analyze present conditions to determine ways of reaching the desired future. Planning requires appropriate information and cost accountants makes analysis of costs of past operations. These costs are adjusted to reflect changes in products, technology, volume, production efficiency, input cost etc.
- Pricing of products and projects This involves determination of prices of new products adjustment in prices of existing products as well as determination of bid prices for contracts. The decision of setting prices is based on cost data collected.
- Measurement of efficiency Cost data are used to measure the efficiency of an organization in utilization of resources employed in production process.
- Inventory management costing assists in inventory management keeping accurate and complete records of materials from time they enter into premises till the time they are used in production process.
- Evaluation of profitability Costing provides information for evaluating the profitability of an activity, department or the entire organization.
Conditions for Effective Costing
System A costing system is designed in accordance to the requirements of the organization. The system should simple, economical and practicable. The main conditions are:
- There must be a proper system of store and stock control
- There must co-operation and co-ordination among the staff members of the organization.
- The wages procedure must be proper and satisfactory. Labour costs should be charged to respective jobs accurately.
- Standard printed forms must be used for recording the receipts of materials and issues, recording labour hours worked and calculations and other activities of the organization.
- The overheads must be recorded accurately and these must be charged to respective production departments
- The costing department must be established. The responsibilities and duties of cost accountant should be clearly stated.
- The cost accounts and financial accounts should be maintained in a way that results can be reconciled easily.