Q. 2. What are the important functions of Management Accounting? Discuss limitations of management accounting.


The main functions of Management Accounting are summarised as:

1. Useful in Planning. Management accounting is very useful in planning. Before planning management has to evaluate past and future strategy. The Management Accounting provides past data on the basis of which future line of action can be chosen.

2. Decision-making functions. Before taking up any scheme, management is to study various alternatives. The selection of best line is recommended, for example, if production is costly than buy, it is suggested to buy.

3. Control functions. The information which collected by Management Accountants is suitable to pre-determined targets and comparable to the present performance, the variances if any are checked.

4. Profit maximization. Management Accounting techniques are very useful for checking all types of wastes and promote efficiencies thus, the profit goes up.

5. Assets protection. The Management Accounting provides internal check and control for the protection for the business assets. The proper insurance coverage is recommended.

6. Protection of business interests. Management Accounting is useful to interpret and report the effects of external influences on the achievement of business goals. This function lays stress on the continuous appraisal of economic and social forces and government which are directly associated with the operation
of the business.

7. Performance Appraisal. The approved plan is put to action if any variation is corrected. Here approved proposals, proper maintenance of accounting and cost systems and records the determination of accounting policy and compilation of statistical records as are required from time to time.

8. Helpful in business budgeting. Management accounting is very useful in planning which involves the setting up of objectives, a search for optional strategies for achieving business objectives and helpful in selection of the most appropriate alternatives.

9. Provides information of wide range. Management accounting provides concise information covering the entire field of business activities at relatively for the long interval to the top management.

10. Helpful in organizing. Management accounting helps in establishing a sound organization by dividing the whole organization into different cost centers. Fixing and controlling of responsibilities and costs at each of these centers leads to efficient business structure. A sound system of internal control and internal audit for each of these centers and the constant review of the procedures helps the people concerned to be alert and makes possible improvements.

11. Motivating. Management Accounting involves establishing sound leadership in order to maintain a high standard and co-operation among the employees. The superiors should be able to identify to needs and gaps in the satisfaction among the employees. This is made possible through periodical departmental profit and loss accounts, budgets and reports prepared by each department.

Limitations of Management Accounting.

The main limitations of management accounting are as under:

1. Based on accounting information. The Management Accounting depends upon the cost and financial accounting records for information. Therefore, the accuracy of information furnished by management accounting and the reliability of conclusions derived therefrom depends upon the accuracy of this accounting information.

2. Lack of capability. Management Accounting is only a tool and cannot replace management. The usefulness of the management accountancy depends upon the extent to which the data provided by it are used by the management in making decisions. The whole utility will go waste if the management accountant lacks the capability.

3. Wide range of knowledge. Management accounting requires a blending of knowledge of different fields—the accountancy, statistics, economics and law. Improper or insufficient knowledge of all these aspects may lead to misleading conclusions.

4. Heavy expenditure. The installation of the management accounting technique needs elaborate procedures and costs which in general cannot be afforded by small organizations.

5. Management accounting is at initial stage. Management accounting is a new technique and is still in the evolutionary stage. New ideas and techniques are being introduced now and then. Therefore, it is essential to keep a continuous track of the latest theories and development in the field. Management accounting is not so easy to make use of them.

6. Bias or psychological. The old techniques of accounting are in use since long. Thus, the change for the new approach is opposed by many. The accounting staff will hesitate to new approach, thus, introduction to management accounting will need more efforts to motivate employees for accepting the new approach.

7. No legal status. The results shown by management accounting do not get legal recognition. The income tax department does not consider the profits shown by management accounting technique.

8. No set principles. There is hardly any prescribed set rule for management accountants, someone may prepare the fund flow statement in vertical form while others may follow its horizontal forms.

9. Limited use. The management accounting is a new technique, its use is limited to big business houses, to small business houses it does not hold good.

10. Lack of knowledge and understanding. The emergence of management accounting has been the result of fusion of a number of subjects like statistics, accounting. management theory, economics, engineering etc. an inadequate grounding on the part of management in any one or more of these subjects is bound to have an unfavorable effect on the consideration and solution of problems relating to management performance.

11. Persistence of intuitive decision making. Though the main contribution of management accounting has been the elimination of intuitive management, there is always a temptation to take an easy course of arriving at decisions by intuition rather than taking the tortuous path of scientific decision making.

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