Utility of Management Accounting

Utility of Management Accounting

In the previous paragraphs, we have observed the use of Management Accounting. One of the unique factors among the management accounting and financial accounting is that the management accounting does not comprise a unified structure. The format where it is prepared varies extensively as per the conditions in each case and the purpose for which the information is being shortened. The management accounting produces information that is employed for three different purposes.

I] Measurement

II] Control and

III] Decision making [Alternative choice problems] 

For each of these purposes, management accounting produces very important information. The utilization of information for each of the three purposes of management accounting are described below.

I. Measurement:

The management accounting system focuses on the measurement of full costs for measurement of full costs. Full costs are the sum of the costs that are needed for producing goods or for offering services. These costs are spilt into

A] Direct costs and

B] Indirect costs.

Direct costs are traceable or identifiable to the products or services offered and while indirect costs are not traceable to the products/services. Full cost accounting measures not only the total costs [direct along with indirect costs] needed for generating products or services but also the full costs needed to run other activity such as conducting a research project or running a welfare scheme and so on. So, full cost accounting is not limited to only to measure the cost of manufacturing.

II. Control:

A significant aspect of the management accounting information is to give information that can be employed for 'Control'. The management accounting system is prepared in such type of a way that information is provided for each 'Responsibility Center'. A responsibility center is organization unit headed through a manager who is accountable for its performance and operations. Management accounting assists to get ready budget for each responsibility center and also make easy comparison among the budgeted and actual results. A report is ready for each responsibility center that depicts the budgeted and actual performance and also the variation among the two. This allows the performance analysis of each responsibility center that is why proper corrective action can be taken in this respect.

III. Decision Making:

Management accounting produced helpful information for decision making. Management has to take various decisions in the course of business. A number of the main decisions are, Fixation of selling price, Make or Buy, Working of second shift, Accepting or rejecting of an Export Order, Capital expenditure decisions, Optimizing of Product Mix, Increasing production capacity and so on. For all these decisions, giving of information is essential and the management accounting produces this information that enables the management to take such type of decisions.

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