Functions of Management Accounting (4 Functions )

The management process implies the four basic functions of: (1) Planning. (2) Organizing (3)

Controlling, and (4) Decision-making.

Management accounting plays a vital role in these managerial functions performed by managers.

(1) Planning:

Planning is formulating short term and long-term plans and actions to achieve a particular end. A

budget is the financial planning showing how resources are to be acquired and used over a

specified time interval.

Management accounting is closely interwoven in planning both because it provides information

for decision-making and because the entire budgeting process is developed around accounting-

related reports. Management accounting helps managers in planning by providing reports which

estimate the effects of alternative actions on an enterprise’s ability to achieve desired goals. For

example, if a business enterprise determines a target profit for a year, it should also determine

how to reach that target.

For example, what products are to be sold at what prices? The management accountant develops
data that help managers identify the more profitable products. Similarly, the effects of alternative

prices and selling efforts (say, what will profit be if we cut prices by 5% and increase volume by

15%, etc.) can easily be determined by the management accountant. As part of the budgeting

process, management accountants prepare budgeted (forecasted) financial statements, often

called proforma statements.

(2) Organizing:

Organizing is a process of establishing an organizational framework and assigning responsibility

to people working in an organization for achieving business goals and objectives. The type of
organizational structure differs from one business enterprise to another. In the organizing

process, departmentalization can be done by setting up divisions, departments, sections,

branches.

Organizing requires clarity about each manager’s responsibility and lines of authority. The

various departments and units are interrelated in a hierarchy, with a formal communication

structure in which information and instructions are passed downwards to lower level

management and upwards to top management level.

Management accounting helps managers in organizing by providing reports and necessary

information to regulate and adjust operations and activities in the light of changing conditions.

For example, the reports under management accounting can be prepared on product lines on

which basis managers can decide whether to add or eliminate a product line in the current

product mix. Similarly management accountant can provide sales report, production report to the

respective manager for taking suitable action about the sales and production position.

(3) Controlling:

Control is the process of monitoring, measuring, evaluating and correcting actual results to

ensure that a business enterprise’s goals and plans are achieved. Control is accomplished with

the use of feedback. Feedback is information that can be used to evaluate or correct the steps

being taken to implement a plan. Feedback allows the managers to decide to let the operations

and activity continue as they are, take remedial actions to put some actions back in harmony with

the original plan and goals or do some rearranging and re-planning at midstream.

Management accounting helps in the control function by producing performance reports and

control reports which highlight variances between expected and actual performances. Such

reports serve as a basis for taking necessary corrective action to control operations. The use of

performance and control reports follows the principle of management by exception. In case of
significant differences between budgeted and actual results, a manager will usually investigate to

determine what is going wrong and possibly, which subordinates or units might need help.

(4) Decision-making:

Decision-making is a process of choosing among competing alternatives. Decision-making is

inherent in each of three management functions described above, namely, planning, organizing

and controlling. A manager cannot plan without making decisions and has to choose among

competing objectives and methods to carry out the chosen objectives. Similarly in organizing,

managers need to decide on an organization structure and on specific actions to be taken on day-

to-day operations. In control function managers have to decide whether variances are worth

investigating.

The decision-making process includes the following steps:

(i) Identifying a problem requiring managerial action.

(ii) Specifying the objective or goal to be achieved (e.g. maximizing return on investment).

(iii) Listing the possible alternative courses of action.

(iv) Gathering the information about the consequences of each alternative.

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(v) Making a decision, by selecting one of the alternatives.

Management accounting plays a critical role in step 4 of the decision-making process. Manage-

ment accounting system contains a storehouse of valuable information for predicting the results

of various courses of action. The management accounting can assist management in formally

structuring decision problems as well as placing the alternatives and their consequences in a form

that will be easier for management to evaluate. While developing and gathering information for
decision making purposes, the management accountant should include qualitative information

also in his report to help managers better in their decision-making tasks.

Dominiak and Louderback III observe:

“Although managers use accounting data extensively as they make decisions, such data do not

answer the questions that managers face. People make decisions and people bring to decision

making their experience, values and knowledge which often cannot be incorporated into

quantitative analyses. An action that seems best based on an analysis of the accounting data

might not be taken because of some factor not captured in those data. For example, because the

managers of a firm want the company to maintain technological leadership, they might launch a

new product that is expected to be unprofitable. Quantifying the benefits of such leadership is not

easy. It is unlikely that such a quantification would be included in the management accountant’s

analysis of the desirability of bringing out the new product. It is, however, quite likely that a

report of that analysis would include a comment about the inability to quantify such benefits.

That is, reports from managerial accountants are very likely to recognize factors whose financial

implication are not incorporated in the reports.”

Horngreen, Foster and Datar state that management accountants perform three important roles—

problem solving, scorekeeping and attention directing.

Problem solving:

Comparative analysis for decision making. This role asks, of the several alternatives available,

which is the best?

Scorekeeping:

Accumulating data and reporting reliable results to all levels of management. This role asks how

am I doing?

Attention directing:
Helping managers properly focus their attention. This role asks which opportunities and

problems should I look into?

Atkinson, Banker, Kaplan and Young infer that management accounting information

assists several different organizational functions, operational control, product and

customer costing, management control and strategic control, as shown below: