Management accounting refers to the various techniques used to process information within a specific organisation which is designed to help managers make decisions and solve problems.
According to the American Accounting Association (AAA) Committee on Management Accounting, management accounting "involves consideration of the ways in which accounting information may be accumulated, synthesized, analyzed, and presented in relation to specific problems, decisions, and day-to-day tasks of business management."
Generally, management accounting is considered a process or an application of techniques. The National Association of Accountants (NAA) defines it as a process used by the management within an organisation that includes:
- Communication of financial information
Managers use the above listed techniques to:
- Ensure the accountability for the organisation's resources
Management accounting is distinguished from financial accounting by its forward-looking approach and abstraction-based techniques for decision making. Management accounting generally serves the management at an organisation rather than market regulators or shareholders; however it could also draw up financial reports for various non-managerial groups. Therefore it is usually confidential and not intended for public announcement. Management accounting does not follow general standards for financial accounting as it takes into consideration the needs of managers. The framework of management accounting is flexible; it does not have rigid boundaries as it is used as a multipurpose tool by managers.
Management accounting is closely related to cost accounting but it requires a broader view in order to find a solution to a wide range of problems and questions managers face. That is why management accounting relies on various organisational, behavioral and strategic foundations as well.
The theory of management accounting comprises a combination of principles from various disciplines for assessment of management accounting techniques. Such theory is composed of four basic elements:
1. Management accounting objectives
2. Qualitative characteristics of management accounting information
3. Management accounting concepts
4. Management accounting techniques and procedures
According to the AAA Committee on Courses in Managerial Accounting, there are four objectives of management accounting:
1. Relation to the managers' planning functions, including the setting of a purpose and planning for optimal resource flow and their measurement.
2. Relation to organisational problem areas, including the establishment of a link between the entity's structure and its purpose. It also entails an effective communication system and measurement of the available resources.
3. Relation to the management control function. It entails the identification of economic characteristics of specific business areas having impact on the goal, and the support of the motivation for individual performance. It also involves highlighting certain performance measures showing a goal incompatibility within certain performances and fields.
4. Relation to operating system management via evaluation of the operations' performance.
The NAA, however, limits the number of management accounting objectives to two – that is to provide information and take part in the managerial process.
In 1974 another AAA Committee outlined the following characteristics of management accounting information:
- Relevance of objectives
- Accuracy and reliability
- Uniformity and compatibility
- Flexibility and adjustment
- Understandability, motivation and fairness
The objectives and qualitative characteristics of management accounting create the foundation for its concepts. The three elements together represent the basic framework of management accounting. The comprehensive conceptual framework is still to be developed and extended by researchers. Yet in 1972 the AAA Committee on Courses in Managerial Accounting presented the following basic concepts:
- Measurement, or the attribution of figures to the past, present or future economic events of an enterprise via observation and rules.
- Information referring to organisations' finance, production, staff or marketing
- System, referring to a combination of human and financial resources within an organisation in charge of the circulation of information considered relevant for the managerial decision making.
- Planning, or the formulation of goals and policies to achieve them
- Feedback, or a revision of the planning process
- Control, or monitoring and assessment of the performance
- Cost behavior, or an analysis of costs
Such concepts are consistent with the definition of management accounting provided by the NAA.
A consensus list of management accounting techniques does not exist yet, as the conceptual framework is still being carved. Most researchers focus on the traditional accounting techniques; however some consider that a multi-dimensional approach should be applied. Various behavioral and quantitative techniques should be added to the standard accounting techniques.