Principle of Management Accounting
Principle of Management Accounting
Various Principles of Management Accounting are as follows:-
Designing and Compiling:
All accounting information, records, reports, statements whether relating to past or present or future should be designed and compiled to meet the needs of the particular business and specific problems. It implies certain flexibility of system. When a particular problem is to be solved the system should be capable of producing the relevant information. Accounting and operational research principles should be linked together. The conclusion is that the accounting information as collected should be modified and adapted to meet every need.
Principle of Exception:
The principle of management by exception should be followed while presenting the information. It means that management should pay attention only to those business problems which are unusual, exceptional or out of line. Hence only when there are variations from predetermined plans management should be informed precisely of what is wrong. In this way the information supplied to the management should be kept to the minimum so that it has less to read and study but have more time to take corrective action. Reports for comparison between current year and previous year, actual and budgeted results, actual performance and the standard, special extraordinary reports requiring immediate attention regarding exceptional situations are generally the reports which should be submitted to the management under the principle of exception
Control at Source Accounting:
According to this convention costs are best controlled at the points at which they are incurred. It means that expenses or costs incurred on the production of articles or services can be easily controlled only when they are incurred. The inculcation of cost consciousness is also and essential part of this convention. For achieving this object, departmental operating statements and costing systems should be adopted.
Accounting for inflation or Revaluation Accounting:
It means that the capital should be kept in fact in real terms. This convention recognises that monetary unit is not stable and changes in its value should be adjusted through accounts so that it may leave no effect on capital. Though people are reluctant to accept complete revaluation accounting, but it is necessary that management accounting should meet the needs of the times, if there is inflation, it cannot be ignored. Management cannot afford to ignore any conditions which affect the profit carning capacity of the business. Hence more and more accountants have started thinking towards this factor and modifying their views accordingly.
Use of Return on Capital Employed:
Return on capital employed is used as the basis for measuring the efficiency of business. For this purpose the capital employed should be calculated by reference to current replacement values.
The management accounting systems and related forms should be used only as long as they serve a useful purpose. It means that systems of management accounting are not stable hence when any system is out of date and looses its utility it should be changed.
Integration of Management Information:
There should be integration of all management information so that maximum use can be made of the facts available. It is also necessary that the accounting service is provided at minimum cost.
Apportionment and Absorption of Overhead Costs:
Overhead costs should be apportioned to cost centers and absorbed to products on the basis of benefits received by fixed costs or responsibilities incurred for variable costs. The method selected should be such as to recover the overheads in the most equitable manner.
Effective Use of Resources:
Management accounting should make efforts to show whether or not the resources of business are being used in the most effective manner.
Distinction between Controllable and Uncontrollable Costs:
When tracing responsibility a clear distinction should be made between the controllable and uncontrollable costs by the management or the department concerned. By doing so the efficiency of the various departments or cost centers can be measured as the uncontrollable costs cannot be reduced.
The organization structure should be so designed as to indicate clear cut demarcation of the authority and responsibility of each employee executive manager and department so that the person responsible for a particular work can be easily located and responsibility fixed. This also necessitates clear distinction between controllable and uncontrollable factors because if the factors responsible for an event are uncontrollable, the person concerned cannot be held responsible.
Forward Looking Approach:
Management accounting should seek to anticipate problems and prevent them. There should be a forward looking approach and actual costs should be employed only as measures of achievements realized. The convention recognizes the importance of budgetary control and standard costing.
Most Appropriate Means:
The most appropriate means of collecting, recording and presenting the accounting information should be selected. This mean that mechanization should be adopted as much as possible. But it does not mean that every business should same a computer. The machines selected should be of size and type that can be economically employed by a particular business to deal with its own problems.
Personal contact with departmental managers, foremen and others should always be pursued as they cannot take the place of reports and statements entirely. It is always useful in planning, co-ordination, motivation and communication. Cost control also becomes effective through personal contacts.
Principles of Key Areas:
There are always some keys areas of operation in every business concern, on whose success or failure depends the success or otherwise of the business. Hence the accounting information and records should be so designed that any time significant information is available regarding these key areas. The management may solve all the problems easily by controlling only those few areas of operations. Hence the key areas should be recognized and special attention paid to them.
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