Management Accounting: Functions & Objectives
Functions & Objectives of Management Accounting
- Planning and Forecasting
- Modification of data
- Analysis and interpretation
- Serves as a means of communication
- Facilitates managerial control
- Use of qualitative information
- Decision making
- Coordination
Management Accounting Distinct from Cost and Financial Accounting (FA): Management accounting collects data from cost accounting and financial accounting. Thereafter, it analyzes and interprets the data to prepare reports and provide necessary information to the management. Cost books, on the other hand, are prepared in the cost accounting system from data received from financial accounting at the end of each accounting period. The main objective of cost accounting is to assist management in cost control and decision-making. The objective of management accounting is to provide necessary information to management in the process of planning, controlling, and performance evaluation.
The cost accounting system uses quantitative cost data. Management accounting uses both qualitative and quantitative data.
Materials Management
Materials are a major part of the total cost of producing a product and are one of the most important assets in the majority of business enterprises. Hence, the total cost of a product can be controlled and reduced by efficiently using materials. Materials are of two types:
Direct materials: The materials which can be easily identified and attributable to the individual units being manufactured. These materials also form part of the finished products.
Indirect materials: Indirect materials are those materials which are of small value, such as nuts, pins, and screws, and do not physically form part of the finished product.
Purchasing Control and Procedures
Procurement by purchase of the proper materials, machinery, equipment, and supplies of stores used in the manufacture of a product, adapted to marketing in the proper quantity and quality at the proper time and the lowest price consistent with the quality desired.
The major objectives of scientific purchasing are to purchase the right quantity at the best price. Materials purchased should suit the objective, production should not be held up, unnecessarily capital should not be locked up in stores, the best quality of materials should be purchased, and the company’s competitive position and its reputation for fairness and integrity should be safeguarded.
Inventory Management Methods
First In, First Out (FIFO): “FIFO” stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first. This does not necessarily mean that the exact oldest physical object has been tracked and sold. FIFO is used to manage assumptions of costs related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes.
Last In, First Out (LIFO): LIFO is a method used to account for inventory. Under LIFO, the cost of the most recent products purchased (or produced) are the first to be expensed.
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has been refined over time. The formula assumes that demand, ordering, and holding costs all remain constant.
The formula is:
Q = √(2DS / H)
Where:
- Q = EOQ units
- D = Demand in units (typically on an annual basis)
- S = Order cost (per purchase order)
- H = Holding costs (per unit, per year)