Principles of Management Accounting

13 Important principles of Management Accounting

The following are the generally accepted principles of management accounting.

1. Designing and Compiling

Accounting information, records, reports, statements and other evidence of past, present or future results should be designed and compiled to meet the needs of the particular business and/or specific problem.

It means that management accounting system is designed in such a way presenting the relevant data. If so, a particular problem is to be solved. Moreover, accounting information can be modified and adopted to meet the requirements of management.

2. Management by Exception

The principle of management by exception is followed when presenting information to management. It means that budgetary control system and standard costing techniques are followed in the management accounting system.

In this way, the actual performance is compared with pre-determined one for finding the deviations. The unfavorable deviations alone are informed precisely to management as what is going wrong. If so, the management has spent less time to read and study the information and more time to take action.

3. Control at Source Accounting

Costs are best controlled at the points at which they are incurred – control at source accounting. The performance of individual workers, details of materials issues and utilization and usage of services such as machine, power, repairs and maintenance, vehicles etc. are prepared in the form of quantitative and qualitative information. In this way, control can be exercised over employees, materials and service providing devices.

 4. Accounting for Inflation

A profit cannot be said to be earned unless capital is maintained intact in real terms. It means that money value is not stable. Hence, it is necessary to assess the value of capital contributed by the owners of the business concern in terms of real value of money through revaluation accounting. In this way, rate of inflation is taken into account to judge the real success of the business concern.

5. Use of Return on Investment

Return on investment is otherwise called as Return on Capital Employed. The rate of return shows the efficiency of the business concern. For this purpose, the capital employed is calculated in terms of real money value.

6. Utility

Management accounting systems and related forms should be used only as long as they serve a useful purpose.

7. Integration

It means that all the required information of the management is integrated so that they can be used effectively at the maximum and at the same time, the accounting service is provided at minimum cost.

8. Absorption of Overhead Costs

Overhead costs are absorbed on anyone of the predetermined basis. The overhead costs are the combination of indirect materials, indirect labour and indirect expenses. Hence, the selected method or methods for the absorption of overheads should bring about the desired results in the most equitable manner.

9. Utilization of Resources

The available resources should be effectively used. The reason is that some resources are available in plenty only in reason and some other resources are available in scarcity throughout the year. Hence, the management accounting system should be ensure proper utilization of available resources.

10. Controllable and Uncontrollable Costs

On the basis of controllability of costs, the costs are classified into two types i.e. controllable and uncontrollable. There is no meaning of taking steps to control the uncontrollable costs. Hence, the management accounting system can provide techniques to control the controllable costs.

11. Forward Looking Approach

The management accounting system can guess the future problems through standard costing techniques by means of fixing standard. In this way, the future problem may be prevented to occur.

12. Appropriate Means

The most appropriate means of accumulating, recording and presenting the accounting information should be selected. It means that proper mechanization of accounts is used in every business organization.

In other words, an ordinary computer may be used in the small size business organization and advanced technology computer with proper software can be used in the large size business organization and multinational corporation.

13. Personal Contacts

Personal contact with departmental managers, foreman and others cannot be replaced entirely by reports and statements. It means that direct personal contact avoids the misunderstanding between the management and employees. Moreover, responsibility is very easily fixed and control is exercised at required time.