Tools and techniques of Management Accounting

The various tools used at present in management accounting may be classified into the following groups.

Tools and techniques of management accounting

Image: Tools and techniques of management accounting

1. Based on Financial Accounting Information

2. Based on Cost Accounting Information

  • Marginal costing (including cost volume profit analysis).
  • Direct or incremental Costing and differential costing.
  • Standard Costing.
  • Analysis of Cost Variances.

3. Based on Mathematics

  • Operations Research.
  • Linear Programming.
  • Network analysis.
  • Queing theory and Games Theory.
  • Simulation Theory.

4. Based on Future Information

  • Budget and Budgeting.
  • Budgetary control: Analysis of Budget Variance / Revenue Variance.
  • Business Forecasting.
  • Project Appraisal or Evaluation.

5. Miscellaneous Tools

  • Managerial Reporting.
  • Integrated Auditing.
  • Financial Planning.
  • Revaluation Accounting.
  • Decision making Accounting.
  • Management Information System.

Important tools and techniques used in management accounting

Some of the important tools and techniques are briefly explained below.

1. Financial Planning: The main objective of any business organization is maximization of profits. This objective is achieved by making proper or sound financial planning. Hence, financial planning is considered as best tool for achieving business objectives.

2. Financial Statement Analysis: Profit and Loss account and Balance Sheet are important financial statements. These statements are analyzed for different period. This type of analysis helps the management to know the rate of growth of business concern. This analysis is done through comparative financial statements, common size statements and ratio analysis.

3. Cost Accounting: Cost accounting presents cost data in product wise, process wise, department wise, branch wise and the like. These cost data are compared with predetermined one. This comparison of two costs enables the management to decide the reasons responsible for the difference between these costs.

4. Fund Flow Analysis: This analysis find out the movement of fund from one period to another. Moreover, this analysis is very useful to know whether the fund is properly used or not in a year when compared to the previous year. The working capital changes and funds from operation are also find out through this analysis.

5. Cash Flow Analysis: The movement of cash from one period to another can be find out through this analysis. Besides, the reasons for cash balance and changes between two periods are also find out. It studies the cash from operation and the movement of cash in a period.

6. Standard Costing: Standard costing is predetermined cost. It provides a yard stick for measuring actual performance. It is used to find the reasons for the deviations if any.

7. Marginal Costing: Marginal costing technique is used to fix the selling price, selection of best sales mix, best use of scarce raw materials or resources, to take make or buy decision, acceptance or rejection of bulk order and foreign order and the like. This is based on the fixed cost, variable cost and contribution.

8. Budgetary Control: Under Budgetary control techniques, future financial needs are estimated and arranged according to an orderly basis. It is used to control the financial performances of business concern. Business operations are directed in a desired direction.

9. Revaluation Accounting: The fixed assets are revalued as per the revaluation accounting method so that the capital is properly represented with the assets value. It helps to find out the fair return on capital employed.

10. Decision-making Accounting: A business problem can be solved by choosing any one of the best and most profitable alternative. To select such alternative, the relevant costs are compared. Thus, accounting information are used to solve the business problem which are arising out of increasing complexity of nature of business.

11. Management Information System: The free flow communication within the organization is essential for effective functioning of business. Hence, the management can design the system through which every employee of an organization can assess the information and used for discharging their duties and taking quality decisions.

12. Statistical Techniques: There are a lot of statistical techniques used in removing management problems. Methods of least square, regression and quality control etc. are some examples of statistical techniques.

13. Management Reporting: The management accountant is preparing the report on the basis of the contents of profit and loss account and balance sheet and submit the same before the top management. Thus prepared reports disclose the strength and weakness indifferent areas of operating activities and financial activities. These identification are highly useful to management for exercising control and decision-making.

14. Historical Cost Accounting: It means that costs are recorded after being incurred. This is used for comparing with predetermined costs to evaluate performance.

15. Ratio Analysis: It is used to management in the discharge of its basic functions of forecasting, planning, coordination, communication and control. It paves the way for effective control of business operations by undertaking an appraisal of both the physical and monetary targets.

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