Question

Management accounting information is used to inform decision-making but it has limitations. What can the accountant do to minimise the limitations of management accounting? Discuss in 100–120 words.

Answer 1

Management accounting is a emerging branch of accounting system. This concept focuses on decision making part of accounting. Primary data is collected from various sources like Financial Accounts, Cost accounts. Etc.

There are a few limitations of this system and ways to over come limitations.

1. It is based on Financial Accounting: If financial data is not reliable then management accounting will not provide correct analysis. this effectiveness limited to the reliability of those sources. Hence one must make sure that the primary data is in place and is accurate.
2. Lack of knowledge: For taking a sound decision it is necessary that the management must have knowledge of various fields like accounting, statistics, economics, taxation, production, engineering and so on. But it has been observed that the person who is taking the decision may not have comprehensive knowledge of all such subjects. We have seen that generally management team is not really meant for all the above subjects one can always acquire knowledge in order to overcome this issue.
3. Lack of continuity and Co-ordination: To make the conclusions drawn by management accountant meaningful, they must be implemented in the organisation at various levels. But in actual practice they loose their significance because it is not feasible to implement such conclusions. To roll out a correct and practical decision it is necessary to understand the impact and situation of organisation at various levels of organisation. Many times we see management rolls out decisions without considering the situation and implementation.
4. Lack of objectivity: There are every possibility of personal bias and manipulations from the collection of data to the interpretation stage in financial accounting. Thus, it loses objectivity and validity. An prompt management accountant should maintain clarity and unbiased records in order to disclose true picture of organisation which will assist in finding out good solution.
5. Costly: The Instalment of management accounting system in a concern requires large organisation and a wide network of rules and regulations and thus requires a heavy investment. This can be avoided if management outsources the matter.

Evolutionary Stage: The management accounting is in a recent origin and still in an evolutionary stage. New theories and new techniques are being introduced every now and then. Thus, Essential to keep a continuous track for the latest theories and their application.

1. Effect of time element: The information received in management accounting are all past and by the time the information and statistics are introduced. The situations are all changed and this condition puts the organisation in difficulties. In order to reduce passage of time, organisation may design the system to check the books on continuous bases in state checking at the time of problems / challenging issues.