Management Accounting and Its Importance:

INTRODUCTION TO MANAGEMENT ACCOUNTING

Management accounting is not a specific system of accounts, but could be any form of accounting which enables a business to be conducted more effectively and efficiently. Unlike financial accounting, where the primary emphasis is on reporting outsiders, management accounting focuses on internal planning and control activities. Therefore management accounting requires the collection, analysis and interpretation not only financial or cost data, but also other such as sales, price, product demands and measures of physical quantities and capacities. In the process, the system utilizes all techniques of financial and cost accounting including marginal or direct costing, standard costing, budgetary control, etc. Management accounting therefore appears as the extension of the horizon of cost accounting towards newer areas of management.

According to the Chartered Institute of Management Accountants (CIMA):

 "Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities"

The American Institute of Certified Public Accountants (AICPA) states that management accounting as practice extends to the following three areas:

• Strategic Management: - Advancing the role of the management accountant as a strategic partner in the organization.
• Performance Management: - Developing the practice of business decision-making and managing the performance of the organization.
• Risk Management: - Contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.

In a nutshell, Management accounting is a profession that measures and report financial nonfinancial information that helps managers to make decisions to fulfill the goals and objectives of organization.

Management accounting is largely concerned with providing economic information to managers for achieving organizational goals. The information flow system is, therefore, extremely important while designing the system. Managers at each level must have a clear understanding about the objectives and goals assigned and receiving flow of relevant information. It is important to note that overabundance of irrelevant information is as bad as lack of relevant information.

IMPORTANCE OF MANAGEMENT ACCOUNTING TO NEPAL LEVER LTD

Nepal Lever Ltd is branch of Hindustan Lever Ltd, the multinational manufacturing company. It spends its long period with lots of success in Nepal. Although it is well established and financially healthy company it need proper (internal) cost and non cost information to face the change and grab the competitive advantages in this competitive environment. It can use management accounting to identify how much profit the company has earned and how efficiently the company uses its economic resources to reach at that point of success. As it is large manufacturing company it need wise financial and business decisions regarding their operation and future strategy. This is the most useful part of management accounting. Some other pinpointing importance of management accounting to Nepal Lever Ltd is as follows:

1.      To implement the new business concepts:  

Nepal Lever Ltd comes with unique strategy. It says "Our deep roots in local cultures and markets are our unparalleled inheritance and the foundation for our future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers." By this we know that it opens its unique concept, strategies, products and services when it opens its door with every new day. It is more clear by its sales volume which is increase during 2061 in domestic market by 21.16% and in export by 25.51%. So when it comes with every new concepts and strategy management accounting help to implement cost reduction strategies by using different concepts such as lean accounting, six sigma or total quality management. These strategies will help Nepal Lever to eliminate production waste and inefficient or expensive operations in implementation of new strategies and concepts.

2.      To prepare proper economic plan:

Nepal lever maintained a strong focus on serving the domestic market and this is reflected in the domestic business growth of 24%. It means it has a strategy to increase its sales in future and also increasing in present. To implement this strategy it need proper forecasting of its future possibilities and challenges to increase its sales volume. Part of this change includes use of management accountants to prepare economic forecast models to determine how well the company can sell its goods and services in current business environment.

3.      To provide cost allocation methods:

The company nurtured last year's innovations as well as launched and relaunched a number of brands in the course of the year. Wheel Active, Fair and Lovely, Lifebuoy, Sunsilk are some examples. With these new products it incure different direct, indirect variable, fixed and semi variable costs. They need a proper allocation. Failure to allocate all business costs may cause negative cash flow situation causing the company to lose money. For this, management accounting provides a proper allocation of costs of goods and services. Which can be done by using different management accounting tool like process costing, job costing or activity based costing etc.

4.      To provide financial information to internal users:

Management accounting information are mainly prepared to use by internal users. Every business organization need the information provided by management accounting so they can make a business decisions that reflect the changing behavior of consumers in the economic marketplace. As for all, it is also important for Nepal Lever Ltd to track all internal financial information and report it to operational and executive managers. Some useful internal management accounting information are: cost of direct material, availability and cost of skilled and unskilled labor, costs to produce goods or services, and general administrative business.