Concepts / Conventions of Management Accounting

Concepts / Conventions of Management Accounting

The intelligent interpretation of data can provide a basis for drawing fruitful conclusions in the management accounting system. In this way, some special problems may be solved. These type of common practices followed by the management from time to time to solve special problems have taken the form of conventions. Some rules have been chalked out to record the business transactions under the financial accounting system. No such rules have been propounded for management accounting.

Concepts, Conventions of Management Accounting

Concepts, Conventions of Management Accounting

In the words of S.K.Adhikari,

Many techniques of management have reached maturity only after their earlier mistakes have antagonised the users sufficiently. Out of the disturbances, thus created, emerge new outlooks and practices that are in harmony with the basic motivation of managers and managed ones.

Some of the conventions or concepts have been briefly explained below:

1. Responsibiliity Accounting

The main objective of this responsibility accounting is the encouragement of employees to do a work with utmost great care and not to unnecessary or irrelevant work. To facilitate the fixation of responsibility, the organization structure should present a clear picture about the authority and responsibility of each employee, executive, manager and department also.

If management accounting system is suitably designed on the basis of organization structure, then the person responsible for any particular task can easily be pointed out. This method of preparing accounting reports on the basis of level or centre is known as responsibility accounting. Under this system, everybody knows what is happening in the business and who is responsible for such happening.

In practice, efforts are being exercised to control the happening of unfavorable events. Moreover, the responsibility is also fixed on the basis of controllable and uncontrollable factors. If an event is occurred and out of the control of the responsible person, he is not held accountable at all.

2. Management by Exception

This principle is followed while communicating the accounting information to the top management. It means that unnecessary accounting information need not be sent to the top management. If so, the management need not spend their valuable time on the routine matters and can pay their attention on unusual, exceptional or out of line matters of the business activities. In this way, business objectives can be achieved without much difficulty.

3. Principle of Key Areas

There are some key areas of operation almost in every business concern. The success of the business operation depends upon the way of utilizing key areas. Hence, an accounting system is designed to give more importance to key areas and records detailed information for critical analysis and interpretation. In this way, the management can exercise better control over the key areas and may resolve all the problems since key area is the life of a business concern.

In addition to the above, J.Batty in his book, “Management Accounting” has listed the following conventions.

1. Accounting is concerned with the recording of business transactions only.

2. Costs and revenues should be matched as far as possible.

3. All possible losses i.e. future losses, should be considered in the calculation of profit but expected profit or unrealized profit should be altogether ignored.

4. There should be consistency and stability in methods, procedures and principles followed.

5. The form of accounting information (whether relating to past, present or future) should be designed to meet the special needs of the business.

6. Capital employed should be kept intact at current price.

7. There should be integration of all management information.

8. Direct costs should be apportioned to cost centres and/or recovered by products.

9. Management Accounting should be forward looking.

10. Management reports and statements should not be used as substitute for personal dealing or contact with persons at the level of authority.

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