Part-2 Principles ,Advantages ,Limitation, and Conventions of Management Accounting

Principles of Management Accounting

Balty has given the following list of management accounting principles-

Designing and Controlling

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 implies a certain flexibility of system . The accounting information should be capable of being modified and changed according to the needs of the business and changing circumstances.

Principle of Exception

The principle of management by exception is followed when presenting information to management.It means that management should pay attention only to those problems which are unusual or exceptional.Therefore,information presented to the management should be kept to the minimum but all important facts should be disclosed.

Use of Return on investment

Return on capital employed is used as the crieterion for measuring the efficiency of the business.For this purpose,the capital employed should be calculated with reference to current replacement values.


Management Accounting system and related forms should be used only as long as they serve a useful purpose.It means no system or form of management accounting is static.


There should be integration of all management information so that the fullest use is made of facts available and at the same time,the accounting service should be provided at minimum cost.

Utilisation of Resources

Management Accounting should make a effort to show whether or not the resources of the business are being utilised in the most effective manner.

Personal Contacts

Personal contact with departmental managers, for men and others cannot be placed entirely by reports and statements.Personal touch plays a vital role in effectively managing the affairs of the business.

Advantages of Management Accounting

Management Accounting is very important for management of a company purposes.The advantages of management accounting can be studied from the following discussion-

It helps in making plans

Modern time is the age of planning.As such,only those manufacturers will stay in the market who make their production in a planned manner.For making plans,the management has to study and analyse present and past trends of the market.

Assists in Decision making

Whatever information and data are supplied by management accounting ,they help the management in making decision regarding plans ,ideas or policies for cutting cost of production,control wastage,and improve quality to increase market share of their products.

Maximum production in minimum costs

Management Accounting is very helpful in cutting cost of production as effective control is made in manufacturing activities through standard costing,budgetary control and internal check.

Increase in productivity

Productivity is the relationship of input and output.Through management accounting a proper control is made on the wastage and unneccessary expenses etc.

Maximise profits

On the basis of Management Accounting,control over wastage ,and finding out new opportunities of production ,minimisation of cost of output is made possible.

Limitation of Management Accounting

Management Accounting being comparatively a new discipline,it suffers from certain limitations.These are as follows-

Suitable for heavy organisation

Management Accounting requires a very big ,heavy and elaborate organisation and also involves heavy cost.It can, therefore be adopted only by big concerns.

Limitations of basic records

Management Accounting collects information from financial Accounting.Cost Accounting and other records ; the strength and weakness of it,therefore,depends upon the strength and weakness of these basis,records.

Unquantifiable Variables

Management Accounting seeks to interpret and evaluate the objective historical event in terms of money.However,in business organisation certain problems are not expressed among members.

Wide Scope

Its wide scope also creates lot of difficulties.It considers both monetary and non-monetary aspects

As such there is ambiguity and subjectivity in the conclusions drawn from it.

Evolution Stage

It is still in its initial stage .Therefore it has fluidity of concepts,imperfect analytical tools ,poor and raw techniques etc.

Conventions of Management Accounting

These are the rules and guidelines which assist a management accountant in discharging his routine work.The following are some widely used conventions of management accounting

Principles of matching cost with revenue

The entire cost which incurred to earn revenue should be taken into account.

This convention is strictly applied in the management accounting.

Book profit after its realisation and losses in advance

This is another connection like financial accounting .Profit is only booked if it is realised while losses are booked in advance.

Management by exception

While reporting some information to the management ,only exceptional items should be reported to the top executives as they have no time for small routine matters.

Keeping and maintaining accounts on the basis of objectives

The records should be prepared and kept in accordance with the objective.

Avoid repetition of work

Sometimes financial accountants and management accountants have to do the same type of work.

The convention of management accounting requires mutual co-operation between the above two to avoid overlapping

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