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Principles of managerial accounting

To interpret financial results in the manner described above, managers use Financial analysis techniques.

Managers also need to look at how resources are allocated within an organization. They need to know what each activity costs and why. These questions require managerial accounting techniques such as activity based costing.

Managers also need to anticipate future expenses. To get a better understanding of the accuracy of the budgeting process, they may use variable budgeting.

1. Designing and Compiling

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 means that management accounting system is designed in such a way presenting the relevant data. If so, a particular problem is to be solved. Moreover, accounting information can be modified and adopted to meet the requirements of management.

2. Management by Exception

The principle of management by exception is followed when presenting information to management. It means that budgetary control system and standard costing techniques are followed in the management accounting system.

In this way, the actual performance is compared with pre-determined one for finding the deviations. The unfavorable deviations alone are informed precisely to management as what is going wrong. If so, the management has spent less time to read and study the information and more time to take action.

3. Control at Source Accounting

Costs are best controlled at the points at which they are incurred – control at source accounting. The performance of individual workers, details of materials issues and utilization and usage of services such as machine, power, repairs and maintenance, vehicles etc. are prepared in the form of quantitative and qualitative information. In this way, control can be exercised over employees, materials and service providing devices.

 4. Accounting for Inflation

A profit cannot be said to be earned unless capital is maintained intact in real terms. It means that money value is not stable. Hence, it is necessary to assess the value of capital contributed by the owners of the business concern in terms of real value of money through revaluation accounting. In this way, rate of inflation is taken into account to judge the real success of the business concern.

5. Use of Return on Investment

Return on investment is otherwise called as Return on Capital Employed. The rate of return shows the efficiency of the business concern. For this purpose, the capital employed is calculated in terms of real money value.

6. Utility

Management accounting systems and related forms should be used only as long as they serve a useful purpose.

7. Integration

It means that all the required information of the management is integrated so that they can be used effectively at the maximum and at the same time, the accounting service is provided at minimum cost.

8. Absorption of Overhead Costs

Overhead costs are absorbed on anyone of the predetermined basis. The overhead costs are the combination of indirect materials, indirect labour and indirect expenses. Hence, the selected method or methods for the absorption of overheadsshould bring about the desired results in the most equitable manner.