Some of the tools and techniques used in management to get required information are: (1) Every business unit requires sufficient amount of capital for its smooth running, (2) Financial accounting, (3) Historical cost accounting, (4) Standard costing, (5) Budgetory control, (6) Marginal costing, (7) Decision accounting, (8) Control accounting, (9) Revaluation accounting and (10) Reporting or communication:
Management requires accounting information in order to perform its functions in a systematic and scientific way. No single technique or tool can provide all the desired information. Consequently, management has to resort to a number of techniques in order to get the required information.
These tools and techniques can be described as follows:
Capital is required for long-term investments as well as for medium and short- term ones. Sufficiency of capital is the ideal situation for a business and it helps much in achieving the desired success. Neither paucity of capital nor its abundance is desirable. So financial planning comprises the correct estimate of the extent of capital required, the determination of the sources from which it will be obtained and the ratio between the different amounts to be had from different sources.
The ratio between equity share capital and preference share capital, between long-term and short-term borrowings, is of vital importance. In addition, the credit and discount policies to be followed have to be determined.
Financial accounting makes a systematic record of business transactions and analyzes them so that the profit or loss for a given period may be ascertained and that a balance sheet as on a particular date may be drawn up. Many techniques of management accounting draw the required information from the records of financial accounting. These are analysis of financial statements, ratio analysis, funds flow statement etc.
Historical cost accounting is concerned with the recording of actual on or after the date when these are incurred. Basically, there are two costing systems—Job costing and Process Costing. Historical costing, by itself, is of limited value as the inefficient performance, if any, cannot be checked and controlled at the very time of its occurrence under this system. But the modern system of Standard Costing, which helps much in control of costs at an early stage, depends much upon the data provided by historical cost accounting.
It is the most effective method available for controlling performance and costs. It develops the forward-looking mentality in the management team. Under this system, a standard is fixed for each job and, under normal conditions, it is hoped that the actual cost is compared with the standard. On the completion of a job, the actual cost is compared with the standard cost and variance is found out.
The causes of the variances are then analyzed and if they are controllable, they are controlled then and there so that, in future they may not cause any such variances. So, this technique helps much in controlling costs and having them as near the standard costs as possible.
Budgetory control shows policy and plans in financial terms. Under this system, target for future productions, sales etc., are pre-determined and a budget for each department is prepared in advance. There is, invariably, a Budget Committee for establishing co-ordination among the different departments. By means of budgets, the responsibilities of concerned officers are established.
The actual performance is compared with the budgeted one and variances, if any, are known. Causes for these variances are then sorted out and the concerned responsible officer is asked to take suitable measures to prevent their re-occurrence in future. In this way, costs are kept within the limits fixed.
The techniques of marginal costing helps much in arriving at sound management decisions. The distinctive feature of this technique is the division of costs into variable and fixed costs. Variable or marginal costs are those which vary in the same proportion in which the production varies. Fixed costs are those which remain unaffected by changes in output with certain limits. Under this technique, only the variable costs are treated as product costs.
The fixed costs are not apportioned to cost centers or products as under the absorption costing system. Instead, these are treated as period costs. The excess of sales revenue over the variable costs is termed as ‘Contribution.’ The total fixed costs of a period are deducted from the total contribution of the period and the resultant figure is the profit or loss for that period. This technique has proved to be very helpful, particularly in arriving at correct decisions concerning the short-term utilization of production.
One of the most important functions of top management is to make decisions. Decision- making means the choice from a number of alternatives. The evaluation of the alternatives may be done on a rational basis, and, in that case, the use of figures becomes essential. With the help of figures it can be definitely know how each alternative affects output, sales, and profits. By selecting the most profitable alternative, the profits of the business can be maximized or the losses can be minimized.
In fact, decision accounting is not a separate system. It calls upon all other systems to produce information which indicates to the management the project likely to maximize profit or minimize loss. If decision is not based on facts and figures, it will be made intuitively and, in the case, the actual performance will reveal whether the decision was good or bad. This process of ‘trial and error’ can prove to be disastrous for a business undertaking at any time, because it is just like driving a motor car on a dark road without lights and brakes.
Again, this is not really a separate system of accounting. The budgetary control and standard costing, techniques, already discussed, have within them their own control mechanisms. Under these, the variances are calculated, their causes are analyzed, and corrective actions are taken to remove them if it is possible to do so.
Similarly, control is also afforded by internal check, internal audit, statutory audit etc. It also embraces responsibility accounting in which a number of responsibility centers are established in an undertaking. The whole cost is allocated to these centers. At each such centre the controllable and uncontrollable costs are separately calculated. The concerned officer is responsible for the controllable costs at his centre.
It is also known as replacement value accounting. It is concerned with the ascertainment of replacement value of an asset and, thus, it ensures that capital is maintained intact in real terms and profit is calculated with this fact in mind.
It includes the presentation of results and facts of the business before the management in such a way that these may be easily understood by the management and appropriate decisions may be taken in time. For this, the help of reports, diagrams, graphs, charts, statements etc., is taken.