The disadvantages of management accounting

Written by wendel clark
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The disadvantages of management accounting
There are certain problems associated with management accounting. (accounting calculator over the hundred dollar bank notes image by Elnur from Fotolia.com)

Management accounting can be an effective tool for business planning, strategic development and internal monitoring. At the same time, there are potential problems that can arise by relying exclusively on management accounting information. Relying only on management accounting can be dangerous and lead a business in the wrong direction. Managers need to be aware of the disadvantages of management accounting so that they can evaluate the information provided in a critical manner. Managers who can do this will be able to use management accounting information in conjunction with other information to make informed business decisions.

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Lack of Standardization

Financial accounting is highly standardised, with financial accountants using guidelines such as Generally Accepted Accounting Principles (GAAP). In stark contrast to this, management accounting does not have a set of standard procedures. A management accountant can devise her own systems and metrics to evaluate the finances of an organisation. The disadvantage of this is that one accountant's method can vary greatly from another's method. This can result in inconsistencies in the way that financial benchmarks and evaluations are measured. It also requires accountants to be much more knowledgeable and able to interpret the accounting systems developed by others.

Over-emphasis on Quantitative Information

Quantitative data can be valuable in making informed business decisions. Management accounting, however, focuses exclusively on quantitative measures and ignores factors that cannot be measured in dollars and cents. For instance, it might appear to make financial sense to relocate a production facility to a region with lower wage costs. Management accounting can calculate the wage savings and certain increases in cost that might occur (for example, shipping costs or import duties). Management accounting cannot, however, factor in things such as the savings related to the goodwill of community members in the region, or public relations problems that can arise from such a decision. Management accounting is very rational, but sometimes being entirely rational can be a disadvantage.

Subjectivity

Management accounting allows for a great deal of subjectivity when creating metrics and methods for measuring performance. This is problematic because the accountant's personal beliefs and biases can have an impact on the way performance is measured. For example, if a management account is required to measure the productivity of workers, she may focus exclusively on outputs and not take into account worker inputs that can have a profound effect on overall productivity. This affects both the company and employees. The company is affected because the information that it is using may not be the best and employees can be affected if they feel they are not being evaluated fairly.

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