Limitations of Management Accounting

08/04/2020 2 By indiafreenotes

Management accounting is an important tool of management. Hence, it serves the management in many ways. Even though, the management accounting has some limitations or disadvantages. They are briefly explained below:

Limitations or disadvantages of management accounting

  1. Based on Financial and Cost Records

Both financial and cost accounting information are used in the management accounting system. The accuracy and validity of management account is largely based on the accuracy if financial and cost records maintained. These records determine the Strength and weakness of management accounting.

  1. Personal Bias

The analysis and interpretation of financial statements are fully depending upon the capability of the analyst and interpreter. Hence, personal prejudices and bias of an individual can affect the objectivity and effectiveness of the conclusions and recommendations.

  1. Lack of Knowledge and Understanding of the Related Subjects

Financial accounting, cost accounting, statistics, economics, psychology and sociology are the related subjects of management accounting. The organization can derive more benefits of management accounting if the management accountant has thorough knowledge over related subjects. If not so, the success of management accounting system is questionable.

  1. Provides only Data

Under management accounting system, many alternatives are developed to solve a problem and submitted before the management. Out of the many alternatives available, the management can select any one of alternatives or even discard all of them. Hence, management accounting can only provide data and not prescribe any course of action.

  1. Preference to Intuitive Decision Making

Scientific decisions can be taken with the help of using management accounting techniques. But, majority of the management accountant and top level executives prefer their past experience and intuition in making business decisions. The reason is that an intuitive decision making is very simple and easy.

  1. Management Accounting is only a Tool

The management accountant is using the management accounting system as a tool to give advice and facilitate the management for decision making. The actual decisions, their implementation and follow up action are the prerogative of the management.

  1. Continuity and Participation

The decisions are taken by the management. Their implementation is vested in the hands of management accountant. The continuous efforts of management accountant and full participation of all levels of management are necessary for successful operation of management accounting system.

  1. Broad Based Scope

The scope of management accounting is very wide since it considers both monetary and non-monetary transactions of the business organization. The limited knowledge and experience of the management accountant can lead to prepare the data unreliable and undependable.

  1. Costly Installation

The cost of installation of management accounting system is very high. Hence, a small business organization can not bear the cost of such installation. Moreover, the utility of this system is restricted only to big and complex organizations.

  1. Resistance to Change

The installation of management accounting system brings some changes in the organizational set up and accounting practice. The personnel concerned may resist such changes unless they are getting confidence.

  1. Evolutionary State

Management accounting is a recent development discipline. The utility of management accounting is depend upon the intelligent interpretation of the data available for managerial use. Hence, it is presumed that the management accounting stands in evolutionary stage.

  1. Unquantifiable Variables

Management accounting seeks to interpret and evaluate an objective historical event on record in terms of money. But, in practice, the business organization is facing many problems which cannot be exposed.