Like every tool and technique, management accounting has its benefits but also limitations. While it is clear that management accounting is a fixed cornerstone in a proper finance department, we should remember some limitations. This short article will give you an overview of the five most common ones.
Management accounting limitation #1: Accounting records
“Shit in, shit out” is a classical saying for any information system and it does apply for management accounting too. Any system or report can only be as good as its inputs are. This means the final result may give the wrong picture when, for example, some costs are recorded on the wrong account.
Another limitation comes from mainly processing past figures and then derive impacts and actions for the future. IT systems have been becoming more and more sophisticated and predictive. Although this is a positive development, it still involves processing past figures to determine the future.
#2: Lack of knowledge
A lack of knowledge is responsible for limitation number two. Managers receiving reports should have a sound understanding of the business and its environment as well as the underlying principles of the report they are receiving. This is, however, often not the case and leads to wrong interpretations. Which in turn may lead to wrong decisions.
#3: Lack of continuity
In order to record differences over a timespan, a certain continuity is important. However, many reports produced by management accountants are one-offs (ad hoc reports) or reports that are adjusted over time and thus are not fully comparable to previous periods.
Even for reports that are produced regularly, there is an issue. The company structure likely changed over time and consequently, figures can not be compared anymore over the years.
#4: Bias of the management accountant
Bias is another limitation of management accounting. When preparing and commenting reports people may have a certain idea in their head and this can influence the work they produce. A manager then receives a reporting which is not objective at all.
The final limitation: Allocated budget
The fifth and final massive limitation of management accounting can, ironically, be found in itself. Like all departments also a finance department has a certain budget available to pay salaries and infrastructure. This will bring some limitations to it. Purchasing and maintaining an expensive analytical software may not be within the budget. Staff may be limited by budget too, so tasks and reports need to be prioritized.
Yes, limitations but…
As we discussed in the paragraphs before, there are some impactful limitations in the domain of management accounting. Nevertheless, a thoughtful setup management accounting process will produce great benefits for each company and certainly outweigh its restrictions.