Management Needs and Accounting

Original financial accounting model based on double entry system of book keeping, developed by an Italian merchant named Lucas Pacioli, is basically to fulfil managerial requirements of a trading business. Financial accounting can measure results of a merchandising business on the basis of departments which serves well the management’s needs for performance evaluation and for policy making. similarly, in a trading business it is relatively easy to determine sales prices and value of inventory. The only costs to be considered for these purposes are the purchase price and transportationin.

But in manufacturing concerns complicated production processes are employed. Consequently, pricing of products and valuation

of inventories (raw materials, work in process and finished goods) require more elaborate computations. Moreover, evaluation of alternative methods of production, determination of profitability of different products, measurement of efficiency of labour and determination of magnitude of individual element of cost require much more detailed information which a system of financial accounting cannot provide.

Management of a manufacturing enterprise needs to prepare not only financial budgets but also production budgets on weekly, daily and hourly bases and plans for purchase of manpower hours. Determination  of standard and actual costs and quantities is necessary for control purposes. Furthermore, management needs to know actual results of operations on daily or even hourly basis so that in case of deviation from budgets and standards corrective measures can be taken immediately. As such financial accounting is of little value to management as it is concerned with total of historical costs for the entire organization.

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