managerial accounting for managers

managerial accounting for managers

The Role of Managerial Accounting in Effective Decision-Making

1. Introduction to Managerial Accounting

The second objective of managerial accounting is to provide information that is useful in control of the organization. This type of information is used to evaluate whether the company is getting the job done, and, if not, where and why not so that corrective action can be taken. The emphasis is generally on the day-to-day activities of the organization. Reports containing this type of information will often be much more aggregate and summary in nature, showing overall revenues and expenses for a department or division. The third objective of managerial accounting is to provide information that is useful in making special decisions. How should we price a product? Is a special customer order profitable? Should we continue producing a product or buy it from an outside supplier? As with most special decisions, objective analysis must be performed because an immediate decision needs to be made without waiting for the usual course of business to evolve.

Managerial accounting provides accounting information to managers within organizations who direct and control its operations. Like financial accounting, managerial accounting has three broad objectives. The first of these is to provide information that is useful in planning and decision making. For example, how much do we expect a particular product to contribute to the organization’s profitability over its expected life span. Basically, managerial accounting gives the anticipated financial information that the managers need to make plans for the future. The emphasis is on estimating future revenues, expenses, and income from the proposed activities. In making these estimations, different cost concepts are used that are typically not apparent in financial accounting reports. Additionally, the information is presented in ways that are particularly useful for management decision-making. The reports may be very detailed, project-specific, and contain much nonfinancial information in addition to financial information. For example, financial accounting reports would capture revenues from sales of every kind of product made by the company. In contrast, managerial accounting information would break down sales in terms of different product lines and customer types and even into the amount charged off to specific customers.

2. Cost Behavior and Analysis

In this chapter, we illustrate just two of those implications: (1) developing cost formulas from activity-based costing; and (2) the high-low method of cost analysis. These topics could also be examined by using the graphic method or tools such as logistic and other regression models. We begin by discussing these three basic concepts of cost behavior and the relevant terminology. When we talk about a single product or a group of products, a cost that has some relationship to the amount of the product we produce or sell can be classified as either variable, semi-variable, or fixed. The question for managers is how to use these cost classifications to plan and control costs and to make decisions.

Managers need information about how costs behave so they can measure and manage those costs effectively. The term cost behavior refers to how (or why) a cost changes as output changes. In a previous Managerial Note, we introduced the concept of simple linear regression analysis by using it to help estimate a cost function. In this chapter, we examine that topic in detail and also consider other important ideas about cost behavior. For example, we examine the concepts of variable costs, fixed costs, semi-variable costs, and curvilinear costs. This variety in cost behavior has practical implications for managers.

3. Budgeting and Performance Evaluation

Three essential elements of budgets are: who should be involved in the development process; the extent and timing of resource allocation; and the measurement and reward systems that will be emplaced. The actual administration of these items at the segment level is usually the responsibility of the production process owner, though the chief executive officer or other executives may have to oversee the entire process. The top executive versus operating personnel will need to balance the focus between top-down and bottom-up. Depending on the level of attention that might be necessary, there is a spectrum of choices that include no action, budget participation, or more active management of the process.

Budgeting and performance evaluation are two major examples of organizational control. By setting targets, budgets provide both organizations and their managers an effective method for preparing short-run action plans. At the end of a segment’s period, actual results are compared with what had previously been authorized by the budget. The objectives in using budgets are to plan, to coordinate projects, to resolve conflict regarding assumptions and performance targets among participants, to communicate plans, to motivate employees, to assess the capability of segment managers, to evaluate the effectiveness of organizational policies and strategies, and to document and regularly communicate performance results to build cooperative behavior.

4. Strategic Decision-Making with Managerial Accounting

Among the most commonly used tools for helping management do the planning, implementing, and controlling of organizational activities are budgeting, variance analysis, and related performance evaluations, which are the subjects of Chapters 8 through 11. But as one proceeds through a course in managerial accounting, it will be clear that consideration of all of the environments that organizations work within is important. The remainder of the chapter discusses some more strategic decision-making issues.

The overarching goal of a business enterprise is to create value for its owners and stakeholders. Sustainable profitability is essential for creating this value and involves effective positioning within a competitive market, capable management of the enterprise’s economic assets such as human resources, equipment, and facilities, and acting as a responsible corporate citizen. Managerial accounting supports decisions made specifically to further these goals. Managerial accounting helps managers and owners of businesses formulate rational and effective strategies for planning, implementing, and controlling activities. Common tools of managerial accounting help plan, direct, and motivate actions that transform input resources into desired output.

5. Emerging Trends in Managerial Accounting

The budgeting process can be effectively used to ensure that all segments of an organization work together. One effective tool to use in the process is the preparation of a “mission statement.” A mission statement can be created at any level of an organization. The mission statement can be used in subunits of an organization (including team mission statements) to help ensure that individual pieces of the organization are cohesively working toward a common, overall objective. A mission statement typically addresses several key issues: what are we good at, who are our customers, who is our competition, why are we in business, how do we exceed our customers’ expectations, and what are our values.

Emerging trends in managerial accounting include an increased emphasis on value chain analysis, identifying and managing customer profitability, increasing recognition of cost-volume-profit relationships and learning curves in processes, and the use of activity-based techniques in responsibility accounting. Managerial accountants and management accountants must possess the skills that help coordinate activities and decisions in areas that management has traditionally not managed. Managerial accountants must be able to coach others as they participate in the budgeting process on the details of how cost and service information is accumulated and dispersed, what the actual alternatives are, and how these alternatives are effectively evaluated. Furthermore, managerial accountants must also be able to train these individuals how to calculate ROI, residual income, and other tools.