managerial accounting garison

managerial accounting garison

The Importance and Application of Managerial Accounting in Modern Business Practices

1. Introduction to Managerial Accounting

A major area of management accounting is cost accounting, the form of financial information that captures or measures costs incurred when an organization undertakes a project, which may include delivering goods and services to both external and internal customers. Costs are measured in terms of resources sacrificed to achieve or deliver the good or service. Another purpose of managerial accounting is to cost organizational products. The cost of capital is an important management accounting implication. Managing capital effectively starts with a good understanding of the capital market and the price of money, the company’s cost of debt, and the cost of equity. To offset the cost of capital, companies attempt to focus on other activities such as increasing profits and retaining customers.

Managerial accounting, also commonly referred to as management accounting, is a rapidly-evolving area of accounting. Managerial accounting is necessary for sound business decisions. Managerial accountants utilize enterprise data—revenues, costs, and profits—to help managers with a host of capital management-related issues. Managerial accounting includes many areas of accounting aimed at improving the quality of information delivered to management so that it can be used as the basis for better decisions. This course will stress the manager’s primary responsibility of making informed decisions concerning capital management. Managerial accounting is also quite different from financial accounting. Management accountants are inwardly-focused; they seek cost savings rather than generally accepted accounting principles (GAAP).

2. Key Concepts and Techniques in Managerial Accounting

Key Concepts and Techniques in Managerial Accounting: – Absorption (Full) costing: The use of the actual direct cost of an item plus the share of all total indirect costs associated with creating a product. It includes overhead; an allocation of total support, production, or operational expenses to the cost of the product or service. – Activity costing: The accumulation and assignment of specific overhead costs to identified or traceable activity pools, which are used to estimate the mix and costs of the specific resources consumed by an activity, process, or consumer. – Activity-based costing: An accounting mechanism established to accurately associate the costs of specific activities and resources to products or services actually consumed or used. – Activity-based management: The use of activity-based accounting information to improve the decisions that are made about profit-enhancing and expense-reducing alterations in products, processes, and organizations. – Profit planning: The structure and dynamic processes designed to achieve a target level of profit or income statement (e.g., at the sole product-driven for-profit level) or growth in facility (e.g., at the patient-oriented healthcare level). – Break-even analysis: A format designed to identify the specific level of operations at which total costs equal total revenues, and the profitability area boundaries for marginal increases (or decreases). – Business process reengineering: Efforts to establish a combination of more flexible data access combined with better information and traditional (financially driven) accounting transformation across the entire continuum of business activities. – Strategically-driven performance measures: Performance measurement systems, usually used for strategic business unit (SBU) or product line activities. These external performance measurements are designed to reflect success or failure regarding specific axial elements of the business or market.

One of the goals of financial accounting is to ensure that sufficient information is thoroughly and accurately disclosed in the annual and quarterly reports. The content of these reports is basically a regulated, standardized set of preliminary definitions and data, organized for an external audience – mostly regulators, tax authorities, rating agencies, etc. But the emphasis of managerial accounting is to ensure that sound, accurate data is available for internal planning and control, and reporting. Modern managerial accounting goes beyond reporting – in fact, reporting to external parties may encompass managerial accounting data, but other reports reflecting internal communication of important information will also be generated. The development of product-line or division-level Income Statements and Balance Sheets, for example, enables accountability to be allocated to specific business units and provides the foundation for relatively decentralized supervision and control.

3. Strategic Decision-Making and Performance Evaluation

There is a growing consensus that interfunctional and intraorganizational efficiency measurement techniques, such as single or multiple nonfinancial indicators, time-based measures, accounting information and fast-close techniques, data warehousing, and computer-integrated manufacturing, should be planned and executed by interdepartmental and multidimensional teams within firms. The manufacturing area of a company must be able to fulfill the production tasks demanded by business strategies. The manufacturing function today has moved beyond the simple processing of orders to requiring excellent teamwork, increased flexibility and quick change capability, better communication with other business functions, and establishment of a supplier network. An international link brings different and extreme challenges in organizational flexibility, decision-making and coordination, risk analysis, time constraint, and global competition, regardless of whether product or service flow between firms reaches the country level or between an affiliated group.

Through identifying future opportunities and leveraging contemporary information technologies, firms have begun to reengineer the managerial activities associated with their primary value-adding processes so that better strategic decisions and deliverable products or services can be achieved. Focusing on functional excellence, deciding how and at what cost to produce products or services, and evaluating operating performance are essential in these internal value-adding processes. As a result, managerial accounting and cost allocation activities in firms have changed from simply providing financial reports and calculating inventory valuations to supporting organizational strategies and measuring production efficiency and delivery quality. Identifying and assessing risks and ensuring that competitive advantage activities are performed effectively have become the major managerial accounting activities.

4. Technological Advancements in Managerial Accounting

Technology used within the operations of a business lies behind many aspects of manufacturing and complex business systems. The trend of using Information Technology and the PC is toward an ever closer association of manufacturing, accounting, and financial reporting information for newly developed business systems.

Marketing is conducting complex consumer research that extends product distribution to multiple locations and allows the manufacturer to structure a variety of different pricing and discount schedules. In the future, information about future consumer demand is required by market consumers. Upon receipt of this information, management will adjust purchases and production requirements. In turn, all these adjustments convey the ability of a company to maximize profits for its shareholders.

Managers analyze sales data, work in process statistics, and quality control data. Also, consideration is given to materials purchase orders, the company’s collection of monies owed by its clientele, and the controls for the payroll and its insurable items. The establishment of a historical record of what has occurred is the foundation for the preparation of corporate statements by responsible accountants. Examples of operating statements are those that pertain to sales, production, and other expense categories, budget variances, inventory control, and quality, and so forth. The creation of useful classifications can be especially challenging to accountants due to the constant changes in technology within businesses.

Technological advancements promise to transform modern business practices within managerial accounting. Together with traditional methods of accounting, modern technology will be used to gather, quantify, and interpret data from various segments within a business. Technological tools that are specialized permit detailed analysis by not only many types of business but also by specific business practices. Finally, advanced technology allows immediate feedback so that both management and their accountants can remain abreast of the business operations. In turn, they can identify and respond to problems or pursue opportunities.