managerial accounting 17th edition pdf

managerial accounting 17th edition pdf

The Importance and Application of Managerial Accounting in Modern Business Practices

1. Introduction to Managerial Accounting

A special characteristic of managerial accounting is its focus on internal sources of information. Specifically, management accounting information details the downstream financial effects of specific operational decisions. In contrast, external financial reports summarize and report information that flows from the organization to external parties such as creditors, investors, and government regulators. Regulatory bodies such as the U.S. Securities and Exchange Commission and the Financial Accounting Standards Board prescribe numerous detailed rules regarding how these external financial reports are prepared. Many rules specify particular methods that may not be changed, but rather with which companies must comply. The preparation of external financial reports is the domain of financial accounting, which relies on data and information prepared by a mixture of financial accounting standards and efficient means to collect and summarize the required reporting.

The importance and application of managerial accounting in modern business practice can hardly be overemphasized. Today, with intense competition in every industry across the world, business managers are routinely called upon to make difficult and intricate decisions. The success of an organization, whether a large global enterprise or a local not-for-profit organization, often turns on the quality of these decisions. Drawing on a long history of improving complex decisions with relevant and timely information, management accountants specialize in this aspect of accounting. This paper describes how the tools and techniques of managerial accounting help organizations make high-quality decisions.

2. Key Concepts and Principles of Managerial Accounting

Successfully operating and managing a business organization requires the functions of planning, directing, and controlling. Planning begins with determining the outcomes or results that the company wishes to achieve, then developing a plan to do so. These plans are carried out by teams throughout the organization working on specific tasks and overseen at a wide range of levels by management. The evaluation of how well the outcomes and results actually achieved are compared to the expectations and goals established produces feedback, which is used in the directional search for change (necessitated by feedback) and the adjustment of future plans. As plans are executed on a daily basis, there are lots of decisions being made up and down through the organization. Since scarce resources such as capital, employees, time, and space are at stake, these decisions should be made as efficiently and effectively as possible. This requires pattern recognition, especially recognizing meaningful changes, weighing trade-offs, and thinking about the future effects of the decisions.

Managerial accounting involves the development and analysis of accounting information for management planning, decision-making, controlling, directing, and performance evaluation. It provides qualitative and quantitative information for the various layers of management in all types of organizations, from high-level CEO positions through middle-management division leaders to supervisory crew chiefs on the front line. Today’s rapidly changing and highly competitive environment requires that businesses operate as effectively and efficiently as possible. The importance of inter-departmental and intra-departmental coordination is crucial and will only increase over time.

3. Tools and Techniques in Managerial Accounting

Standard costing is used to capture the details and costs in the accounting system, as implemented in a manufacturing or production environment. Actual costs are compared to a predetermined budget, target, or “standard” costs which could occur in assembling a product. The manager can then examine and track any type of inventory, labor, or overhead discrepancies among the product’s actual, standard, or budgeted performance. Companies have also been using standard costing as a tool in normal economic times. However, due to the uncertain conditions of today’s economic environment as a result of the Covid-19 pandemic, management accountants might need to change from standard costing systems to other cost accounting techniques.

Cost accounting is the process of determining and accumulating the costs of activities. Using cost accounting, accountants can measure the costs associated with executives, profit centers, manufacturing facilities, activities within operations, and activities within departments. This information is useful for both strategic planning and performance evaluation. Executives are responsible for the purchase of raw materials and conversion of these materials into finished goods through the use of labor and physical facilities. Costs are accumulated based on raw materials, labor, and physical facilities. Production costs are accumulated for specific jobs or capital projects. Costs or full-time employee equivalents are assigned to specific accounting classifications. Optional facilities and programs are also accounted for using cost accounting. Optional facilities and programs can also include administrative activities, supportive services, and sales and marketing activities.

Various tools and techniques are used by managerial accountants to provide useful information to large groups of people across the organization. These tools are characterized as planning and decision-making tools and include cost accounting, standard costing, job order costing, budgeting, cost-volume-profit modeling, and relevant decision-making tools. The integration of both the planning and control functions is supported by the use of these tools.

4. Managerial Accounting in Decision-Making Processes

Two basic types of business decisions are made: long-run decisions, and short-run or tactical decisions. Because business environments are dynamic, the objectives of business organizations will also change. Consequently, top management is continually engaged in strategic planning in an effort to keep the business goal-oriented and changing with the dynamic business environments in which they operate. The long-term goals and objectives of business organizations are the basis for the enterprise’s strategic planning process that shapes its future. The firm’s future decisions and activities are directed towards the accomplishment of the strategic plan. Nevertheless, sound strategic planning rests on the availability of reliable, relevant internal and external economic and non-economic information. Underpinning this information need is a comprehensive and effective financial managerial accounting system that has both an external and internal orientation. With an external orientation, managerial accounting meets the information needs of non-owners or outside parties.

Business managers are constantly faced with challenges associated with decision-making. Since managerial accounting systems provide vital financial accounting information to business managers, it is necessary to consider their decision-making role. Moreover, even though technical specialists provide business managers with assistance in making these decisions, the actual decision-making responsibilities rest with business managers. The challenge lies in making effective and productive decisions to help the organization accomplish its strategic and operational goals. In an effort to meet this challenge, business managers turn to the formal and informal decision-making models provided by the accounting information system.

5. Emerging Trends and Technologies in Managerial Accounting

A study has reported that there are only 14 companies that use optimization systems in costing areas. These companies are among the Fortune 500 and are in the automotive, aerospace, and consumer products retailing sectors. Other areas of software development focus on enhanced accounting systems utilizing expert systems, the data dictionary aiding in data quality in the company, multimedia databases, a company balance scorecard evaluating and improving performance through sustained value, and data warehousing. What trends do we see in the application of information technology in managerial accounting? There is a move towards web-enabling managerial accounting systems, which means a completely new approach to the design and development of these systems. The delegate concerns the construction of flexible and comprehensive models that enable knowledge exchange between managers and information system developers. Furthermore, the growing importance of decentralized organizational structures requires that the potential of knowledge representation and distributed computing are accounted for. Concerning decision support systems, there are several research areas that managerial accountants feel are important.

There is no doubt that managerial accounting should take advantage of the power of modern electronic tools, i.e., computers. Surveys have reported that a high percentage of managerial accountants use microcomputers in their jobs. Over 50% of the people working in the managerial accounting area use microcomputers for word processing, spreadsheet analysis, and statistical analysis. The number of people who use microcomputers for graphics or for database access is lower than those who use it for the other applications. There are several interesting applications and technologies that could be used in the area of managerial accounting that have been catalogued by a group of researchers who are working in the investigative end of this area. The software suggested to be used on the microcomputers covers areas of education with interactive systems, optimization such as for profit contribution analysis, strategy assessment, workload pertaining to capacity planning, budgeting, MRP support and JIT planning, forecasting, trend analysis, standard cost monitoring, data mining, valuation models for transfer pricing, activity-based costing, and other uses for spreadsheets.