managerial accounting epub

managerial accounting epub

The Role and Importance of Managerial Accounting in Business Decision-Making

1. Introduction to Managerial Accounting

It is clear that managers make decisions in many different areas of an organization, and these organizational activities produce accounting and financial information that is somewhat generic in nature. The process of classifying transactions and events and summarizing, presenting, and analyzing this information for decision-making purposes is known as accounting. Such accounting information can be used to support decisions for almost every activity in which managers engage. However, accounting information is sometimes limited by the manner in which it is presented and by the rules that govern the nature of the information that is included in financial reports. These rules are designed to ensure that accounting information is relevant, meaningful, and reliable to an external party. However, these same rules can also inhibit the use of accounting information for internal or managerial purposes. The solution is to use a special form of accounting designed to meet the needs of managers. This form of accounting, termed managerial accounting, really represents a reprogramming of accounting information for internal-use applications. In this chapter, consideration is given to the applications, needs, and purposes of accounting that are of specific importance to individuals who are internal users of accounting information.

One of the most important jobs that any manager has is to make sound, well-informed decisions. As a new manager in an organization, one is often asked to consider the relative merits of different options, to come up with a recommendation, and give an articulate explanation of why one’s choice is best. Such choices can involve which products to make, which process to use to make them, which sales force to employ and how they should be compensated, or what amount of inventory to keep on hand. In some respects, each and every activity performed by a manager represents a small-scale allocation decision. One determines where to allocate resources in the hope of maximizing organizational benefit. In short, making good decisions is the key to managerial success.

2. Key Concepts and Principles in Managerial Accounting

From a managerial perspective, accounting has three classic roles: the control of an organization’s operations, report writing, and business planning. These correspond to the needs for information on control, of a historical, economical, and quantitative nature, the preparation of the information generated in a printed format with the help of standardized reports using the most rigorous and reliable techniques available, and the implementation of techniques to facilitate forecasting, measurement, and continuous evaluation of a business’s administrative process. These activities should be coordinated, starting with the reporting of administrative data, leading to its use and application, which take the form of adequate planning and control exercises, in order to assist managers in discovering and testing organizational decision options.

As a resource generated by top executives to make business decisions that affect the future, management accounting is an essential aspect of the competitive business environment. Management accounting is characterized by being “designed to allow decision makers to prepare forecasts, solutions, and evaluations using information gathered from operational and/or financial data”. This implies that management accounting is not a discipline focused on either functionality or reports, but on relationships and inflows and outflows of fiscal and economic information, generated to influence and help business managers understand the characteristics and consequences of the tools they have and can use to make appropriate decisions in a timely manner.

3. Tools and Techniques Used in Managerial Accounting

In managerial accounting, the planning and control function is generally performed with the help of defined planning and control management tools including the communications network, trial balance summaries, problem audits, and production and scheduling reports. Cost-based tools used in planning and control include budgeting, standard costs, and/or the products of variance analyses or related cost reporting tools. Productivity-based tools used for control include measures of output per unit of one or more inputs – some of which measure long-run interests, and others that measure the extent to which outputs may be productivity- or efficiency-impaired in the short run. Other tools focus on ratios of deliveries to demand or the reasons for cashouts to creditors, lenders, and stockholders of the firm. These and other tools of managerial accounting are critical to the performance of some of management’s basic internal “decision functions”.

Managerial accounting uses essentially the same tools and techniques for conducting the basic “decision functions” of management: planning and control. Managers must plan the activities of the firm – what, when, and how they should be done – and also decide what resources are needed to carry through these activities. Managers must then organize the resources of the firm to carry through these plans. The planning function includes decisions about product pricing, what products to add or drop, what customers to serve, the extent of the firm’s present and future commitment to the capital assets used in making the products or providing the services, and so forth. The control function involves the evaluation of operational performance. It notifies the managers of problems, is crucial in helping them to understand why the problems arose, and allows them to evaluate alternative courses of action to deal with these problems. In general, all of the established management-accounting tools and techniques can be grouped under the broad heading “Planning and Control.”

4. The Role of Managerial Accounting in Business Decision-Making

One major role of managerial accounting is to measure the production costs of goods and services to assess the profitability of different products. This is achieved under cost accounts or managerial accounts of products that are manufactured. It also provides essential reports for budgeting, performance evaluation, and management control of manufacturing and marketing operations. The aforementioned concept represents the essence of product-cost information and is fundamental to a business organization’s success in a competitive world. Only those organizations capable of producing and marketing goods and services that consumers want at a lower or comparable cost to other producers can be successful and survive in the long run. It is essential to make the correct decisions and implement them effectively.

Managerial or management accounting deals with the production of economic information for internal use by the firm’s management. This information can be defined as planned and/or actual data that is relevant to making decisions within an organization. With advancement in the modern theory of management, business mathematics, business statistics, and other quantitative techniques, management accounting based on the desired concepts and techniques has evolved and is fast becoming an effective subdiscipline, needed not only in business organizations but also in public nonprofit organizations.

5. Challenges and Future Trends in Managerial Accounting

The future of the managerial accounting model rests on the assimilation and internalization of the assumptions, methods, and procedures described above. The enrichment of the economic content of the various technical protocols used, such as the logic of information systems, ERP control procedures, game theory and decision theory, process reengineering techniques, and resource management. The extension of the environmental accounting perspective to tackle environmental economic and environmental management problems, which have not yet been resolved, achieving the global accounting development that will overcome the remaining barriers, both at the strategic, tactical, and operational levels, in accounting information quality. Finally, the deepening of the competence profile of the managerial accounting technicians to face both the technical and the ethical and deontological challenges in the light of the specific current and future professional qualification paradigms.

The role and importance of managerial accounting in business decision-making is also considerable. Managerial accounting contributes information for the following purposes: enable the manager to understand what products, services or processes are most profitable; help the manager determine ways to prevent losses or inefficiency; increase the efficiency of the production system through the development of accurate financial data and control systems; enhance the information base for relevant planning activities; assist in setting or changing product prices; and help the manager to make accurate decisions to generate sufficient revenue, reduce costs, and distribute profits. Moreover, managerial accounting needs to determine the direction, provide guidance, control the activities performed, and provide feedback on the quality of managerial results. Practical decisions require the definition and implementation of the system and the technical tools needed to evaluate, monitor, and adjust the strategy.