managerial accounting pdf

managerial accounting pdf

The Role and Importance of Managerial Accounting in Business Operations

1. Introduction to Managerial Accounting

Only then will it provide a basis for evaluating economic operations and make meaningful contributions to the decision-making process. Managerial Accounting is involved with the provision and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. It does not include any detailed discussion of reports such as the annual report and the financial statements issued for the benefit of those who own or invest in the business. The reports issued to the managers are more detailed and comprehensive so as to make the basis for more detailed and important decisions.

All groups of accounting studied in universities’ business courses have something to contribute to the overall body of knowledge that is necessary if a student is to become an effective manager. In the early chapters, the major purposes and features of managerial accounting are covered in some detail to set the stage for the specific accounting procedures discussed in ensuing chapters. Future practices in the field will determine how effectively we are meeting these purposes and desires of students and educators, but for the present, it is useful only to assert what the future can and should hold. Organizations have an unmistakable need for information that will improve performance and aid in decision making. Such information is an important output of the accounting system, but it can be helpful only if properly organized and classified.

2. Key Concepts and Principles of Managerial Accounting

Cost-benefit affects every decision made inside and outside an organization. It guides the benefits chosen by society, the investments chosen by owners, and the activities chosen by managers. The general cost-benefit rule suggests that an action should be undertaken, and all other actions abandoned, to the extent that the extra benefits from the decision are at least as great as the marginal costs of the decision. The organization’s resources, including its human and technical capabilities, are in limited supply. Thus, to achieve the best and properly motivated use of these resources, management must identify, measure, and evaluate those forces that lie within and without the organization. Financial performance measures typically dominate the qualitative information that managers use to make decisions. However, managerial accountants often stress that these financial measures do a better job of reflecting past decisions than of predicting future performance. To better understand why performance measures are important for both managers and the organization, it is useful to first define the characteristics of most modern business organizations.

Any study of accounting should be rooted in the basics – the key concepts that underlie accounting and financial reporting. This chapter reviews a few fundamental concepts that align with the practice of managerial accounting. They form the foundation for the more detailed discussions that follow. The business entity concept is the perhaps the most crucial accounting principle. It is the driving force behind the preparation of financial reports. Managers and owners have different objectives and information needs, however. This difference gives rise to conceptual frameworks or models that stress different underlying assumptions about the economic environment, assumptions that are essential tenants in the construction of most managerial accounting systems. Other principles provide supplementary guidance, always helping craft reports that are useful, and sometimes helping identify characteristics of the reports that are not useful. They also identify the underlying constraints of accounting practice – the natural and pragmatic limits on the type and characteristics of the information that can be provided.

Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization’s goals. Managerial accounting often goes by different names, such as management accounting, cost accounting, performance measurement, or even accounting for decision-making. Perhaps the calling card of managerial accounting is its focus on relevant information for internal users – the company’s management. To understand this focus, recall that the primary objective of external financial reporting is to provide useful information to investors and creditors outside the company. While both external and internal accounting should be governed by the same key accounting assumptions, principles, and constraints, these different objectives help shape the development of unique concepts and principles that guide the day-to-day practice of managerial accountants.

3. Managerial Accounting Techniques and Tools

Operating leverage – Operating leverage is a type of business risk that is obtained when a high proportion of costs are pegged as opposing to variable. These fixed expenses, which usually consist of plant’s fixed operating and administrative costs, create varying degrees of operating dependability on shifts in volume. The organization that has the intensification of operating expense boasts the high fixed costs and vice versa.

“Break-even” point – Accounting break-even is a feature of security, which underlies the mathematical relationship among sales volume, fixed cost, variable cost, average contribution, and the earnings before interest and category taxpayer. Break-even also means a condition wherein revenues the same profit and was exactly offset the expenses, resulting in no gain (profit) nor loss.

Cost volume profit (CVP) analysis – CVP analysis is an accounting tool used to measure the company’s operating level of activity, particularly the changing of output required to achieve the break-even level of sales and the related changing of an annual profit depending on the company’s resources. The framework of cost-volume-profit analysis assumes that the relationship between turnout, prices, total production costs, and expenses is linear, that is, variations incurred are proportional.

4. Strategic Decision-Making with Managerial Accounting

Other strategic decision-making context tools focus on the effect of capacity decisions on firm profitability. Decisions that expand or contract capacity of system resources are often large and have long-run consequences. The allocation of costs for system resources (often including specialized resources) is increasingly important given the increasing recognition that many firms face significant non-scale implications of a firm’s size and hence depend more on specific resources than pure profit leverage. The availability of short- and long-term pricing strategy tools that depend on capacity dependence, and hence create more flexibility in this increasingly important area. This flexibility is essential to develop short-term pricing policies, particularly customer and product mix policies, for firms with complex capacity decisions.

Managerial accounting provides several tools and concepts for strategic decision-making. These tools can help business people achieve their strategic objectives. An important set of tools places costs in the context of processes, providing measures of process-related costs that can be compared with process outputs in order to understand the efficiency and value of these process activities. Such measures can help firms manage the trade-offs between efficiency and value that firms face when deciding how to allocate resources. Process tools focus on cost allocation methods that support this management task, uncovering the implicit costs that are neither transparent nor the same as contractual market transactions. Activity-based costing (ABC) has become a major tool to capture implicit costs and manage trade-offs.

5. The Future of Managerial Accounting in a Digital Age

The increased efficiency, accuracy, and lower costs made possible by progress in IT and automation could mean that management accountants have more time for strategic considerations. Most companies will be able to cut costs and increase value and quality by implementing business reengineering, continuous improvement, TQM, and other productivity enhancements. Continuous improvement is more than an objective; it is a means of achieving the objectives of a balanced scorecard. Balanced scorecards are a key internal performance measurement and linking tools that enable companies to manage their activities and capabilities and their internal and external business results. Substantial gains are achieved when these measures are linked to strategic objectives. MaRs generic value chain model assumes that managerial accounting begins with procurement and ends with distribution. Costly errors are made all along the value chain because companies mistakenly believe that the procurement and distribution processes have nothing to do with each other. They use traditional job cost and standard cost systems to develop misleading information. Balancing scorecards can show managers how these processes influence each other and how to improve and manage them concurrently. Companies might not have the luxury of excellence in each function of their activities, but that is the ideal to which they must strive.