Essay Sample on Managerial Accounting

6 pages
1578 words
Wesleyan University
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1.0 Introduction

In the past few decades, advancement in information technology has had a significant impact on the corporate environment and changing the way business entities perform their operations and activities. The increased utilization of computers and information management systems has enhanced the speed, ease, frequency, and accuracy in business processes. This state of affairs has, in turn, resulted in changes in expectations among the different stakeholders of business organizations. For example, the accounting and finance units of an organization were traditionally tasked with the maintenance of books of accounts and making relevant financial reports to both internal and external stakeholders of the entity on a quarterly or annual basis. Upon the inception of technology and particularly information systems, financial or accounting managers are today able to capture a lot of information with marked ease and in real time. These changes have led to the need to refocus the roles of the accounting and finance functions to be factored in the day-to-day decision-making process. As a result, managerial accounting has become more relevant and important than ever before. This essay discusses the role of managerial accounting in accomplishing business objectives.

2.0 Role of Managerial Accounting

The general role of management accounting can be depicted from the National Association of Accountants definition of the concept of management accounting. According to this body, management accounting refers to a holistic function that includes identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating relevant information (Shim & Siegel, 1998). Managers utilize this information in the planning, evaluation, and controlling of the entire business organization. Moreover, managerial accounting helps a company to make sure that all organizational resources are utilized in an accountable manner (Garrison, Noreen, Brewer & McGowan, 2010). The scope of management accountings role stretches to the responsibility for preparing financial records and reports that are used by non-management stakeholders, including regulatory agencies and tax authorities.

Despite the absence of regulations requiring businesses to undertake managerial accounting that does not imply that this practice is not useful to the entity. For both small and medium-sized enterprises, particularly those who lack advanced information management systems or enterprise resource allocation software, Shim & Siegel (1998) hold that managerial accounting tools and techniques can generate valuable insights regarding the entity. In a nutshell, the role of managerial accounting seeks to account for the planning, control, and decision-making process of a business entity (). Getting a better understanding about some of the specific functions of management accounting may provide managers with relevant information about their firms, which can help them to have a competitive advantage over their market rivals.

2.1 Planning and Controlling

Managerial accounting plays a critical role in planning and controlling in a business. The chief management accountant commonly referred to as the chief controller, not only give direction and exercises line authority to staff under the accounts unit such as bookkeepers, internal auditors, and budget analysts but also gives advice and other services to other departments of the organizations. The primary functions of managerial accounting under the control area include planning for control, communication and interpretation of financial records, tax administration, and internal audits among others (Shim & Siegel, 1998).

For instance, performance-based budgeting is a type of financial control through which managers seek to improve the effectiveness and efficiency of public spending by looping the financing of public organizations to the outcomes they deliver (Ittner & Larcker, 2001). This control utilizes systematic performance information including performance indicators, evaluation measures, program costing, among other elements, to plan and prioritize business expenditure and enhance their service delivery effectiveness and efficiency.

2.2 Decision making

In addition to business planning and controlling, another critical function of management accounting is decision-making (Zimmerman, 2001). In the course of business operation, managers face different situations which require them to make well-informed decisions. From the management accounting perspective, the concept of decision-making can be described as the choice of a course of action from several alternatives (Shim & Siegel, 1998). The best decision is one that attracts the least cost and involves the most revenue. The general management collaborates with the accounting manager to identify the best course of action among many. Managers follow certain steps in the attempt to make and implement the best decision. First, they identify the different course of action for a particular decision.

Second, they collect relevant data and data to help them evaluate the various alternatives. Third, they analyze and point out the possible outcome of each course of action. Fourth, they choose the alternative they perceive to best accomplish the desired outcome. The fifth and sixth steps involve implementing the selected alternative and assessing the outcome of this course of action against standards or other desired results (Zimmerman, 2001). From this illustration, it is clear that decision making constitutes the focal point of managerial accounting.

2.2.1 Routine and Non-routine decisions

Routine decisions

In managerial accounting, routine reporting decisions regularly involve defined aspects of a firm like efficiency variances of specific input factors that enable the management to chart trends over time and to compare different functions within the entity in a structured manner (Shim & Siegel, 1998). Their preparation may be based on either the widely-accepted standards or principles of computation or be customized to meet the needs of the firm.

Non-routine decisions

Unlike routine reporting, their non-routine counterparts analyze one-off cases or decisions, which can gain from the deeper analysis of their different aspects (Shim & Siegel, 1998). In simple terms, routine decisions can be said to concern ongoing operations of an organization while non-routine ones often involve investment decisions. Besides that, it is imperative to note that accounting managers make non-routine decisions to address particular areas of business operations like the analysis of unusual production variances. In the realm of manufacturing and sales function, managers are constantly required to decide the particular alternative course of action to pursue. For instance, the must decide what to produce, how to make it, target market to offer their market, and the price to charge their goods (Zimmerman & Yahya-Zadeh, 2011). The major non-routine or non-recurring decisions the management often make include accepting or rejecting special offers, making their own or buying from suppliers/manufacturers, pricing standard goods, adding or dropping a certain product line, and utilizing scarce resources (Shim & Siegel, 1998).

2.3 Decision-Making Techniques in Managerial Accounting

2.3.1 Product costing

Managerial accounting plays an important role in determining the cost of products. Knowing the cost of goods is critically important to the management as it can enable them to determine the price at which they must offer their products to the consumer in order to break even (Zimmerman & Yahya-Zadeh, 2011). Moreover, by estimating the costs of products before deciding to manufacture or produce them, cost data analysis can allow the management to know if they will earn a profit on a product before investing resources towards its production. This decision-making tool makes manager be keener because the assumptions they make when calculating product costs can potentially have a significant impact on their final price. In the event the assumptions turn out to be realistic, the information will be valuable in helping managers to make informed decisions. Therefore, managers need to have or rely on appropriate product costing techniques to have a systematic framework for determining the level of cost that accrues when manufacturing products.

Furthermore, insights derived from the cost analysis is utilized in valuing a companys inventory as well as external reporting. In fact, information on the cost of products is not only used to determine the price the firm will charge its products but also monitor the performance of an entitys manufacturing process and activities (Zimmerman, 2001). Managers pursue two major approaches when conduct cost analysis job-order costing and process costing. Firms that produce goods in batches utilize the job-order approach as it enables them to assign costs to products according to the particular batch in which the item was produced. On the other hand, firms that manufacture products on a constant basis often adopt process costing as they assign costs to products in every area of the manufacturing process.

2.3.2 Cost-Volume-Profit analysis

Cost-volume-profit (CVP) analysis is an important decision-making tool that the management can utilize to project how changes in one of the three fundamental metrics - cost, volume or profit will impact the remaining two in the business (Garrison et al., 2010). It is an effective method of managerial accounting as it shows the effect different levels of sales and products will bear on operating profit (Ittner & Larcker, 2001). This analysis can graphically illustrate the actual level of sales the business needs to avert a loss, the amount of price the product should be offered to the market, and how to accomplish the set profit. CVP analysis seeks to determine the breakeven point of cost and volume of products and can help the management to make informed short-term financial decisions. In order for the CVP analysis to be relevant, the sales price, all costs (fixed and variable) per unit are held constant. Performing this analysis entails utilizing various equations that involve price, cost and other variables and plotting them out on an economic graph.

2.3.3 Breakeven analysis

Breakeven analysis is another useful decision-making technique that managerial accountants can use to know when the business can expect a profit (Shim & Siegel, 1998). This analytical technique is primarily utilized to determine the specific point or time the company will be able to cover all its costs (fixed and variable) and start to make a profit. It is important for the management to determine their current expenses which will, in turn, assist them to det...

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