“The accounting system generates the information that satisfies two reporting needs that coexist within an organization: financial accounting and managerial accounting” (Schneider, 2012, ch 1. 1, para 1). Managerial accounting is the process of preparing reports and accounts required by management to make business decisions for daily, weekly, monthly, and yearly projects.
Financial accounting is the branch of accounting that organizes accounting information for presentation to interested parties outside of the organization. Financial accountants produce annual reports for external stockholders.
Managerial accounting is a vital component in managing. Management accounting is concerned with providing financial information to managers to plan and control activities (Garrison, Noreen, & Brewer, 2010). The purpose of this paper is to define managerial accounting, the role of the management accountant, and management accounting techniques. Managerial Accounting Management accounting is used to evaluate a business’s results beyond what the financial statements are telling. Management accounting reports show the amount of available cash, sales revenue, status of accounts payable and accounts receivable, outstanding debts, and inventory.
Management accounting provides the decision makers with the financial data necessary to make sound managerial decisions (Collier, 2003). The information is used to determine if the company is following its budgeted limits in all departments and operational areas of the business. A management accounting system must provide timely and accurate information to facilitate efforts to control costs, to measure and improve productivity, and to devise improved production processes (Kaplan, 1983).
Managerial accounting plays an important role in business management and provides the forecasting, planning and performance opportunities for the business to consolidate their performance in an effective way (Konel, (n. d. ). Managerial accounting provides the cost transparency and help to forecast situations with variable analysis and information contrasting in order to analyze the information in an effective way. Managerial accounting uses different financial and economic information in order to plan and coordinate the functional activities of production, operations, marketing, and support.
The purpose of managerial accounting is to let company leaders know specific financial and statistical information to make important business decisions (Konel, (n. d. ). Managerial accountants create reports that analyze sales, project income or market trends or review a specific product’s income viability and the costs it takes to create and market it. Managerial accounting helps a company’s key decision-makers plan and budget for the future (Konel, n. d. ). This includes creating reports that might help leaders develop new product ideas or make decisions about eliminating products or services.
The purpose of managerial accounting is to let company leaders know specific financial and statistical information to make important business decisions. Managerial accounting helps a company’s key decision-makers plan and budget for the future. Managerial accounting aids in revealing the current and future financial health of company (Garrison, Noreen, & Brewer, 2010). Managerial Accountant’s Role “A management accountant maintains accounting records, prepares financial statements, generates managerial reports and analyses, and coordinates budgeting efforts.
The management accountant is an advisor, an internal consultant, and an integral part of management” (Schneider, 2012). One of the main functions of managerial accountant is to create budgets and forecasts for the future. Budgeting and forecasting represent a company’s quantitative action plan for the future in sales, production figures, income, and expenses. It incorporates the projected inflow of cash and the outgo of expenses so that the management team has a handle on where the company is headed.
Dynamic companies use their internal budgets to make course adjustments throughout the year. For instance, if a product or service is not doing well in the first half of the year in comparison to the forecast or budget, the management team can use that information to make necessary changes or to scale back operations until market trends or the economy changes. Managerial accounts are the value creator for the organization (Collier, 2003). Their forward-looking capacity will help the organization to plan and make decisions for future profitability.
The management accountants have a dual role to perform in an organization. The management accountant works as a strategic partner to provide strategic based financial and operational information (Collier, 2003). They are also responsible for business team management in organizations. The management accountant plays a prominent role in preparing financial reports, risk, and regulatory reporting, aggregating financial information, forecasting and planning important organizational information.
Managerial accountants often perform cost analysis of products and divisions, which include variable and fixed costs. The production decisions made by managers are a direct result of information received from managerial accountants. Ethical Issues in Management Accounting Due to the importance of the information supplied, management accountants should observe certain professional ethical standards. Professional management accountant organizations worldwide have developed professional ethics standards.
Setting professional ethical standards is important because they provide trust in the employee-employer relationship; standards represent a reference for management accountants facing ethical dilemmas, and provide a guarantee to the information users that concerning the quality of the information (Collier, 2003 & Schneider, 2012). A business’s code of ethics is a non-prescriptive framework within which the business can operate (Collier, 2003). The code of ethics represents how business is to be conducted. It may cover diverse issues such as anti-competitive practices, bribery, corruption, and environmental pollution.
The code supports a business, because it is an integral part of building a culture within the organization. A code of ethics aligns the behaviors of the organizations’ employees and guides them in their day-to-day decision-making. Following the code of ethics can become the glue that cements to the company together. Having a code of ethics is a normal business practice. A Code of Ethics is the key to a successful, long-lasting business (Collier, 2003). To be an effective manager in accounting, one must have a strong sense of business ethics.
In the subject of management in accounting, it is especially crucial to have a strong sense of business ethics due to strict laws and guidelines, as well as regularly scheduled audits. The Institute Management of Accountants (IMA) is the most important management accountant professional organization in the USA. IMA developed “Standards of Ethical Conduct for Management Accountants. ” These standards require the compliance with four basic principles: competence, confidentiality, integrity, and objectivity (Collier, 2003).
When taking into account the nature of the information supplied by the management accounting, it is important to ensure its confidentiality. Management accountants have the obligation not to communicate confidential information; with the exception of the cases when they have the legal obligation to do so. According to their position within the compartment, management accountants have the obligation to inform their subordinates concerning the confidentiality of the information obtained during work, and to supervise their subordinates’ compliance with these principles.
Management accountants work inside a company, handling all internal accounting data. These individuals often allocate production costs, create management reports, and provide support for managerial decisions. Ethical issues can result from managerial accounting activities. Like all professionals, management accountants must be sure to be ethical when working for a company. Unethical behavior results in lost time, production, overhead charges, initiative, professionalism, customer respect, reputation, attitude, spirit, and drive (Collier, 2003).
Accountants can select a method that improves operating profits through recording more expenditures as production costs. This lowers period expenses and increases finished goods inventory. Absorption costing is the common method abused during overproduction. Operating managers and management accountants report higher profits by using absorption costing to record fixed costs in final inventory accounts. All employees including management accountants need to embed their own values in all aspects of their operations (Schneider, 2012). Accountants bring their own personal codes of ethics with them into an organization.
Difficult issues may arise when the employee’s personal code of ethics prohibits certain types of ethical behavior that are legal, socially acceptable, professionally acceptable, and acceptable to the organization. Three Managerial Accounting Techniques Cost Management “Cost management is related to cost control, but here the emphasis is on establishing the level of costs that becomes the benchmark for measuring performance” (Schneider, 2012). Management accounting uses a variety of techniques for applying business costs to produced goods or services.
Standard cost and activity-based costing are important parts of management accounting. Companies are allowed to allocate costs to products in whatever way they deem most acceptable. Costs attributed to produce products include raw materials, labor, and manufacturing overhead. Management accountants usually create a system to allocate a portion of costs to each item produced by the company. This ensures that companies price goods appropriately to agree to the production costs of the item along with some profit, which pays for additional business costs.
The main objective of cost management is to reduce the costs expended by an organization while strengthening the strategic position of the firm. Schneider (2012) stated “A standard cost for a product is the amount that management believes one unit of product should cost and consists of a price standard (a generic term indicating price for materials, rate for labor, and rate for factory overhead) and a quantity standard (a generic term indicating quantity for materials, time for labor, and activity or volume for factory overhead). “Labor cost control is another part of cost management.
Schneider (2012) listed five advantages of a standard cost system. This section covers the major advantages of standard costs: 1) Cost control, 2) Cost management, 3) Decision making, 4) Recordkeeping costs, 5) Inventory valuation. “Cost control is comparing actual performance with the standard performance, analyzing variances to identify controllable causes, and taking action to correct or adjust future planning and control” (Schneider, 2012). Cost controls start by the businesses identifying what their costs are and evaluate whether those costs are reasonable and affordable.
Then, if necessary, they can look for ways to cut costs through methods such as cutting back, moving to a less expensive plan or changing service providers. The cost-control process seeks to manage expenses ranging from phone, internet, and utility bills to employee payroll and outside professional services. Schneider (2012) stated, “Cost management is related to cost control, but here the emphasis is on establishing the level of costs that becomes the benchmark for measuring performance.”
Operations and production can be analyzed, waste and inefficient areas can be identified and then eliminated. A standard cost system creates a workplace in which employees become cost conscious (Schneider, 2012). When standards are set at attainable levels, the standard costs are useful in making valuable workplace decisions. Standards provide benchmarks that individuals can use to judge their own performance. Schneider (2012) stated, “A standard cost system saves recordkeeping costs, not during the initial startup, but in the long-run operation of the system.
When using actual costs, each item of materials issued from a storeroom has its cost, which came from a specific purchase order. ” Standard costs can greatly simplify bookkeeping. Instead of recording actual co0sts for each job, the standard costs for materials, labor, and overhead can be charged to jobs. “A standard cost system records the same costs for physically identical units of materials and products; an actual cost system can record different costs for physically identical units. ….. Standards provide a more rational cost in valuing inventories” (Schneider, 2012, ch. 7. 2 para. 10).
Some manufacturers prefer to use standard rather than actual costs when accounting for the value of their inventory. Standards provide a stable inventory value, since it suppresses the effect of fluctuations in material costs, and actual manufacturing operations on the cost basis of their inventory. Capital Budgeting Businesses choose investments based on the future profitability of cash flows. Most investment decisions require large amounts of financial information. Most businesses accept investments with low risk and moderate reward, although a high-risk/high-reward investment may be considered.
Capital budgeting is the process of evaluating specific projects, estimating benefits and costs of the projects, and selecting which projects to fund. Capital budgeting is the process of determining whether an investment is worthwhile. Different capital investment techniques will be used in order to make the right investment decision (Bosch, Montllor-Serrats, & Tarrazon, 2007). Capital budgeting techniques include Net Present Value (NPV), Payback Period, and Internal Rate of Return (IRR). The internal rate of return (IRR) is the rate of return promised by an investment project over
its useful life. The internal rate of return is computed by finding the discount rate that equates the present value of a project’s cash out flow with the present value of its cash inflow (Bosch, Montllor-Serrats, & Tarrazon, 2007). . In other words, the internal rate of return is that discount rate that will cause the net present value of a project to be equal to zero. The internal rate of return is compared to the company’s required rate of return. The required rate of return is the minimum rate of return that an investment project must yield to be acceptable.
If the internal rate of return is equal to or greater than the required rate of return, than the project should be acceptable. If IRR is less than the required rate of return, then the project should be rejected. Divide the expected profit by the expected expenditure, and you will arrive at a percentage of returns (IRR). “Net present value (NPV) is the difference between the present value of the incremental net cash inflows and the incremental investment cash outflows” (Schneider, 2012, ch 10. 3, para 6).
NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV calculates all of those inflows and outflows over time, takes inflation and foreign exchange rates into account, and expresses the final benefit to the company in terms of today’s dollars. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield (Bosch, Montllor-Serrats, & Tarrazon, 2007). NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account.
If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should be rejected because cash flows will also be negative. NPV is a popular method used by most of the companies in order to help managers make investment decisions (Bosch, Montllor-Serrats, & Tarrazon, 2007). The payback is another method to evaluate an investment project. The payback method focuses on the payback period. The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates.
The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment. The payback period is expressed in years. When the net annual cash inflow is the same every year, the following formula can be used to calculate the payback period. The formula or equation for the calculation of payback period is Payback period = Investment required / Net annual cash inflow (Schneider, 2012). The payback method is not a true measure of the profitability of an investment.
Rather, it simply tells the manager how many years will be required to recover the original investment. Quality Control Quality control is a matter of checking and re-checking various components in the manufacturing and marketing process to ensure the product or service being provided is satisfactory and safe for all involved. Quality of product and services determines success or failure of the organization (Collier, 2003). Consumers expect the company to maintain high-level of quality and consider it an important aspect of satisfaction.
Quality management, therefore, becomes very important as far as any organization is concerned. Quality management can be accomplished through various quality control techniques. Quality assurance and quality control are objective oriented and can be achieved through statistical quality control (Collier, 2003). Reducing product defects lead to less variable cost associated with labor and material. Reduction in wastage, scrap, and pollution reduce overall cost of raw materials used. Ability to produce quality products over longer period of time helps to establish and maintain a satisfied customer base.
Quality control can increase employee motivation, productivity, efficiency, and awareness of quality Quality assurance is a basic method of quality control. During manufacturing of vehicles and other items, there may be inspectors that test the product to ensure it meets a certain standard for the company. Companies also test all the individual components that make up the individual product or service for quality and satisfaction. Product testing usually includes purposely breaking or damaging a product to see how well it holds up.
An example of this is when brand-new cars are put under rigorous crash tests to determine how safe and effective they are before selling them to customers. Pharmaceutical industries test and retest drugs before the Food and Drug Administration (FDA) approves their use on humans. Companies like Apple, and Microsoft are all aligning their processes with quality assurance in order to minimize defects in their products and to achieve high quality outputs. Manufacturing companies are ensuring quality control by using techniques like lean manufacturing in order to ensure minimized error in their processes (Montgomery, 1991).
These techniques work to ensure product or process high quality and minimize the rate of errors that will help the management to take important decisions and minimize cost. Conclusion A management accountant’s responsibilities can be a variety of things, depending on the company you work for, the management accountant’s level of experience, the time of year and the type of industry the management accountant is at, you could find yourself doing anything from budgeting, handling taxes, managing assets to help determine compensation, the benefits packages and aiding in strategic planning.
The managerial accounting techniques used in different areas support management decisions and enhance the chances for a high rate of return in the future. An accounting department plays an enormous role within any company. As the backbone of the organization, the accounting department allows the organization to operate at its fullest potential. Without an accounting department, it would be impossible for any type of organization to operate in a cost effective manner.