Management accounting

The purpose of management accounting in the organisation is to support competitive decision making by collecting, processing, and communicating information that helps management plan, control, and evaluate business processes and company strategy. The process of management accounting is the process of creating and using cost, quality, and time-based information to make effective decisions within the organisation. Finally, cost accounting obviously plays a key role in tracking and reporting relevant product and service costs. The significance of managerial accounting is that it has to meet several information needs. According to Horngren C. T., G. Foster, and S.M. Datar (2003) the major functions of managerial accounting include the following:

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Planning and budgeting. Planning extracts the most useful trends based on past performance, and incorporates known or expected changes in other variables. Budgeting goes further by incorporating motivational aspects, and expectations based on macroeconomic variables. Decision-making. Management accountants prepare analyses based on past variables and their assessments of other key variables in the future. Accountants are most familiar with the data and often participate in the decision process.

Product and service costing. Allocation of cost to production and services is mandatory for tax and financial accounting purposes, and is necessary for decision making and planning. Control of operations. Frequent feedback on the cost of manufacturing operations is required to ensure that the process is “in control.” Standard costs and nonfinancial measures are used as benchmarks against which the management accountant periodically compares the current cost of a specific manufacturing process. Evaluation of segment management. In decentralised operations, the performance of divisions or branches is periodically evaluated to determine whether the firm’s objectives are being met and whether resources are efficiently allocated.

The internal environment of both service firms and manufacturing firms is complex. To meet the demands placed on them by managers, management accountants must be able to model or simulate various aspects of the firm’s operations. In particular, the accountant must prepare analyses and forecasts of future costs. Of primary importance is the behaviour of cost. A firm’s survival depends on the ability to generate resource inflows from operations (revenue) in excess of the cost of providing those resources. For planning, decision-making and control purposes, knowledge of cost behaviour is essential. The manager and accountant must have a strong understanding of the costs affecting decisions. Accurate forecasting of cost also depends on this understanding (Johnson, H. T. and Kaplan, R. S. 1987).

In the nineteen seventies a method called ‘Activity-Based Costing’ was devised by Robin Cooper and Robert Kaplan at Harvard University. Their theory was that it is the activities needed in making products that cause costs rather than the products themselves. Therefore proper product costing depends on determining the costs of activities that then, so the theory goes, can be rationally allocated to products depending on the degree or amount of each activity they consume in the manufacturing process. In addition, the method requires that more of the total costs relegated to overhead in traditional systems be considered the cost of activities to ultimately be directly applied to products (Cooper, R and Kaplan, R.S., 1999).

The growth of the service and non-manufacturing sectors of the economy has also undercut traditional management accounting since the model, which is based on the manufacturing process, is limited in its applicability to non-manufacturing organisations. To make management accounting more relevant to a wider spectrum of enterprise academics proposed the ‘Balanced Scorecard’ approach wherein various key measures of customer satisfaction, supplier performance, employee performance etc. as well as process measures are determined and used. The underlying theory is that in order to be useful, the income number must be augmented with the key measures of every critical aspects of the enterprise. Management decisions and practices that to optimise all of the measures of the balanced scorecard are most likely to yield success (Horngren et al.2003).

Management accounting plays a key role in organisations today. All decision makers in the organisation must understand how to create and use good management accounting information. Management accounting is also being significantly affected by dramatic improvements in computer technology. Today’s technology allows management to track performance information that goes beyond the cost-based information of historic general ledger systems. Good management accounting involves a responsibility to manage a wide variety of critical information. And finally, we need to understand that management accounting is not just for manufacturing companies. Service and merchandising industries represent a much larger portion of the economy than does the manufacturing industry. Further, the advent of the Internet and e-commerce is bringing dramatic changes to many companies and industries (Horngren et al.2003).