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Management Accounting Assignment
Management Accounting is the process of collecting, analyzing and interpreting the business information to get some useful insights for the management. It acts as a tool that aids the management in the decision-making process. The processed information is made available only to the management of the organization and it is not made publicly available. The information helps the management in taking some important decisions by looking at the financial and financial and accounting aspects of the business (Emmanuel, C., Otley, D. and Merchant, K. 1995).
The role of Managerial accounting has evolved over the years. In the past, the managerial accountants were just mere staff employees whose role was concerned with providing reports and information. But with the passage of time, managerial accountants have gained in importance in the process of decision-making; they are now working in the role of business consultants and work in various departments alongside the departmental heads, helping him out with all the possibilities of any operational problems (Abernethy, M. A. and Lillis, A. M. 1995).
Managerial Accounting is concerned with providing the valuable business information to the management so that they can carefully weigh all the options in the decision-making process. The major functions of the managerial accounting process have been identified and enumerated below:
- Assisting in the Decision making process by providing necessary valuable information.
- Contributing by helping the functional manager’s in directing and controlling operational efficiency.
- Employee motivation and directing of the actions of the employees.
- Performance Management of the various departments, its managers, and all other employees of the organization.
- Assessment of the competitive situation of the business and to suggest departmental strategies thereof.
It has been seen that the major focus of management accounting has been towards the financial analysis, but with the evolvement of Management Accounting there is a shift towards the use of non-financial information as well. The strategic analysis of the business and the product market can be emphasized upon in the process of Management Accounting (Bjørnenak, T. 1997).
Controlling Activity is basically aimed at checking if the organization is able to meet the goals and objectives laid down. It ensures if the organization is operating in the intended manner or not. Any deviation of the actual from the standard is noted and passed it in to the concerned parties for the necessary changes.
Control Process refers to the processes where a person or a group of persons determines or intentionally affect what another person, group or organization will do. It states that the monitoring process is the most important part of the control process as the targets are set and measured with. The control process is a must in any organization as it helps in verifying that the activities are aligned towards achieving the goals of the organization and also because it bringing it back on track, if required (Chapman, C. S. 1997).
Directing and controlling mundane operational activities require a lot of data in deciding the process of delivering value to the customers. In controlling operations, the management would compare the actual costs with that of the standards set down.
As management control involves a wide array of practices and mechanisms besides accounting, therefore Management Accounting is an important part of Management Control Systems.
To implement the strategies developed during the planning process for achieving the ultimate goal of an organisation, management control systems are in place and that is the sole purpose of MCS. Management accounting provides useful information to the mangers and is a mechanism which supports the decision making process.
Management Accounting Information can be used for Management Control in a number of control processes (Mia, L. and Chenhall, R. H. 1994). The organization can benefit from any of the below mentioned tools or even a combination of such tools.
- The budgeting exercise is focused on preparing a budget for the future activities. This exercise helps the organization in identifying the quantum of funds required for the future activities and also to finance such activities. Any deviation from the budgeted can help us to identify the factors that why it deviated and how it can be prevented in future (Bruns, W. J., Jr, and Waterhouse, J. H. 1975).
- Activity Analysis helps in looking at the relationship between the cost and activity, which is called Cost Behavior. This is crucial to the Managerial decision making process as it helps in planning and control exercise. For a specific level of activity, the level of cost is determined by understanding the cost behavior. The analysis of cost behavior helps in estimating the changes in level of cost with the change in level of cost activity or the cost driver itself. There is an entire range of cost behavior patterns, from simple variable to fixed costs to the complex variable and curvilinear costs.
- Cost Volume Profit Analysis helps the organization to identify the impact of any changes in the level of output on the costs, sales and profits. This analysis helps in identifying the break-even point for the organization.
- Use of Standard Costing system for cost control process. The work of management accounting is to identify the standard costs of labor, material and overheads through the use of past data or through the use of task analysis. This standard cost is then used as a benchmark against which the actual costs are compared. The cost control process will include the identification of the variances from the budgets; material variance, price variance, labor variance and total variance.
- Use of Balanced Scorecard System in the organization will help in a better strategic planning as all the facets of the organization will be effectively analyzed and studied. It helps in the control process as it gives a holistic picture of where the organization should be and where it wants to be.
- In the control process, the flexible budgeting technique can be used to control the overhead costs. The amount of overhead as given by this technique is taken to be the standard overhead costs and variations are noted and analyzed accordingly.
Any information from the business that is used for the control process is generally affected by a lot of factors. These factors have been highlighted below:
- Information and Incentives: The main force that keeps the managerial accounting alive is the need for information. Information is provided to the decision maker and he takes the decision based on the information provided by the managerial accountants. Therefore, the role of managerial accounting is crucial and sensitive as well. They have the power to influence the decision making process if they have the incentive to do so. This becomes a powerful tool in the hands of the accountants. And for the organization, it becomes a necessary evil to use Management Accounting (Chenhall, R. H. 2003).
- Behavioral Issues: The course of events is affected by the reaction of the internal stakeholders towards the information provided by the managerial accountants. The different groups of people within the organization will react differently to the information provided. The managerial accountants have to be good player of human psychology to be able to understand whom to disclose and how much to disclose. Any information overloading or any chances of inadequate information will do harm to the control process (Abernethy, M. A. and Brownell, P. 1997).
- Management Involvement: The top management has a huge influence of the managerial accountants’ team and they can manipulate the information as per their needs and requirements. The team of accountants has to go by the requirements of the top management as they have the superior authority. This form of malpractices will definitely harm the management process and the growth of the firm.
- Costs and Benefits: Like other product or services, information can also be called a commodity. It can be of a good, bad, high, low and average quality. This dimensions sound unusual but this are applicable to information. Like other products and services, it also has costs and benefits. The cost of providing information will include all the costs involved in procuring the information, like, cost of infrastructure, cost of employees, and the cost of time involved in reading and interpreting the costs report.
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On the other side, the benefits are better decision making capability, increased efficiency, effective planning, better control and direction of operations.
All the above factors influence the control process in a negative manner, but like always it can be dealt with if the systems and processes are in place. One should understand that although management accounting is for the internal use by the company, but the main focus of any action of business is aimed at value creation for all the stakeholders of the organization.
|Flexed budgets for FLX Limited for Quarter 1|
|Cost per unit||Case 1||Case 2||Case 3||Case 4|
|No. of Units||5000||6000||7000||8000|
|Direct Material A||24||120000||144000||168000||192000|
|Direct Material B||Till 5500 units||12||60000||66000||66000||66000|
|After 5500 units||15.6||0||7800||23400||39000|
|Direct Labour||Till 6400 units||18||90000||108000||126000||144000|
|After 6400 units||4||0||0||2400||6400|
|Rent and Rates||Fixed||12,000||12,000||12,000||12,000|
|Cost per unit||Budgeted||Actuals||Variance||Variance (In percentage)||Nature of Variance|
|No. of Units||7350||7350|
|Direct Material A||24||176400||175320||1080||0.61%||Favorable|
|Direct Material B||Till 5500 units||12||66000|
|After 5500 units||15.6||28860|
|Direct Labour||Till 6400 units||18||132300|
|After 6400 units||4||3800|
|Rent and Rates||Fixed||12,000||12000||0||0.00%||Neutral|
- Abernethy, M. A. and Brownell, P. (1997) Management control systems in research and development organizations: the role of accounting, behavior and personnel controls, Accounting, Organizations and Society, 22, pp. 233–248.
- Abernethy, M. A. and Lillis, A. M. (1995) The impact of manufacturing flexibility on management control system design, Accounting, Organizations and Society, 20, pp. 241–258.
- Bjørnenak, T. (1997) Diffusion and accounting: the case of ABC in Norway, Management Accounting Research, 8, pp. 3–17.
- Bruns, W. J., Jr, and Waterhouse, J. H. (1975) Budgetary control and organizational structure, Journal of Accounting Research, Autumn, pp. 177–203.
- Chapman, C. S. (1997) Reflections on a contingent view of accounting, Accounting, Organizations and Society, 22, pp. 189–205.
- Chenhall, R. H. (2003) Management control systems design within its organizational context: findings from contingency-based research and directions for the future, Accounting, Organizations and Society, 28, pp. 127–168.
- Emmanuel, C., Otley, D. and Merchant, K. (1995) Accounting for Management Control, 2nd edn (London: International Thomson Business Press).
- Mia, L. and Chenhall, R. H. (1994) The usefulness of management accounting systems, functional differentiation and managerial effectiveness, Accounting, Organizations and Society, 19, pp. 1–13.