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Management Accounting and Other Organizational Functions

Introduction

It is the devising and analysing business processes, making budgets, doing forecasting, introducing internal controls and monitoring the same and evaluating, synthesising and compiling information mainly to derive economic value.

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It is an accounting technique employed for the development, management and implementation of decision-making process of a business entity. Managerial accounting is to offer more information to managers of a company who are in-charge of planning, directing and managing operations and initiating a range of management decisions. Management accounting is entirely different from that of financial accounting which provides info to various stakeholders of the company like shareholders, banks, creditors and other outsiders who are having relations with the company.

Thus, management accounting offers information to internal users and it is not mandatory and it is voluntarily practiced by the business. It is concerned with the flexibility and relevance of information and gives more significance to the future.

According to Johnson H Thomas, supervising by means with a blueprint language is a viable alternative method to control operations that creates steadier and more convincing long-term financial achievements than the business ever have accomplished with established management accounting techniques. According to Robert Kaplan, the concept of management accounting had its origin in 1850. Though, there have been tremendous changes both in size of the business organisations and the extent of competition during the past six decades, there have been no innovation both in the structure and in the execution of management control techniques and cost accounting concepts.

Further Kaplan stresses that so as to improve the arena of management accounting, academics should indulge in field research and analyse the case studies to explain and narrate the ground-breaking practices that appear to be successful for leading companies. For instance, product costing helps to enhance the data’s on production and to arrive at marketing choices in manufacturing companies around the globe. Further, by sketching overhead costs to the functions associated for the resource utilisation which really forms overhead costs may facilitate accountants to estimate the cost of products more perfectly than earlier systems of cost allocations. Management accountants have also started to realise that push of enhancement initiatives like process engineering, ABM (activity-based management), bench marking, best practice, outsourcing and other initiatives to minimise non-value overhead transactions.

According to Johnson H Thomas, key to steady and suitable performance is to consider a business as a natural being and to administer its transactions accordingly.

For instance, Toyota is able to manufacture in the shortest period in the industry the top-most quality products with the larger variety of products at the minimum cost. Each employee’s output is self-standardised as to description, sequence, timing and results. Each employee converses directly and concisely with his customer and supplier. All materials adhere the unswerving process through step by step path. All accomplishment is supervised at every point so that any deviation as they happen are identified and adjusted at the moment they occur. And every employee involves in ongoing self-improvement of the work they accomplish. It is to be observed that disciplined attention to minute details ensures foreseeable and steady results time after time. By cherishing patterns in the correlations among the minute details, accomplishing a good outcome is essentially unavoidable.

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With the help of management accounting, overhead cost variances in a daily management accounting report are utilised to evaluate performance against an objective.

For instance, two companies that are engaged in car manufacturing where one company is able to offer competitive pricing whereas the other could not offer the same. If one looks into the quantitative information and quantum of manpower, it may lead valuable information for the variances and may offer an insight into the reasons for the same and how to plug such loopholes in the company where the cost advantage is missing. Cost escalation can be trimmed down either by trimming down the size of the employees or by making the employees to manufacture more quantity per shift. Minimising the defects in individual process may lead to attaining standard product quality. Any delay in executing the order may be eliminated by minimising the nonvalue-added time in manufacturing processes. Further, inventory holding costs can be maintained at minimum with the help of computerised and automated retrieval and storage system.

Management accounting relation to functions of organisation

Management Accounting and Human Resources

Management accounting techniques is being applied in human resources department of a business mainly to assess the problems engulfing in production trends and sales effectiveness and if production and sales encounters downtrend, then human resources department has to suggest to restore the production to the targeted levels and this may involves employee performance correction issues, improving sales training, reconsidering compensation policies and other associated actions. Management accounting technique like regression trend can be employed to predict marginal profitability per employee.

Management Accounting and Sales and Marketing Functions

Management accounting tools like cost-volume –profit analysis can be used to fix the incentive to be payable to dealers who brings more profitability for a business through record high sales. Cost allocation like variable cost can be used to determine the incentives and sales commission to be payable to customers and sales employees to boost the sales. Sales forecasting reports can be used to predict future sales and to arrive at sales budget for future periods.

Management Accounting and Research and Development functions

There is close association between R&D cost and management accounting techniques like stock price and earnings as it could be predicted by using regression and correlation analysis both in pharmaceutical and manufacturing companies. Management accounting techniques like regression, correlation analysis and activity-based-costing can be used to find out the return on R&D cost for retaining efficient human resources and to evaluate goodwill appreciation especially in pharmaceutical companies.

Management Accounting and Production / Operations

Management accounting techniques like TQM , Statistical Process Control, Target Costing , Process Re-engineering , ABC , Six Sigma can be used to improve the production and to achieve more outputs at standardised costs. Further, it can be also used to arrive at the waste cost, to minimise the industrial waste and to achieve cost optimisation. ABC can be employed to obtain accurate data on product cost and cost-volume-profit analysis can be used to pricing the product competitively.

Management Accounting and Customer Service

Management accounting techniques like special reports and budgeting techniques can be employed to take customer surveys, impact of company’s advertisement, new and new product analytical report etc. By employing profit centre concept, it is easy to measure how profit was exploited while prolonging to maintain customer service levels fixed by the top-management.

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Management Accounting and Finance and Accounting function

Management accounting techniques like comparative analysis , budgetary analysis ,feasibility studies and reports on merger and consolidation can be used to analyse variance , to decide whether to venture into merger or not. Financial forecasting like cash budgets, capital budgeting can be made. Estimates for future periods like p& l account and balance sheet for future can be made to assess the future profitability and future performance of a business.

Management Accounting and Administration and IT

Management accounting techniques can be effectively used in basic features of business administration in the following areas.

  • Can be employed in conveying financial happenings in the organisation.
  • To instigate assessments on allocation of resources.
  • To persuade the management to enhance the insight and response.

Management accounting can be made more efficient by employing information technology tools like ERP system (Enterprise Resource Planning), CRM (Customer Relationship Management), Executive Information System (EIS), Business to Business (B2B) and Electronic Data Exchange (EDI). (Bhimani 74).

Kaplan further insists that researchers should use case studies and make field research to explain and account the novel practices that appear to work for flourishing companies. New concepts like ABC (Activity Based Costing), total quality management (TQM), Just-in-time (JIT) have been introduced in the management accounting now. Researchers Casey Rowe et al have studied about the responsibility accounting and responsibility centres within a large U.S aerospace contractor. Their research offered a wide range of information for analysis. ABC was found to be a significant segment of company’s strategy. The research study also suggested that the responsibility centre manager’s attitude and interaction are positively if the accounting practices are properly structured when the organisation is undergoing transformation. (Bolt-Lee 50).

The following are the some management accounting techniques used by management accountant to analyse the performance of a company.

Cost-Volume-Profit Analysis and Cost Behaviour

Under this, costs are break down into two categories namely fixed and variable costs from the financial statements of the company. It is better to analyse contribution margin ratio by treating operating expenses are fixed for the past three years. Further, one can also analyse what is the trend in breakeven and margin of safety of the company for the last three years. With the help of above, one can find out difference in margin of the company if operating expenses increases or decreases. This will help the top management to take decisions to control the operating expenses if the profitability decreases in the due course. ( Bamber et al 267).

Job-Costing Technique

Under this, one can use the reported average cost per available seat-mile to predict the cost of different flights especially in airline industry. The identical technique can be also used in the manufacturing and other industries also. One can assimilate why airline top management accords more significance in the costs of various flight jobs.

Using the information available in the financial reports of airline industry, one can compare a full-service airline and a discounted airline that have similar point –to-point flight services in a particular sector on a particular day. One has to take into account the number of miles that flight travels, the maximum-discount allowed at the last minute on that day’s flight, the total number of available seats, the average cost per available seat-mile. With this information, one can easily compute the profits, costs, revenues of the two said flight on that particular flight.

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With this calculation, one can easily evaluate the threat that discount airlines pose to full-service airlines. It is to be noted that full service airlines frequently have last minute sales and they most probably offering fares well below their average cost per available seat –mile. Thus, a management accountant can demonstrate the economic underlying principle behind these last minute law-fare sales. ( Bamber et al 267).

Activity –Based Costing Technique

It is to be observed that activity –based costing is not just mere an accounting process but it demands expertise from all functional areas. This technique also offers an opportunity to spotlight the significance of selecting drivers that are cost-effective to assess and to signify that management accountants have to exercise judgment other than to perform calculations.

Budgeting and Responsibility accounting technique

Management accountants have to struggle lot to complete the voluminous calculations demanded to construct a master budget. In developing a budget, the real challenge will be in estimating the key inputs like material costs and sales volume.

In figuring out the budget for the future period, what specific factors of uncertainty have to be taken in to account is first to charted out. If there is any seasonal variation in sales and operational expenses as in the case of sugar industry, sales and manufacturing cost have to be allocated accordingly in each quarter. (Bamber et al 267).

Incremental or Relevant –Costing technique

Management accountants should pay closer attention in arriving at incremental costing to arrive at management decision whether to outsourcing services or products, adding or deleting business segments or lines, scratching old technology by replacing with the improved technology.

Just-in-Time and Total Quality Management

It is to be noted that there are some costs associated with both JIT and as well as TQM.JIT can be analysed by interpreting inventory turnover of the company for the last three years. One can demonstrate by adapting to JIT, how company is benefited in minimising its inventory holding costs and able to increase its profitability. Under TQM, one can demonstrate how a company is enhancing its quality of the product to remain more viable in the competitive market. Further, it is wise to analyse the various costs involved in TQM process like prevention costs, total quality costs, internal failure costs, appraisal costs, external and internal failure costs.

Balance Scorecard technique

Balance score card is a concept and a process to assist to aware where business should be heading. It is a devise for arriving at a consensus on where an operation should be leading and to confirm whether it stays on its course or not. It is better to understand how learning and growth initiatives driving enhancement in internal process by lining the components of the scorecard as these will ultimately result in increased customer satisfaction and financial success for the company. It is an innovative tool to assist top management to interlink strategic goals to evocative performance measures. (Kaplan and Norton, 1996). It is being employed to gauge ‘service-oriented” and “internally-driven” performance yardstick, frequently used through performance management overtures footed on self-assessment. A balance score card is trying to connect short-run operational control to that of long-run strategy and vision of the business. ABB is a MNC which is in the electrical engineering industry. ABB developed a balance score cord on the ideology of Kaplan and Norton in 1994 and christened it as EVITA and its major aims are as follows:

  • To have a perspective of company from different views or different areas of focus.
  • To offer a system of control and support for the business activities of a manager’s own unit.
  • To offer a system footed on the company’s overall strategy and vision.
  • To develop a structure of presentation patterned on a cockpit.
  • To foster a presentation –support structure footed on Information Technology. (Olve et al 86).

Capital Budgeting Technique

It relates to estimated useful life of an asset which has an important effect on capital budgeting decisions. One can delve into amount invested by a company on fixed assets for the present year and the average useful life of those assets. This technique helps to compute the minimum annual expected cash inflow that would justify that year’s investment if the company requires 15 percent rate of return on such investments. If the useful life increases by 25 percent what will be the minimum annual cash flow change? Thus, capital budgeting helps to analyse the return on investments made in the assets of the company. (Bamber et al 267).

In this era of information technology, companies are expecting from the financial consultants to work as business associates with their works managers by offering valuable information to support in decision making exercises. Thus, now management accountants are increasingly engrossed in strategic management through the fostering and implementation of novel accounting techniques by assimilating both non-financial and financial information. Companies are in the process or tuning their strategies to counter fast transformations fostered by globalisation and novel technologies. For instance , when CAM / CAD is linked with payroll , bill of materials , routing and then it will end in higher efficiency and more effective than operating the CAM /CAD in seclusion.

By introducing business process re-engineering, one can make fundamental transformation to tune the organisational processes to take advantage of technological advancement. It is to be observed that business process re-engineering is the demarcating line between the radical changes and incremental transformation.

For instance, gain from a technological innovation may end in generating advantages of innovation into a separate revenue-generating product. For instance, American Airlines introduced SABRE reservation system which turned to be most successful decision which became independent and considered to be its most profitable division. (H.Thomas Johnson).

According to Robert Kaplan and Robin Cooper, the activity-based costing offers the viable justification for re-engineering enhancements processes to minimise or eliminate incompetence in business activities.

Researchers Raffi Indjejikian and Michal Matejka found that in a decentralised company, there will an increase in performance of the company if the management accounting system spotlights on corporate control rather than the information requirements of the local business unit. These researchers studied about 104 giant decentralised business organisations and found that organisational laxity was the main culprit for failure to accomplish performance goals by spotlighting more on decision –making information requested by the business segment and giving lesser priority to information on corporate control. The researchers found that in a decentralised company, performance will augment if the management accounting system spotlights on corporate control rather than on the information requirements of the local business unit. (H.Thomas Johnson).

We can analyse how management accounting is helping to increase the profitability of business through the following case studies. These case studies have been illustrated by Harvard mainly to explain how management accounting techniques are useful in increasing profits of a business.

Colorscope

Colorscope is a small company engaged in the pre-press printing activity. Colorscope is required to increase its performance due to intense competition prevailed in the pre-press printing market. Due to introduction of new technologies and entry of new entrants, market has witnessed sudden spurt in the supply aspect of the industry. Since Colorscope is not a big player, it has to compulsorily to peruse both quality control and cost containment strategy. To measure the customer profitability, a simplified activity-based costing system has been introduced. It is a shocking revelation for the Colorscope to find that many of its customers were unprofitable and major share of company’s revenue is being generated only by a few clients. Colorscope found that it had to control costs and to maintain quality and to increase the customer profitability at the same time. To achieve this, Colorscope implemented quality enhancement strategies, an incremental change mainly to restrict in-house errors. (George Joseph 5).

RBC

RBC is a big chain of a large bank that operates in Canadian banking sector. After regulation in banking sector in Canada, RBC has to face large competition. With the help activity-based costing data, RBC has focused on measuring the sources of its profits and costs by customer and by product and has evaluated a strategy relying on that data. In tune with competent environment, RBC introduced CRM system mainly to augment the interaction with the clients. With these initiatives, RBC is now comprehend the actual requirements of its customers and market product to tune its customer more profitable. (George Joseph 6 ).

Kanthal

Kanthal is a manufacturing firm which was using CRM (Customer Relationship Management)and it was found by the newly appointed president of the company that various production processes, general, selling and administration costs had increased largely to the extent of 35% of total costs. New President of the company introduced the activity-based costing and found that some major customers were really unprofitable to the company. It was also found that one of Kanthal’s large customers used the system to cater the requirements of their JIT (Just In-time Inventory) inventory process. Kanthal is also using the EDI (Electronic Data Interface) to assimilate the information of the large customer for predicting their order trend. So as to remain more competitive, Kanthal introduced many transformations in pricing, employees’ compensation plans and discounts structure to its customers. (George Joseph 7).

Conclusion

Management accounting techniques is found to be very useful in the case of Kanthal and RBC as these companies retaliated to external pressures by closely monitoring their cost structures by employing activity-based costing. These measures are of much helpful not only in understanding the customer specific issues but also to muster strategies like CRM.

Thus, management accounting is not only required to shore up management decision making process but also to add more value to the business. Management accountants are required to appreciate these challenges facing companies in the atmosphere of ever changing process. Management accountants need not only to have a wider perspective of the organisation but also the capability to appreciate the role of the company in the background of its environment and individuals that form part and parcel of it.

Works Cited

Bamber, E. Michael, and Linda Smith Bamber. “Using 10-K Reports Brings Management Accounting to Life.” Issues in Accounting Education 21.3 (2006): 267+.

Bhimani, Alnoor, ed. Management Accounting in the Digital Economy. Oxford: Oxford University Press, 2003.

Davis, Stanley B. “Cases in Management Accounting and Control Systems.” Issues in Accounting Education 20.2 (2005): 214+.

Joseph, George. “Understanding management accounting techniques in the context of organisational Changes: as Management Accounting Quarterly. (2007).

Olve, Nils-Goran, Jan Roy, and Magnus Wetter. Performance Drivers: A Practical Guide to Using the Balanced Scorecard. New York: Wiley, 1999.

Poznanski, Peter J. “Management Accounting, 3d Ed.” Issues in Accounting Education 21.3 (2006): 332.

Rezaee, Zabihollah. “Introduction to Management Accounting, 13th Ed.” Issues in Accounting Education 21.4 (2006): 462.

Riahi-Belkaoui, Ahmed. Behavioural Management Accounting. Westport, CT: Quorum Books, 2002.

Riahi-Belkaoui, Ahmed. The New Foundations of Management Accounting. New York: Quorum Books, 1992.

Robert Kaplan.” Evolution of Management Accounting” Journal The Accounting Review Vol LIX, No. 3 (1984) 🙁 7).

Thiru, Yaso. “Readings in Management Accounting.” Issues in Accounting Education 21.2 (2006): 157+.

Thomas, Johnson H. “A former management accountant reflects on his journey through the world of cost management.” Accounting History (2002).

Weinstein, Gerald P. “Management Accounting.” Issues in Accounting Education 20.4 (2005): 368+.

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