Executive summary
This report provides valuable information on management accounting in detail and explores various aspects of this concept. The analysis of management accounting in the body section of this report is divided into five sections with each section describing a crucial aspect of management accounting. The first section enables an understanding of management accounting in general and describes different management accounting systems. The second part analyzes the various methods used for management accounting reporting while the third section focuses on the benefits of management accounting systems and their advantages within the organizational context. The fourth section explains how management accounting systems and management accounting reporting are integrated within organizational processes. The fifth section of the body is an analysis of two planning tools used in management accounting. The last part of this report provides a conclusion of the contents and recommendations on management accounting.
Introduction
Management accounting or managerial accounting refers to the process of identifying, collecting, and analyzing both financial and non-financial data within an organization that aids in internal decision-making. Management accounting varies from financial accounting as the latter focuses on financial information analysis and is guided by fiscal policy and government standards (Weetman, 2019). Management accounting is only used by the management team for various purposes within the organization and is not disclosed to people or organizations outside management.
There are various management accounting systems and their requirements vary as detailed below. Product costing and valuation is a managerial accounting system that focuses on determining the costs involved in the production of goods and services (Weetman, 2019). A breakdown of costs into subcategories such as variable, fixed, direct, and indirect costs is crucial for this system. Managerial accountants calculate the overhead costs associated with a certain product to ascertain the expenses incurred. A crucial aspect of the product costing and valuation system is marginal costing that aids in the valuation of goods.
Cash flow analysis is another method of management accounting that enables the determination of the impact of business decisions on cash. A managerial accountant focuses on the impact of a specific decision on cash inflow or outflow in the business in this system (Reza, Kusumaningrum, and Edi, 2017). Inventory turnover analysis is vital and is essentially the calculation of how often an organization has sold and replaced inventory within a given period (Amanda, 2019). A management accountant seeks to particularly establish the carrying cost of inventory, the expense of unsold items on the company.
Constraint analysis seeks to establish existing constraints within a production line or sales process (Amanda, 2019). This method is specific to either of the mentioned components. When a management accountant focuses on challenges within the production line, they may identify difficulties that are responsible for diminished profits and increased losses within the company. Challenges within the sales process may vary from difficulties related to the company or difficulties that are specific to the clients.
Financial leverage metrics is another method of management accounting that refers to a business entity’s use of borrowed capital. The borrowed capital can be invested in acquiring additional assets or increasing return on investment (Amanda, 2019). This system includes a balance sheet analysis that can offer valuable insights into company debt and equity. Performance measures that are relevant in this case include return on equity, debt to equity, and return on invested capital.
Accounts receivable (AR) management is an additional method of management accounting and affects a firm’s bottom line. It enables a company’s management to decide on whether a certain customer is becoming a credit risk (Amanda, 2019). This method focuses on how long a client takes to pay their debt and it is classified based on time. Grouping different clients on this basis enable decisions on which clients the company should consider dropping. Budgeting, trend analysis, and forecasting is the final method of management accounting that will be analyzed in this report. Deviations from budgetary plans indicate flaws within the plans made by the company. An analysis of trends enables the prediction of future business possibilities while forecasting enables the setting of targets.
Methods Used for Management Accounting Reporting
Management accounting reporting methods vary based on the nature of the management accounting method initially applied and the intended purposes. Budgeting reports analyze past expenditures within an organization and seek to establish whether the past expenditures were in tandem with intended targets (Maheshwari, Maheshwari, and Maheshwari, 2021). Budget reports also carry out forecasts of future budgets to enable efficient planning within an organization. Accounts receivable aging reports deal with credits and customer creditworthiness within the organization.
Proper segregation of customers based on how long they take to pay their debts is the purpose of this report (Madhuri, 2020). The accounts receivable method classifies them in different categories such as those that pay in 30 days, those that pay in two months, and those that pay in three months. This classification enables a company to eliminate customers who are not creditworthy from their books and retain those who pay in desired time.
Job costs report provides an analysis of how much a project costs the organization. This report focuses on areas within a report that are ridden with wastes and enables the company to channel the excesses elsewhere while finding ways of reducing wastage (Madhuri, 2020). These reports may analyze a project upon completion or while it is in progress. A job cost report while a project or business venture is in progress ensures that the profitability, cost, and expenses of a venture are known beforehand.
Inventory and manufacturing reports are for companies involved in the manufacturing business to ensure efficiency in their business processes (Fay and Kazantsev, 2018). Labor cost, per unit overhead cost, and wastage are the most vital components of such a report and enable the managers to make comparisons between different assembly lines. The comparisons ensure management can make decisions on areas that require improvements within the manufacturing sector.
Performance reports contain information on calculated differences between actual results and budgeted performances. The performance report enables management to gauge the effectiveness of their plan for different employees and the business in general (Karevold, 2021). It enables management to identify prior errors and chart mitigation measures that ensure such errors do not occur in the future. Order information reports are additional reports for management accounting that provide vital information on orders made by customers. These reports gauge the effectiveness of ordering and delivery within the business.
The efficiency of the staff in meeting client demands can also be gauged by this type of report. It enables management to come up with measures that reduce the cost of placing orders and the management of these orders. Opportunity reports or a business situation report inform management of a particular event (Schaltegger, 2020). It enables management to understand occurrences within the business and make relevant decisions on the same. Situation reports are regularly made within an organization and are prompted by recent developments within the company that make their preparation crucial.
Benefits of Management Accounting Systems and Application within an Organization
Management accounting systems apply to companies and confer many benefits to the organizations that use them. Management systems are essential during the planning phase as plans are made based on sound information (Erokhin et al., 2019). Planning involves vital aspects such as budgeting. Planning how a company will utilize its funds is essential in guaranteeing long-term success. Planning also enables companies to effectively mitigate unprecedented challenges in operations.
Management accounting systems also offer grounds for efficient control of various operations within an organization (Pavia, 2019). Progress in various facets of a business can be measured and compared to a set standard that is anticipated. Various aspects such as production and sales can be assessed and evaluated based on these standards, ensuring profitability. Management accounting also enables better service delivery to customers hence ultimate customer satisfaction (Cuzdriorean, 2017). Better customer service is informed by adequate investigations into the internal running of the company. Recognizing flaws in customer service or quality of goods spurs reforms within the company that are geared towards the improvement of service delivery.
Management accounting also enables better organization within a company as the authority and jurisdiction of various managers within the company are set. Better organization by employees who clearly understand and adhere to their responsibilities ultimately ensures successful operations and success in business (Joseph and Wayne, 2020). Management accounting eases coordination within a company and ensures each department within a company is integrated into achieving departmental goals that eventually cause overall success.
Departmental goals ultimately lead up to greater company goals and coordination must be achieved within an organization. Efficiency is generally boosted within an organization that invests in management accounting (Joseph and Wayne, 2020). This is because avenues of time and resources wastage are identified and addressed. Management comes up with means of ensuring flawless flow in the work process ensuring minimal time wastage and also eliminates wastage of resources. Maximum utilization of time and resources ensures that a company can operate optimally and generate sufficient profits.
Management accounting ensures sufficient motivation within the workplace. Management accounting reports are usually submitted in the form of budget reports or situation reports and so on. These reports usually inform various essential decisions within an organization such as demotion and promotion of employees. These are crucial decisions that influence employee morale for those who are promoted to higher positions (Cuzdriorean, 2017). Those who are demoted are also encouraged to work harder and smarter in a bid to regain their previous positions. Good morale and motivation within a company are grounds for good performance and enhanced productivity.
Management accounting also contributes to better communication within an organization by ensuring the harmonization of information. Management accounting reports ensure that there is an efficient collection of data on the finances and business of a company (Ahmed, Ameen, and Hafez, 2018). Such information is relayed to employees and management in a clear and precise way. The net benefit of the benefits of management accounting listed above is enhanced profits within an organization. A company attains growth in profits and productivity as a result of management accounting. Tools used in management accounting are reliable ensuring unswerving data is provided to management.
Management Accounting Systems and Management Accounting Reporting Integration within Organizational Process
General management of a company and assignment of responsibilities within the organization is affected by management accounting systems. Management accounting reports are a great indicator of duties that should be performed by every member of the workforce (Hilorme et al., 2019). Such decisions are informed by flaws that are identified by performance reports and boundaries set for each employee to ensure effectiveness. Division of labor and specialization are vital aspects of production that are affected my management accounting reports due to the various insights discovered.
Acquisition of assets for organizational growth and assets assignment to various sectors of a business is also affected by management accounting reports. These reports identify the investments that are profitable for a business and encourage increased investment in these ventures (Doktoralina and Apollo, 2019). Additionally, they discourage investment in loss-making ventures, ensuring that a business can minimize wastage. Management accounting reports also identify sectors that are not adequately furnished with resources and enable management to make these decisions that increase allocation. Resource allocation does not necessarily refer to finances as it can also refer to the allocation of human resources to a department based on the reports.
Management is a crucial part of making decisions on employee hiring, demotion, and promotion based on both performance and customer demands. Management reports that indicate the input of various employees and sectors are integrated into the human resource department (Brierley, Gwilliam, and David, 2018). These reports can influence the hiring of additional employees if a business is booming and there is a need for a bigger workforce. The demotion of workers and the promotion of others can be necessitated by levels of customer satisfaction discovered by situation analysis reports.
Long-term decisions on the longevity of a business such as product diversification and stopping the production of a specific product are also affected. Budgeting and forecasting are affected by management accounting reports and these affect long-term business decisions (Ahmed, Ameen, and Hafez, 2018). Financial reports indicate the health of a business and negative finances may encourage management to quit on a product that is causing losses. Losses may also be necessitated by the rigidity of a company to one product and these reports necessitate diversification of production. Trendy products are often profitable at the start but gradually become loss-making ventures. Through management accounting, a company can forecast when that is likely to occur and make decisions that prevent this such as permanent closure.
Prior information of internal stakeholders before meeting external stakeholders and making decisions that mitigate flaws that may affect the external stakeholders is also a role of management accounting. Internal stakeholders essentially run a business but external stakeholders including the various management institutions are also crucial (Ahmetshina, Vagizova, and Kaspina, 2017). When internal management is capable of detecting a flaw within the system in time, they can rectify and evade potentially harmful effects of external stakeholders. This may include data of irregularities that were not previously detected.
Planning Tools in Management Accounting Analysis
Target costing is a management accounting planning tool that involves implementing a common set of tools on cost planning, cost management, and cost control. This method analyzes each stage of the production cycle and identifies costs at each phase of production and improves the technology used for efficiency (Cooper and Slagmulder, 2017). It evaluates techniques of market study, value analysis, reducing diversity, manufacturing technology, and the relationship between suppliers and customers.
Target cost refers to an estimated production cost for a specific product. This value is settled on by management after evaluating the facets mentioned above and aids in evaluating business progress (Ahn, Clermont, and Schwetschke, 2018). The targeted cost incorporates expected profits by the company and competition within the market. Management mostly moves in to control target costing due to their diminished control on the selling profits to ensure profitability.
Target costing is a very effective method of management accounting as it ensures that a business continuously makes profits given this is the primary role of a business. It also improves production technology as management settles for the cheapest and most effective means of production, generally boosting the company’s quality of goods (Ahn, Clermont, and Schwetschke, 2018). This tool also reaffirms management’s commitment to process improvements and product innovation to gain a competitive advantage. The detrimental effect of target costing may emanate from ruthless management that aims at achieving its target cost regardless of effects on employees (Cooper and Slagmulder, 2017). To minimize cost, management may lay off workers to ensure that minimal human resources are used for a cheap cost. In general, target costing ensures the setting of goals and their achievement by an organization.
Break-even analysis involves computing and probing the margin of safety for a company based on revenues accrued and associated costs. The analysis shows how many sales are made before the cost of doing business is paid (Sintha, 2020). This method is used for corporate budgeting of various projects to ensure they remain profitable. This tool relies on calculations that involve fixed costs and variable costs. The break-even analysis is usually used to ensure that if a scenario where a company does not make profits occurs, the company still doesn’t make losses. This point is considered the safe point for a company that ensures it can operate without making losses.
The break-even analysis is an important tool for any business as it ensures budgeting and setting of targets. This means that a business can plan for its available finances and ensure an equalization fund is in place to prevent stalling of projects (Vagner Iryna, 2020). This tool is also crucial for monitoring and controlling costs as the company can make only the products that do not jeopardize its operations. These products can be sold by the company without losses occurring. The company also produces a manageable amount of goods ensuring market saturation does not occur. Having the required amounts of goods in the market ensures that a company can effectively manage competition (Vagner Iryna, 2020). These benefits ensure that the method is very effective in management accounting.
Conclusions and Recommendations
In conclusion, management accounting is a crucial aspect of any business as demonstrated above. Management accounting ensures that the business remains healthy during operations without making catastrophic losses. It is recommended that management accounting be carried out regularly to ensure that flaws within the business are noted and rectified on time. It is also recommended that copies of the management accounting reports be availed to all the staff within the organization. Availing such crucial data ensures that all stakeholders are informed of the state of the company and act in the best interest of the business.
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