Distinguishing Financial And Management Accounting In Modern Business

The main purpose of this report is to distinguish and discuss between financial accounting and management accounting in modern business. Thus, a management accountant’s role in business organizations has also been discussed in this report. Furthermore, it also critically discusses the highlighted statement that Jackie Williams has quoted from the conference. Lastly, with the help of applicable examples, the limitations and benefits of Activity Based Management are also discussed. Additionally, based on the overall discussion stated in the report, a conclusion has been provided.

The following difference between management accounting and financial accounting are discussed and mentioned below:

Management accounting refers to an accounting system that delivers applicable information or details to the managers to make plans, strategies, and policies for running or operating the business efficiently (Bromwich & Scapens, 2016). Thus, it mainly generates information that is utilized in the organization by employees and managers (Drury, 2018). In addition, it is not necessary for management accounting to a company with standards when data or information is obeyed for internal consumption. Its reports are the weekly, yearly, or monthly analysis of products, functions, and geographies. The reports prepared in this accounting are beneficial to the internal parties such as higher-level managers, CEO, promoters, and directors.

Moreover, its statements are mainly meant for confidentiality and Management of the statements, which is an essential concern because they include business secrets. Management accounting data is not essentially 100% provable, and so it is quite important that data must be applicable, logical, and timely. For example, sales cannot be forecasted or predicted perfectly (Yang, Lee & Li, 2020).

While on the other hand, financial accounting refers to an accounting system that mainly concentrates on the financial statement preparation of a company to deliver financial information or details to the attentive parties. This accounting generates information that external parties like lenders and shareholders mainly utilize. Hence, a piece of information or data that is needed for the financial accounting statements or declarations is financial, and it needs to comply with different accounting standards. Moreover, the financial accounting reports comprise profit & loss statements, cash flow statements, and balance sheets (Hopper & Bui, 2016). This statement is mainly prepared for external parties or outside parties such as suppliers, government, banks, shareholders, and customers. Hence, its statements are referred to as publicly published statements & are meant for the public. So, there is no such question of confidentiality with respect to this. Lastly, the financial accounting data are 100% precise and verifiable. Here, each and everything has proof to support it. It also addresses a proper asset and liabilities valuation and so is included with revaluations and impairments.

Role of a Management Accountant

Management accountant plays a significant role in the organization for accomplishing its objectives or aims (Parker, 2016). The following role that an accountant performs in the organization are discussed and mentioned below:

1. Short and Long-Term Planning: Management accountants play an important role in forecasting economic events and future business for future strategies or plans, i.e., corporate strategy, long-term plans, market study, strategic management accounting and budgets.
2. Developing MIS:The reports and routine reports for the purpose of decision-making (long-term) are sent to managerial employees at each level so that they can take remedial or corrective action. Thus, they also utilize these reports for fetching an important decision.
3. Maintaining Best Capital Structure: They had a primary role in fundraising and their applications (Malmi, 2016). Thus, he had to determine about maintaining or handling a proper combination between equity and debt. Fundraising through debt is quite cheaper due to the benefit of tax. However, it is dangerous because interest on debt needs to be paid whether an organization earns sufficient net profits or not.
4. Management Process:Management accountant plays a convincing role in the organization and has full authority or power over the accountants & other employees in the workplace. Thus, he guides the juniors concerning different financial policies and procedures and assists in solving the business financial problems (Skogland, 2017). Moreover, he also shifts applicable information or details from the inappropriate and reports the similar in a transparent form to Management & former to an attentive external party.
5. Decision Making:Management accountants deliver all the essential information to the top Management to make short-term determinations such as buy or make decisions, product pricing, optimum product mix, & long-term decisions such as investment appraisal and capital budgeting.
6. Financial Control and Monitor Spending:They set expenditure targets by making budgets & then keep usual track of who is devoting what. Hence, in this manner, the management accountant gets the concept of quarterly or monthly spending in an organization.
7. Control:Management accountants examine accounts and prepare reports such as budgets, interpretation, fund flow analysis, cash flow analysis, performance evaluation, standard costs, and variance analysis for control.

Traditional management accounting refers to a distribution of factory overhead – products mainly based on the consumed production resources volume. Organizations using this technique would apply overhead to the number of machine hours utilized or the hours of direct labour consumed (Abdusalomova, 2019). This method is also having many limitations, which are discussed and mentioned below:

1. Unanticipated expenditures are avoided when the traditional management accounting approach is utilized. This happens because an average is factored in the product. It might cost a company more to produce goods or deliver services after the primary projections or forecasts are made, & there is no method for such an accounting system to consider. When organizations poke into their raw values for specified data, they may find that their services or products earned less than what is being expected at the year-end.
2. Furthermore, this approach does not show sufficient specifics to recognize where waste may be occurring in the system. Therefore, the indirect prices of manufacturing products & delivering services are not considered under this system. Generally, it only looks into the overhead costs, avoiding the specifics for an overall number. Hence, for that reason, most companies prefer using “ABC” if they are accused that there are measures that may be implemented. 

Activity-Based Management assists a business in analyzing or evaluating the business activity cost on the basis of value addition that activity brings. However, ABM assists an organization to know its weaknesses and strengths, containing an activity where the organization is wasting money, time, and effort. It considers each cost, including equipment cost, overhead costs, employees’ costs, distribution costs, and facilities. Such an evaluation assists a business to determine whether to promote the activity or eliminate it (Zheng, Liu & Xiao, 2018).

The following benefits of Activity-Based Management (ABM) are discussed and mentioned below:

1. The findings or judgements of ABM analysis may help as data to forecast the budgets and models. Therefore, it can be said that ABM may help the Management in getting a better idea or concept of further business prospects.
2. Since ABM assists to make value-generating activities efficient, which in turn is ultimately enhances the experience of a customer.
3. Activity-Based Management concentrates on accountability for actions or activities rather than costs & focuses on the system’s maximization wide performance than individual performance. Thus, ABM control identifies that increasing subunits does not essentially lead to increased effectiveness for the system.

The following limitations of Activity-Based Management are discussed and mentioned below:

1. ABM assumes or affects that all the costs and benefits of adaptation to monetary units are achievable. It can also be said that it avoids the activity’s intrinsic value. For instance, an ABM analysis can recommend chartering a less notion office so that it can save costs. Hence, an organization require a modern or upgraded workplace to appeal to new talent.
2. Moreover, ABM may also interfere or inhibit strategic determinations if such decisions are anticipated to prove expensive in the near term, while on the other hand, it offers or proposes a long-term payoff.
3. The ABM achievement was also reliant on the popular implementation of Activity-Based Costing (ABC). It implies that if an organization fails to apply ABC propel, it might fail to earn the ABM benefits.

Examples of Activity Based Management are mentioned and discussed below:

• AMB may also assist an organization in evaluating the cost of operating a second workplace by utilizing the lease cost and staff cost(Plowman, 2017).
• One may also utilize ABM in determining the new product’s profitability. For this, it will utilize production costs, warranty claims, marketing costs, sales and return costs, and more.

Conclusion

Based on the above discussion, it can be concluded that accuracy and data precision is quite vital for the organization’s success or achievement. Without action and meaningful insights, one might hardly measure the current position of affairs, or it also may plan further business moves. Hence, in such situations, management accounting turns out to be a modern businesses anchor.

References

Abdusalomova, N. (2019). PROBLEMS OF MANAGEMENT ACCOUNTING AND WAYS TO SOLVE THEM. International Finance and Accounting, 2019(3), 2.

Bromwich, M., & Scapens, R. W. (2016). Management accounting research: 25 years on. Management Accounting Research, 31, 1-9.

Drury, C. (2018). Cost and management accounting. Cengage Learning.

Hopper, T., & Bui, B. (2016). Has management accounting research been critical?. Management Accounting Research, 31, 10-30.

Malmi, T. (2016). Managerialist studies in management accounting: 1990–2014. Management Accounting Research, 31, 31-44.

Parker, L. D. (2016). From scientific to activity based office management: a mirage of change. Journal of Accounting & Organizational Change.

Plowman, B. (2017). Activity based management: Improving processes and profitability. Routledge.

Skogland, M. A. C. (2017). The mindset of activity-based working. Journal of Facilities Management.

Yang, C. H., Lee, K. C., & Li, S. E. (2020). A mixed activity-based costing and resource constraint optimal decision model for IoT-oriented intelligent building management system portfolios. Sustainable cities and society, 60, 102142.

Zheng, H., Liu, W., & Xiao, C. (2018). An activity-based defect management framework for product development. Computers & Industrial Engineering, 118, 202-209.