Management Accounting: Role, Importance, And Comparison With Financial Accounting

The role of management accounting

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The role of management accounting:

The management accounting is necessary for the organization to plan for future needs and goals of the business and it is a method used to analyze a company’s financial information.

The management accounting helps the organization into several aspects those are following:

Before the management, takes any decisions, planning should be undertaken to implement the functions. The organization can focus only on the goals and objectives through the proper planning process. The strategic planning is required to make the appropriate decision for the organization that is taken by the upper-level managers. There are inputs like those forecast of employee needs, capital funding, facility needs for long-term planning. The management accountant of the organization should identify the risk associated with each course of action.

The main purpose of the management accounting is directing and motivating the employee of the organization. Between the upper-level management and the employees, management accountants serve as liaisons to solve the problems of the organization. The managers of the organization assigned the task to the employees and after accomplishing the task, the managers are giving the reward to the employees.

The plans are being followed controlling ensures that. The departments are mainly performing by using the operational statistics, time sheets, performance reports to determine the performance report of the organization. To achieve the desired result, the company managers should recognize the modification to the plan.

To analyze the information is the main purpose of the management accounting. It develops several ways to correct them and to determine the problematic areas. To increase the company’s profit, they are using the company’s information to develop ways.

All the plans and the information are stating as a report format by the management accountant of the organization. These reports suggest that the information that they have stated in this report this can be used as recommendations for the solution of problems.

The relevance of management accounting over financial accounting:

Basis	Financial accounting	Management accounting
Users	The financial reports of the company can be used by the internal and the external users	The internal users are using the managerial accounting
Compliance with accounting standards	Required strict compliance based on the accounting standards	Not required any compliance
Time orientation	Historical data used	Current and future data used
Emphasis	Objectives of financial information, reliability, verifiability	To present the maximum aid in the management decision and relevance and timeliness
Necessity	Compulsory	Not obligatory
Purpose of reports	General purpose	Special purpose
Details of reports	Brief	More specify
Sources of data	The accounting records of the company that is mainly sources within the company	Both the sources like political environment, industry concerns, interest rates etc.
Frequency of reports	Monthly, quarterly, annually	When the need arises

a) Fixed, variable and semi-variable cost: Increase or decrease in the volume of output, the cost that directly varies in proportion is known as the variable cost. Like: a cost of direct material, wages of laborers.

A range of activity in spite of the fluctuations in production, the cost that does not vary but remain constant within a given period is known as fixed cost. Like: insurance charges, management salary, rent or rates.

Planning

The cost simultaneously does not remain stationary at all times and which does not vary proportionately is known as semi-fixed cost. Like: repairs, depreciation.

Variable cost is sometimes known as direct costs, or the fixed cost is known as the period cost. This can be classified into a committed fixed cost and discretionary fixed cost. Further, the fixed cost can be classified into two types of costs. Those are following:

Committed fixed cost the committed fixed cost can be included in the category of fixed cost that is the needed for the basic organization structure, and that arise from the possession of plant, equipment, etc.

The discretionary fixed cost in the budgeting process set at fixed amount for a specific period of the management. This cost has no direct relationship with the volume of output, and the cost directly reflects the top management policies. According to the circumstances, this cost eliminated or reduced from the process.

The variable cost can be classified into two types of costs that are following:

Discretionary cost is defined as when the management has decided to spend a certain amount of their cost from sales can be used in the donations, sales promotion, research, etc then it can include in the category of variable cost.

Engineered variable cost directly relates to the production or sales that included in the variable cost. The relationship between the input and output can exist in some particular circumstances.

The cost, which incurred as a part of the cost of a product rather than the expense of the period are called as product cost. The cost that are treated as an assets included in the inventory values that treated as an asset that needs to be sold. The cost can be both variable and fixed cost. For example depreciation of plant and machinery or cost of raw materials and direct wages.

The cost that can be easily traceable or can direct or indirectly incurred is known as direct or indirect cost. For example in the case of laborers the wages to them directly paid that is the direct cost. The laborers are helping in the production and the manufacturing procedure.

The cost, which is not directly related or not directly incurred that is called indirect cost. Like: salaries of the foreman, storekeeper, etc.

d) Decision making cost and accounting cost:

In some circumstances when they are compiled, then the decision making cost are special purpose costs that are applicable in that particular circumstances only. From the financial statements, the accounting cost can be compiled primarily. This is not included in the accounting financial statements. The decision-making cot can be showed when the operations are mechanized to show the cost of the product when there are operations are manual.

Directing and motivating

According to the managerial decision, the relevant cost can be changed but in the case of irrelevant cost, it is not affected by the decision of the management.

Based on some temporary technical difficulties a manufacturer or an organization may have to suspend its operations for a period, for example, non-availability of requisite labor, shortage of raw materials, etc.

The action that could not be avoided by taking any subsequent action an individual may regret purchasing or constructing an asset. To determining the gain or loss, the asset that will be matched against the proceeds from sales of an asset. In case for all the future decisions, the sunk cost is present for all the future decisions.

The ratio or specified member of the undertaking can be influenced those costs that can be controllable but the costs that cannot be controllable is called as uncontrollable cost. In the specific level of management, the factors cannot be divided into some responsibility centers. About a particular individual or level of management, this is the main difference between the controllable and the uncontrollable cost.

The cash outlay does not involve in this type of cost. While making the management decisions, the cost accounts should take into consideration when it included in cost accounts. To judge the relative profitability of the project, the management should take into consideration the capital. For example, it is considered in the financial accounts when the interest on capital is ignored in the cost accounts.

The different cost can be termed as the difference in total cost between the two alternatives. In the total cost when it is increased as the alternative cost then it is called as the incremental cost. The incremental costs are matched with the incremental revenue when the profitability assessed for a proposed change.

From excluding the direct materials into finish products, the cost of transforming direct materials is known as the conversion cost.

The production cost is included in the production activity, the administration cost is included in the policies, the procedures, and the selling, and the distribution cost is included in the demand and the selling activities.

 The cost volume profit analysis helps the management in making their decisions.

The CVP is helping to identify the business operation that is very important to make any decision for the project activities. The cost structure is very important for any company to make their financial performance better in the future. If the company can understand, what are their variable costs and the fixed cost then they can easily increase or decrease their cost by taking into consideration some factors. 

Controlling

The cost that remains after the variable cost is subtracted from the percentage of each sales dollar. That is called contribution margin analysis. It will help the company to understand whether to add or subtract from the product line, how to structure the sales procedures or the product or services. With the help of the CVP analysis, the company can understand in what proportion they should invest in a project or in what proportion they can reduce their amount.    

The CVP is helped to determine the break-even analysis when the company already knows the fixed and the variable cost. The effect of increasing or decreasing the fixed cost, in the operating structure it is very important to understand the CVP so that the company can contribute or increasing their cost structure.

Therefore, the CVP analysis can help the company in making their important decisions.

AVN plc is the company given in the case study; they should manage their accounting procedures by preparing the operational budget.

The operational budget is necessary for the company to prepare the day-to-day expenses and the revenue that should be included in the budget. Here the expenses define the cost of goods sold, as well as the overhead, and the revenue represents the sales of product and services and for producing the goods and the services the administrative cost is needed. This budget should prepare monthly or weekly so that the management accountant can follow up all the activities. This budget mainly prepares for the smaller period rather than budgeted annually. For variation in revenue, the managers can compare their ongoing results to budget throughout the year, planning and adjusting for the period. Therefore, the company should continue with their operational budget to continue with business activities.

With the help of the operating budget, the company can manage their several activities those are following: 

The overhead cost and the expenses that have incurred previously this should be included in the operational budget. The managers can track all the costs like cost of supplies. This will help the company to ease the financial strain, and this could benefit the total budget.

The actual needs of the business can be depicted in evaluating the past expenses. The company should assess their future expenses so that the operational budget can help the company to depict their future needs and expenses.  

Instead of restricting, the operational budget should be liberating. It helps to build the company’s reserves and reduces the debt. In certain circumstances, the operating cost remains the same, when the income can be reduced. The business activities of the company can go on temporary with the remaining cash reserves of the company.     

Analyzing

The operating budget can help the company and the employees of the organization become accountable to handle all the financial activities because the operational budget prepared monthly or weekly. This will help the company to increase their business activities internationally.      

Reference list:  

Bebbington, Jan and Ian Thomson, ‘Sustainable Development, Management And Accounting: Boundary Crossing’ (2013) 24 Management Accounting Research

Blocher, Edward, David Edward Stout and Paul Juras, Cost Management (McGraw-Hill Higher Education, 2012)

Bouten, Lies and Sophie Hoozée, ‘On The Interplay Between Environmental Reporting And Management Accounting Change’ (2013) 24 Management Accounting Research

Cafferky, Michael E and Jon Wentworth, Breakeven Analysis (Business Expert Press, 2010)

Carr, Chris, Katja Kolehmainen and Falconer Mitchell, ‘Strategic Investment Decision Making Practices: A Contextual Approach’ (2010) 21 Management Accounting Research

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Raiborn, Cecily A and Michael R Kinney, Cost Accounting Principles (South-Western Cengage Learning, 2013)

Soin, Kim and Paul Collier, ‘Risk And Risk Management In Management Accounting And Control’ (2013) 24 Management Accounting Research

Chris Carr, Katja Kolehmainen and Falconer Mitchell, ‘Strategic Investment Decision Making Practices: A Contextual Approach’ (2010) 21 Management Accounting Research.

Michael E Cafferky and Jon Wentworth, Breakeven Analysis (Business Expert Press, 2010).

Sandra Cohen and Efrosini Kaimenaki, ‘Cost Accounting Systems Structure And Information Quality Properties: An Empirical Analysis’ (2011) 12 Journal of Applied Accounting Research.

Drs. Sugijanto Drs. Sugijanto, ‘Decentralization Analysis Of Decision Making And Performance Of Accounting Control System’ (2013) 10 IOSR Journal of Business and Management.

Colin Drury, Management Accounting For Business (Cengage Learning, 2013).

Leslie Eldenburg and Susan K Wolcott, Cost Management (John Wiley, 2011).

Lies Bouten and Sophie Hoozée, ‘On The Interplay Between Environmental Reporting And Management Accounting Change’ (2013) 24 Management Accounting Research.

Marc J Epstein and John Y Lee, Advances In Management Accounting (Emerald, 2013).

Markus Granlund, Jan Mouritsen and Eddy Vaassen, ‘On The Relations Between Modern Information Technology, Decision Making And Management Control’ (2013) 14 International Journal of Accounting Information Systems.

Edward Blocher, David Edward Stout and Paul Juras, Cost Management (McGraw-Hill Higher Education, 2012).

Tom Groot and Frank H Selto, Advanced Management Accounting (Pearson, 2013).

Jan Bebbington and Ian Thomson, ‘Sustainable Development, Management And Accounting: Boundary Crossing’ (2013) 24 Management Accounting Research.

William N Lanen, Shannon W Anderson and Michael W Maher, Fundamentals Of Cost Accounting (McGraw-Hill/Irwin, 2011).

Lars Braad Nielsen, Falconer Mitchell and Hanne Nørreklit, ‘Management Accounting And Decision Making: Two Case Studies Of Outsourcing’ (2015) 39 Accounting Forum.

Cecily A Raiborn and Michael R Kinney, Cost Accounting Principles (South-Western Cengage Learning, 2013).

Kim Soin and Paul Collier, ‘Risk And Risk Management In Management Accounting And Control’ (2013) 24 Management Accounting Research.