Managerial Decision Making Activities

Management Accounting Vs Financial Accounting

Discuss about the Managerial Decision Making Activities.

This study deals with management accounting and its importance in the recent accounting world. Management accountant are responsible in taking managerial decision making activities for solving the issues relating accounting firms. The decisions made by the management are based on the information provided to them. Therefore, it is important that the information provided to the management for decision making should be adequate and complete.

Management accounting is referred as the process of identification, presentation, generation, analysis and utilization of relevant information for effective decision making process in an organization (Drury 2013). In this report, an attempt is made to understand the role of management accounting as compared to that of financial accounting. This report also deals with different methods of apportioning overhead in a manufacturing firm. In last two sections of the report modern techniques of management accounting and the objective of budgeting is discussed. Lastly at the end of the report a conclusion is drawn summarizing the entire report.

Accounting is defined as the process of systematic identification, recording, classification and reporting of data for the users of financial statement. The Accounting process is primarily divided into two branches Financial Accounting and Management Accounting. The role of financial accounting is to provide true and fair view of the financial position of the company to the external users like share holders, lenders etc (Barth 2015). Whereas the role of management accounting is internal, they are engaged in providing qualitative and quantitative information to managers in order to assist them in decision making. In this section the difference between management accounting and financial accounting are discussed below.

Table Showing difference between financial accounting and management accounting Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Comparison Basis	Financial Accounting	Management Accounting
Definition	Financial Accounting is defined as the system that focuses on preparation and presentation of financial statement of an organization so that complete financial information could be provided to the shareholder and other interested parties (Henderson et al. 2015).	Management accounting is defined as the system that provides useful information to managers in order to help them in formulating effective plans, policies and strategies so that business could be managed more efficiently.
Is it Mandatory?	Financial Accounting preparation is mandatory under relevant laws.	Management Accounting is not mandatory and completely depends on the discretion of management.
Purpose	The main objective is to provide true and fair financial information to outsiders (Bevis 2013).	The main objective is to assist management in planning and decision making by making available useful information about various matters.
Format	The format for presenting financial information to outsiders is specified under relevant laws.	The format in which management accountant presents information to the management is not specified under any law.
Time period	It is prepared at the end of accounting year. The accounting year is of generally one year.	There is no specific time frame for preparing reports. They are generally prepared as per the requirement of the management.
Users	The users of financial statements are primarily external parties like share holders, lenders etc (Edwards 2013).	The management accounting reports are only used by management for internal purpose.
Reports	The financial accounting prepares report of the financial position of the organization.	The reports include various type of information in detailed manner so that this could be useful to management for decision making.

In a manufacturing business price of a product is determined by adding direct costs, indirect costs and profits. The aggregate of all indirect costs like indirect material costs, indirect labor costs and indirect expenses is referred to as the overhead (Lewis 2013). The overhead forms a major portion of total costs therefore it is very important to classify them appropriately. The classification of overhead is given below:

1. On the basis of nature: Indirect material, indirect labor, and indirect expenses.

2. On the basis of function: manufacturing overhead, administrative overhead, selling and distribution overhead.

3. On the basis of variability: Fixed overhead, Semi variable overhead and variable overhead.

4. On the basis of normality: Normal Overhead and abnormal overhead.

5. On the basis of control: controllable overhead and uncontrollable overhead.

Methods of dealing with overheads

The overhead forms a large part of the total costs therefore it is essential that overheads are appropriately analyzed. In order to analyze the overhead costs it is important to distribute them appropriately between production and service department. The technique of charging the entire overhead costs to a particular costs centre is referred to as cost allocation (Snyder and Davenport 2013). The absorption of costs refers to the process of absorbing all overhead costs to a particular production department. The overhead expenses which cannot be identified to a particular department are apportioned between two or more cost centers on the basis of benefit received. This process of distribution of overhead among various cost centers is called apportionment of costs (Kaplan and Atkinson 2015).

It is evident from the above discussion that overheads costs that cannot be particularly identified with a particular cost center are apportioned between two or more cost centers. The Apportionment needs to have a basis on which overheads are to be distributed. The usual bases on which overheads are generally apportioned are given below:

Overhead	Basis of distribution
lighting	Number of light points, meter reading or floor space
Rent, Taxes and Rates	Floor Area
Insurance, depreciation and heating of building	Area of the floor
Depreciation of plant & machinery	Book value
Canteen, safety, supervision, ESI, compensation, fringe benefits etc	Number of employees
Delivery van, internal transport etc.	Weight or volume
Audit fees	Total costs or sales
Store keepers expenses	Value of material or number of requisition, weight etc.
Power	Horse power or kilo watt hour

The overhead expenses that could be identified with a particular cost center are absorbed on the basis of over head absorption rate. This overhead absorption rate is calculated by dividing total overhead expenses with the total quantity or value (Hugh et al. 2016).  

The overhead cost analysis is helpful in controlling the overhead costs (Osadchy and Akhmetshin 2015). It classifies the costs into different categories which is very useful in analyzing the trend of the costs. For example if after classifying the costs the trend shows that the electricity bill is continuously rising then management will be able to take appropriate measures for controlling the expenses. Therefore from the above discussion it can be said that classification of over head and overhead analysis are the effective methods of dealing with overheads.

The fundamentals of the management accounting have remained the same but with the advancement of modern technologies the practice of management accounting has evolved (Otley and Emmanuel 2013). This evolution in practice has lead to the advancement of various modern management accounting methods. A list of few important modern management accounting techniques is given below:

• Activity Based costing;
• Just in time;
• Inventory Management;
• Balance score card approach;
• Budgeting;
• Variance analysis and etc.

In this section two of the important modern management accounting techniques is discussed in details. The two methods are Activity based costing and Balance Score Card approach.

Activity Based Costing: The Activity based costing offers an alternative to the traditional methods. It is a costing method that identifies the activity centre in an organization and allocates costs to the product or services based on the number of transaction involved during the process (Kaplan and Anderson 2013). The ABC method has been implemented in various organizations and few of the benefits of this method are given below:

• The implementation of this method helps in improving all the process within organization.
• The excessive overhead expenses are easily identified in this method.
• The application of this method helps to identify all the costs associated with the product therefore it is helpful in determining price.
• This method is applied to the entire business and it is very useful in reducing costs.

Analysis of modern management accounting methods

There are certain limitations of the Activity Based costing Method and they are:

• The implementation of Activity Based Costing Method in business is a very costly process.
• The implementation of this method is a very time consuming process.

The advantage of this method much out numbers than its disadvantages therefore this method is considered as one of the important modern management accounting technique.

Balance score Card: It was developed so that strategies could be translated into objectives and can be measured in financial and nonfinancial perspective (Shafiee et al. 2014). The implementation of balance scorecard approach generally involves four process and they are:

• The first step is to translates vision into concrete goals;
• The second step involves communicating the vision and linking it with individual performance;
• The third step is to setting index and business planning;
• The fourth step is to receive feedback and revising the strategy accordingly.

The Balance Scorecard is generally divided into two parts, one is the strategy map and other is the score card (Grant 2016). The strategy map includes the strategy goals and the scorecard measures the performance level against the goals. The Balance Scorecard can be represented in a simple or complex manner depending upon the organization. The Balance Scorecard has gained immense popularity in recent years and the reasons for such popularity are given below:

• In Balance score cared approach all the aspect are considered therefore it helps management to gain a complete understanding of the picture. This in turn helps in increasing the profitability of the business.
• It helps management to accurately allocate tasks so that specific objectives could be attained thus improving the efficiency of the functioning.

The balance scorecard system also has some disadvantages and they are:

• In order to be fruitful this methods requires a lot of time for proper planning and setting of objectives.
• The scorecard provides an overall view of the four areas but the financial information’s included are limited.
• The information that are critical for this process should be tracked otherwise the complete exercise becomes meaningless.

After considering the advantages and disadvantages of the method it can be concluded that the balance scorecard technique should be used in conjunction with other management accounting method.

Budget Format

A Budget is prepared to forecast the financial position of the company for future period. It is useful for planning and measuring the performance of the organization. In short, a budget can be defined as the estimate of revenue, costs and resources that an organization requires to attain a specific goal in future (Robinson 2013). The process of preparing the budget is called budgeting. The objectives of budgeting are given below:

• The budgeting provides a generally direction to the organization and it forms the basis for future planning of the organization.
• It is very useful in estimating future cash flow specifically for rapidly growing companies or seasonal companies.
• The budgeting helps to achieve the goal of efficient allocation of resources of the organization.
• The future projects can also be evaluated by using the process of budgeting. Under this method management can prepare budgets for different scenarios and evaluate the same.
• The budgeting process is used by the management for evaluating the performance through variance analysis (Robinson 2013).

On analyzing the objective it can be derived that budget is an important administrative tool. It is very useful in planning future course of action and also acts as a standard for evaluating performance. It can be concluded that the budgeting is critical for success of any organization.

Conclusion

In conclusion it can be said that management accounting involves tracking of internal costs of the organization in order to help management in making decisions. On analyzing the function of management accountant it can be said that the role includes collecting, recording and reporting data to various units of the organization. On analyzing the report it can be seen that there is a difference between the function of financial accounting and management accounting.

Reference

Barth, M.E., 2015. Financial Accounting Research, Practice, and Financial Accountability. Abacus, 51(4), pp.499-510.

Bevis, H.W., 2013. Corporate Financial Accounting in a Competitive Economy (RLE Accounting). Routledge.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting)(Vol. 29). Routledge.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hugh, C., David, H. and Ellis, J., 2016. Management Accounting-Principles and Applications.

Kaplan, R. and Anderson, S.R., 2013. Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Lewis, W.A., 2013. Overhead costs (Vol. 6). Routledge.

Osadchy, E.A. and Akhmetshin, E.M., 2015. Accounting and control of indirect costs of organization as a condition of optimizing its financial and economic activities. International Business Management, 9(7), pp.1705-1709.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Robinson, M., 2013. Performance budgeting. In The international handbook of public financial management (pp. 237-258). Palgrave Macmillan UK.

Robinson, M., 2013. Program Classification for Performance-Based Budgeting. World Bank Publications.

Shafiee, M., Lotfi, F.H. and Saleh, H., 2014. Supply chain performance evaluation with data envelopment analysis and balanced scorecard approach. Applied Mathematical Modelling, 38(21), pp.5092-5112.

Snyder, H. and Davenport, E., 2013. What does it really cost? Allocating indirect costs. Asian Libraries.