The Role Of Management Accounting In Organizations: A Comparative Analysis With Financial Accounting

Management Accounting Vs Financial Accounting

Discuss the role of management accounting in an organisation (make comparisons to financial accounting).

Discuss the different methods of dealing with overheads when pricing products in a manufacturing firm.

Provide an analysis of two of the “modern techniques in management accounting” An example of a modern technique would be JIT, (You cannot use this method) making references to practical applications (where applicable).

Discuss the objectives of budgeting.

Management accounting is the presentation of accounting information in such a way as to help management in the creation of policy and the day to day operation of an enterprise or any undertaking. Hence, it related to the use of accounting data gathered with the help of financial accounting and cost accounting for the purpose of policy formation, planning, control and decision making by the management system. (Francis, 2011) So management accounting connects management with accounting as any accounting information which is required to take any management decision is linked to management accounting itself. (Business Dictionary, 2012)
In other words, it is the application of appropriate techniques and concepts used in an undertaking which is used for the company to assist management in establishing future plans.
Aim or objectives of management accounting is as follows;
a) It helps in planning and formulation of future policies as it assists and helps the management in planning and arranging the activities of the enterprise. (IMA, 2011)
b) It is also beneficial for the interpretation of financial information. Accounting is a technical subject and may not be comprehended by everyone until the user has detailed knowledge about it. So management accounting solves this problem and presents the information in a simple and non technical manner so that it is easy to comprehend and lay out the planning. (Investopedia, 2012)
c) It plays an important role in controlling the performance. It’s a useful device of managerial control. So it divides the entire company into responsibility centres and each centre is headed by a diligent and responsible person. (Diffen, 2012)
d) Management accounting also helps organizing as the qualified management accountant suggests the use of accounting procedures like the budgeting, cost control techniques and internal financial control. So, it is useful to rationalize the organizational structure. (Caplan, 2014)

There is a narrow scope of difference between management accounting and financial accounting.
Management accounting is a modern tool which comprises of new modern techniques, methods and systems of accounting which lies under the hand of the management accountant. He with best of his ability tries to increase the profits of the business concern by reducing the cost losses and wastages. (S, 2014) This planning is very essential in running a business. So not only it helps in day to day running of the business but also plays a crucial role in overall planning and organising. Financial accounting is closely linked to management accounting. It aims to bring out the profit or the loss of the company by giving a true and a fair view of the financial position of the company. (DebitDoor, 2012)

Method of dealing the Overheads

Overheads can be calculated in many ways. It is greatly dependent upon the various goals and objectives of the company. Those various methods are as follows:

This has been one of the most celebrated methods of calculating overheads. This process of calculating the overheads involves the process where the amount of overheads depends upon the number of units produced in a particular financial year.

At times, most of the companies have adopted the process of calculating the overheads on the cost of direct material incurred by the company. This percentage is calculated as per the articles of association. It is either predetermined or decided by the management of the company. (Kumar, 2012)

There is another which is basically adopted by the companies where the overheads are calculated on the basis of a percentage on the direct labour cost. This direct labour cost is basically the total amount of cost incurred by the company on the employees appointed as the direct labour, i.e. for the purpose of manufacturing the final product. (Freedman, 2011)

There are basically two methods of modern management method of management, which leads to the current management of the companies. These are:

It basically consists of specified and sequential methods of tackling all the problems in the companies. It helps in basically providing information for making all the decisions and improving the operational efficiency. It has adopted the process of accepting all the prescribed manner and all the problems are dealt effectively. The process of systematic method has a prescribed manner, which is to be adopted by the management of the company. (Skymark, 2014)

The other method which is being adopted by the management of different companies is the analytical method. In this scenario, the management uses some of the quantitative methods where all the necessary calculation is done and then the decisions are taken by the management of the company. All the complex and systematic examinations are done by the management and hence the analytical aspect of management leads the company to have the best possible method of management. These are the two main methods as adopted by the management of the company as per the needs and requirements of each. (Drucker, 2011)

All the operations of the company should be executed after making sure that a proper budget for the same. Budgeting has been one of the most important tasks for any company and its management. It is in the process of budgeting where the management take up all the relevant information to come to decision for the operational activities of the company. It is for the purpose of having a smooth course of business that the directors and the managers of the company give emphasis on this fact that budgeting processes are carried out in the best possible manner. Without having an effective form of budgeting, the operational activities of the company are not effectively executed. Following are the main objectives of the process of budgeting:

Modern Management Method

Without having a proper structure of the operations of the company, it is a difficult task for a company to prosper in the long run. Therefore, planning has been one of the most important features of any company as in the absence of the same the company will not be able to execute its activities in the best possible manner. It plans all the business growth and development and how the company should go about with its basic feature of having the operational activities. The process of planning leads the company to have a normal course in their respective operational activities. Apart from this, planning is considered to be the soul of the company, as the activities of all the departments in the company greatly depends upon the fact that how the management of the company is contributing the available amount of working capital and long term capital amongst the various departments. This process of planning will lead the company to have the best possible measure of having the operational activities. The goals and objectives of the company can only be measured once the whole thing is executed effectively.

The other basic aim of planning is the fact that it provides a structure to the organization. It leads to provide the basic structure for the organization. The daily activities and other aspects of the company are managed by having a proper system of planning in the whole process. Therefore, it can be said that most of the process of planning is to be done by the management of the company to provide a proper structure for the organization.

The planning structure of the company predicts the cash flows of the company. It is with the help of this the company would be able to take up decision for the future aspects. Hence, it can be said that  the all the companies including the manufacturing firm has to predict the cash flows of the company as it considers the financial model of the company.

Allocating resources also plays a critical role in the process of budgeting. This process of budgeting leads the company to appropriately allocate the resources as it will benefit the company to actually determine the requirements of each department. Therefore, it can be said that budgeting leads to allocate the resources as it leads to the appropriate workings of the company.

Modelling the scenarios has been one of the major aspects for almost all the companies especially since the time almost all the top companies are being globalized. The budgeting leads to have proper models for the companies in order to predict the future of the company during the normal course of the business. The management conducts these model scenarios in order to make decisions that would lead the company to achieve its goals in the best possible manner. Therefore, it can be said that model scenario plays a very critical role and therefore, budgeting should be considered as one of the most important features or processes of the company. (Finance Management, 2011)

Conclusion

Management accounting has been one of the most important features of a company. The differences between management accounting and financial accounting have been very narrow yet management accounting has been executed for the purpose of having the management take decisions as it would help them in doing the same. (Accountingverse, 2013) This information is not leaked to the third party, whereas the purpose of financial accounting is to issue for all the third parties, for example, creditors and the debenture holders of the company. Therefore, management accounting plays an active role in the process taking up decisions and the process of making the management achieve the goals of the company.

References

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