Management Accounting - Research Paper Example

? Management Accounting Management Accounting Management accounting is not a specific system of accounts, but could be any form of accounting which enables a business to be conducted more effectively and efficiently. Management accounting in the words of Robert S. Kaplan, is a system that collects, classifies, summaries, analyses and reports information that will assist managers in their decision making and control activities (Institute of cost and works Accountants of India, n. d, p.4) Accounting may be defined as “the art of recording, classifying, and summarizing ... transactions and events and interpreting the results thereof” (Introduction to managerial accounting, n. d, p.2). Two types of accounting are usually taking place in organizations; financial accounting and management accounting. Financial accounting and managerial accounting are entirely different things even though some people perceive both as same thing. Financial accounting is a reporting method to stakeholders outside the organization whereas management accounting is a reporting method intended for the stakeholders inside the organization. In other words, management accounting helps managers inside the organization to take sound decisions. Management accounting is a multifaceted entity and therefore it undergoes various processes like data collection, analysis, interpretations, implementations of decisions etc. Management accounting can be considered as an extension to cost accounting since it uses many of the data used for cost accounting. “From a management accounting point of view the primary purpose of management is to make decisions that may be classified as marketing, production, and financial” (Management Accounting and Decision-Making, n.d, p.24). Unlike cost accounting, management accounting is usually done through unregulated channels since it is intended for the internal use alone. Various sources of data such as accounting system, production and sales department, business process etc can affect management accounting. Sources of data for management accounting and how these data are used to make management decisions Accounts department, Production department, sales department and the business process are the major data sources for management accounting. Accounts department is the most important source of data for management accounting. In fact the top managers taking critical decisions about the future business strategies of an organization based on the feedbacks they receive from the accounts department. Accounts department is the only entity in an organization which knows the current financial strength of an organization. They are the ones who hand the debts and credits of the organization. Moreover, they are the ones which estimate the profits and losses of an organization during a particular period. Accounts department also identifies the underperforming areas of the organization. All these information will help the top managers in taking sound decisions and guiding the organization towards prosperity. Only the production department knows the volume of raw materials, labor and time required for the completion of a particular job and therefore the accounts department should consult with production department before making any estimation about the probable cost an organization may spend for the completion of a particular work. Some jobs may appear simple in its nature; however, the complications involved in the actual production of such jobs are better known only to the production people. On the other hand, some other jobs would be easier for the production department even if it appears to be complicated. Since the accounts departments may not have the technical know-hows about the various mechanisms or methods used in the production of a particular product, costing of a job without consultation with the production department will always generate problems to the organization. The accounts department may quote more or less price for a particular job if they fail to seek the advices of the production department before preparing and submitting the estimates to the clients. If the organization quotes more prices, they will not get the project and if the organization quotes less prices, they will suffer losses. In short, estimation without consultation with the production department would end up in unfavorable results for the organization. Sales department is the second source of data for management accounting. Sales department is responsible for conducting market study to know the market climate well. Sales departments get valuable feedbacks from the market about the demand and possibilities of competition for particular products. Costing of a product is normally done by an organization based on the demand and the nature of competition. For example, Apple’s iPhone enjoyed huge success in the market when it was initially introduced. The demand for iPhone was huge and Apple Company succeeded in fixing the prices of iPhone at their own will. However, at present Samsung is raising huge challenges to iPhone which forced Apple to reduce the prices of iPhone. Sales department is providing information to the accounts department about the competition and the demand and based on this information, accounts departments make changes in the prices of a particular product time to time. Business process is the third data source for management accounting. Business climate is changing rapidly because of the fluctuations in the market and advancements in technology. The product, which moved rapidly yesterday, may not move well today because of the rapid changes taking place in consumer behavior. Moreover the whole concept of business is changing day by day because of globalization. International business or cross cultural business is growing rapidly and it is easy for firms to establish business units in overseas countries now. As a result of that domestic firms are facing stiff challenges from international competitors. It is necessary for a company to make changes in its operations based on the fluctuations in the market to survive in the market. In short business process is as important as production and sales as far as the sources of management accounting are concerned. Conclusions Management accounting is the accounting intended for the internal stakeholders of an organization. It helps managers to take sound decisions for the betterment of an organization. Accounts department, production department, sales department and the business processes are some of the data sources for management accounting. These data sources provides data with respect to the complexity and time consumption of a particular work, overhead expenses of that work, raw material and labor required for that work, market demand and competition related to that work or product etc to the top managers. Top managers analyze, interpret and take sound decisions based on the data they received from the bottom level. References Institute of cost and works Accountants of India, (n. d). Basics of cost accounting. Retrieved from http://www.cga.nic.in/pdf/management_accounting.pdf Introduction to managerial accounting, (n. d). Retrieved from http://acct.tamu.edu/strawser/acct210/spring%2008/Texts/Man%20Ch%201.pdf Management Accounting and Decision-Making (n.d). Retrieved from http://www.microbuspub.com/pdfs/chapter2.pdf Read More