Decision Making with Managerial Accounting - Case Study Example

Decision Making with Managerial Accounting of the of the and number: Table of Contents Introduction 3 PART 1 3 Managerial accounting 3 Role of managerial accounting 3 Role of managerial accountant 4 Ethical Issues for managerial accountants 4 Managerial accounting techniques 4 Activity based costing 4 Lean accounting 5 Transfer pricing 5 PART 2 6 Budgeting  6 Quality control 7 Capital investment decision techniques 7 Conclusion 8 References 9 Introduction This case study will primarily focus on different aspects of managerial accounting in order for the researcher to develop a critical understanding of the role of managerial accounting and different techniques that are segmented under this field. In order to conduct an in-depth analysis, real world applications of different managerial accounting techniques will be provided and appropriate conclusions will be drawn. PART 1 Managerial accounting Managerial accounting is a work procedure, which presents financial and non-financial information to the organization’s managers and other key decision makers integral to the organization (CSN, 2013). In other words, managerial accounting is referred to as the internal business-developing role of finance and accounting professionals who plan, implement and manage the internal systems, which encourage effective decisions, thereby supporting and controlling the value creating activities of an organization (Ioana-Diana, 2014). Role of managerial accounting Managerial accounting is aimed at providing financial and non-financial information to managers, so as to help them make the best decisions. It facilitates effective internal decision making that is primarily focused on planning and controlling purposes. The type of decisions taken by managers depends heavily on the accounting information available to them. Given the fact that financial accounting data does not provide sufficient detail for internal decisions, it must be broken down to further details, regarding individual services and products offered by the company. Not only do managers need to be aware of the cost of a service or product, but they also need the cost information to be broken into intricate details of smaller components, that will enable them to conduct ‘what if’ analysis and thus, predict the future. The types of decisions that managers more often than not are supposed to make are regarding pricing a particular or a group of products, dropping a product or product line, purchase of new resources by replacing the old ones, assessing the performance of managers and divisions of an organization and sometimes, making instead of purchasing a product. Therefore, this suggests that the two fundamental utilities of managerial accounting are planning and controlling. Both the factors mentioned in the statement above help managers to accomplish fluent decision making (UNF, n.d. ). Role of managerial accountant The principal role of managerial accountant is to record financial information within the financial statements of a company, which is utilized by the management team of the organization to contribute towards the decision making process. They are assigned with the responsibility of developing budget plans, perform cost and asset management and develop crucial reports that help a company to identify areas that need attention. Provided that managers rely largely on the information reported by their managerial accountant in order to formulate effective and efficient business strategies, information provided by them affects the decision making ability of the managers significantly (Johnson, 2014). Ethical Issues for managerial accountants In the contemporary business world, individuals working in the field of managerial accounting face constant ethical dilemmas. For example, if the immediate superior of the accountant instructs the latter to report physical inventory within the financial statement at its original costs, when it is quite apparent that inventory has depreciated over time due to obsolescence. In such cases, what is the accountant supposed to do? (Wiley, 2013). In addition, companies might desire to act unethically in the business world. Business owners may perceive that adopting unethical means may not necessarily be illegal. This is a logic that puts a grey shade to the business world. These are the pressure points that might force managerial accountants to constantly push the ethical limits, while drafting and reporting financial information (Vitez, 2014). Managerial accounting techniques Activity based costing This managerial accounting technique allocates manufacturing overhead costs to products in a rational manner, unlike the traditional approach of allocating costs, simply on the basis of machine hours. This method of costing, at the beginning, allots costs to those activities that are the actual cause of the overhead. Thereafter, cost associated with those activities is assigned to the products, which actually demand the activities. Activity based costing technique helps an organization to identify unproductive products, departments and activities. In addition to that, activity based costing also enables an organization to distribute resources effectively on profitable products activities as well as departments (Cokins, 2002; Baker, 1998). Lean accounting This is a general term used to signify changes, which are required to a company’s accounting, measurement and control as well as management process in order to support lean manufacturing and lean thinking. Majority of the companies who embark on lean manufacturing process soon realize that their accounting procedures and management methods are at odds with the lean changes, which are being made by the company itself. The underlying reason behind this fact is that traditional accounting and management approaches were formulated in order to support traditional manufacturing, which are actually based on mass product thinking. Since lean manufacturing violates the rules of heap production, traditional accounting and management approaches are inappropriate and are usually very hostile to the lean changes that are made by the company (Stenzel, 2008). Transfer pricing Transfer pricing is a segment of managerial accounting, which enables an accountant to do effective profit allocation. This accounting technique is used to allocate an MNC’s net profit or loss before taxes, to those countries where the organization does business. Transfer pricing is usually done in companies with multiple divisions, where inter-division transaction takes place. This technique is implemented in cases where individual divisions of a large multinational corporation are treated and measured, as if they are separately run entities. In the field of managerial accounting, where different sub-entities of a multinational corporation are accountable for their own profits, they are also responsible for their own return generated on investment capital. Thus, in such cases, when divisions are required to have internal transactions between each other, transfer pricing is done in order to determine the costs (Wittendorff, 2010). PART 2 Budgeting  Davis service group, headquartered in London, UK, is a large publicly listed company, which employs close to 17000 people. The company has developed a robust and detailed budget plan in order to meet its needs. The company’s budget detailed the overall financial that evidenced expenditures of the available funds. The variables that have been mainly used within the budget plan are sales, output, operating as well as fixed costs, profits, cash flow and capital investment. The budget is based on fundamental assumptions regarding the likely conditions of the company for the upcoming financial year. So, the budget plan accounts for the detailed operating budgets, which plan the month-on-month sales, activity expenditures and levels. One example of such a variable is the staff costs. While preparing the budget plans, accountants as well as managers had to take into consideration the unexpected changes by preparing flexible budgets. The company had to make key assumptions regarding variances in the internal and external business conditions. Once the after-effects of those assumptions were assessed, the managers were able to set forecasts for sales turnovers as well as costs needed to be borne by the company in order to meet profit targets. Following this assumptions, detailed budget plan was prepared that included the estimate of staffing, plant capacity, materials and marketing required. Thereafter, sensitivity analysis was conducted in order for the company to be able to review different scenarios. The what if analysis is performed where the company focuses its attention towards the economic outlook, competition in the market, existing as well as target customers, staffs, suppliers and finally, the distributors. The budget plan of the company used such resources that can be closely related to the key performance of indicators, which in this case are organic revenue growth, management retention rate, operational throughput, environmental performance as well as health and safety records. Having applied the managerial accounting approaches mentioned above, the budget plan, thus, prepared helped the company to better allocate and use resources. In addition to that, the company was also able to monitor and control the operations as well as promote forward thinking. Furthermore, the company was also able to uphold a clear picture of the direction in which the company was heading, thereby motivating its staff and lastly, it provided the company with a method to delegate. All of the abovementioned facts suggest that the budgeting plan prepared by Davies service group facilitated effective decision making (Business case studies, 2014). Quality control Toyota’s approach to quality control have transformed drastically, over the last decade or two. They made many changes to the conventional quality control systems in order to ensure a superior quality of their finished products. In the contemporary society, the company is widely known for its high quality vehicles all over (Toyota, 2013). The company has been able to achieve this feat by implementing a robust quality control technique, which always took into account the requirements of its customers. The quality control in the purchasing function was well-supported by a good follow up in the accounts payable of the company. The company’s manufacturing and production was cushioned by a robust cost accounting method, that accurately reflected the company’s productions costs, thereby providing the management with the required information in order to make informed decisions regarding achieving production efficiencies at low cost. The company’s quality control technique with respect to managerial accounting considered different types of customers, both internal and external to the organization, which includes management, auditors, employees, vendors, contractors, customers, lenders and creditors, taxing authorities, regulatory agencies and so on and so forth. Another concept of total quality control employed by the company was to meet even higher standards than what was previously achieved. The accounting department of the company had to meet requirements of different types of customers simultaneously and also, ensure robustness of the accounting function by keeping an update of the modifications in tax laws or regulatory reporting requirements and changes in internal business procedures (Hagen, 2013). Capital investment decision techniques Nearly all companies throughout the world employ capital investment decision techniques in order to determine whether a long-term investment would generate sufficed return, which is substantially more than the cost of raising that capital (Northcott, 1992). By determining the above factor, a company is able to make an informed decision regarding whether to pursue a particular project. For being able to do so, companies implement various investment decision techniques, such as, determining the accounting rate of return, payback period, net present value, profitability index, internal return of return, modified internal rate of return, equity annuity and real options valuation. Out of the abovementioned techniques, net present value, internal rate of return and profitability index are widely used as they serve as key indicators regarding the prospect of a project. Profitability index is the ratio between the investments to the payoff of a particular project. It serves as a useful indicator, precisely because it helps a company to estimate the value generated per unit of investment made by the investor. Another method is the NPV rule, which helps a company to compute the present value of all future cash flows, resulting from a particular project. A positive present value suggest that the company’s present value of all the future cash flows is greater than the initial and thus, gives a positive indication to the management for pursuing the project. In addition, companies also adopt the IRR method, which is the discount rate at which the cost of investment can be equated to the benefits of investment. IRR and NPV are complimentary methods because if NPV is positive, then IRR will always exceed the cost of capital. This indicator also helps a company to assess the prospect of a project (Das, 2013). Conclusion Having done an in-depth analysis, it was found that managerial accounting is a critical dimension, which ensures a long-term sustainability of a company, thereby enabling its management to make well-informed decisions regarding the activities to be conducted. These decisions are largely based on information provided within the managerial accounting methods and are clearly evident from the case study examples in part 2. References Baker, J. J. (1998). Activity-based Costing and Activity-based Management for Health Care. Maryland: Aspen Publishers. Business case studies. (2014). Planning a budget: A Davies Service Group case study. Retrieved from http://businesscasestudies.co.uk/davis-service-group/planning-a-budget/introduction.html#axzz2sXYLvCc6 Cokins, G. (2002). Activity-Based Cost Management: An Executives Guide. New Jersey: John Wiley and Sons. CSN. (2013). Managerial accounting concepts and principles. Retrieved from http://sites.csn.edu/bgutschick/MGR_ch01.pdf Das, D. (2013). Capital Budgeting. Retrieved from http://www.slideshare.net/dpdas3/capital-budgeting-18990882 Hagen, K. (2013). Total Quality Control in Accounting. Retrieved from http://voices.yahoo.com/total-quality-control-accounting-15453.html?cat=3 Ioana-Diana, B. (2013). The role of managerial accounting in the Management process. Retrieved from http://fse.tibiscus.ro/anale/Lucrari2013/Lucrari_vol_XIX_2013_011.pdf Johnson, R. (2014). Managerial Accountants Role in Business Planning. Retrieved from http://smallbusiness.chron.com/managerial-accountants-role-business-planning-38322.html Northcott, D. (1992). Capital Investment Decision-Making. Connecticut: Cengage Learning. Stenzel, J. (2008). Lean Accounting: Best Practices for Sustainable Integration. New Jersey: John Wiley and Sons. Toyota. (2013). Toyota’s approach to quality. Retrieved from http://www.toyotauk.com/media/Our-approach-to-quality.pdf UNF, (no date). Introduction to Managerial Accounting. Retrieved from http://www.unf.edu/~dtanner/dtch/ch1.pdf Vitez, O. (2014). About Ethics in Managerial Accounting. Retrieved from http://smallbusiness.chron.com/ethics-managerial-accounting-3737.html Wiley. (2013). Ethical Standards. Retrieved from http://www.wiley.com/college/kieso/0471363049/dt/protool/Ethics/ Wittendorff, J. (2010). Transfer Pricing and the Arms Length Principle in International Tax Law. Netherlands: Kluwer Law International. Read More