Management Accounting - Essay Example

Management accounting [Name] [Unit] [Date] 1. Introduction The definition of accounting involves four key ideas; it is a measurement process by nature, its scope consists of operational and financial information, its aim is assisting the organization in achievement of strategic goals and it is attributed in enhancement of the phenomena that is measured, provision of decision making information thus, supporting, encouraging and creating beliefs, shared values and mind sets. Accounting can also resulted into two sub disciplines that are financial and management accounting. Financial accounting involves providing the information outside the organization to the stakeholders. Management accounting consists of provision of information within the organization and involves collaborating in decision making in the organization, devising management systems on planning and performance, providing expertise in financial control and reporting with an aim of assisting the management to formulate and implement the strategy of the organization. The main role of management accounting in the firm to support decision making that is competitive through collection, processing and communication of information that will assist the management in planning, evaluating and controlling the processes within the business and the firm’s strategy. Moreover, the ability to use ad develop good management accounting is an essential ability for different individuals such as professionals in finance, managers in marketing and operations, information technologists and other executives in top levels. In most cases, large organizations have top accountants in every division known as a controller where a large portion of management accounting is performed in these divisions under the controller’s leadership. In addition, the controllers reports to the overall finance officer. In this case, all these individuals have the responsibility of ensuring that there is a flow of good information on accounting that supports the control, planning and evaluation work within the entire organization (Nagy, 2010). The operations in an organization are based on the decision-making processes where the managers enhance the establishment of the most effective decisions for implementation. Management accounting requires application of mathematical calculations in order to come up with the decision that is effective to implement. Due to continual in complexity of business processes, management accounting has proved to be a very essential tool for making decision in the organizations. There is a variety of potential benefits for management accountants in the course of understanding the diverse explanations that exists in the processes of decision-making. The process of decision-making involves creation of policies that will be employed in order to achieve the organization’s goals and objectives. In an organization, the decision making process involves a step-to-step activity. Making of the decision involves solving of problems that affect the stakeholders and the organization. Thus, the whole process is aimed at establishing solutions to problems various problems faced by the organization. Making of the decision involves various individuals and the ultimate decision to be employed as the organizational policy requires screening by the organization’s top management. Due to increased competition and short life cycles of various products and services, employment of managerial accounting has been crucial in the success of organizations. This means that the management accountants must understand the implications of their decisions in a financial perspective. Managers must be aware of any major changes in the standards of financial accounting since these standards affect the reporting on the results on managerial decisions. Thus, the managerial accountants’ potential benefits in understanding of the diverse explanations that exists in the processes of decision-making can be discussed using the strategic cost management using the following themes; strategic position analysis and cost driver analysis. 2. Strategic cost management Strategic cost management is an approach to managerial accounting, which has become crucial for management accountants in making decision to ensure the success of the organization by maintaining and increasing the profitability as well as the competitive advantage of the organizations. In order to made the most effective decisions to address the shortened life cycles of products and services and the difficulty of changing production procedures due to increased automated products, strategic management of cost will be essential in decision making. Cooper (1996) conducted research on world-class companies and noted that due to increase in global competition and enterprises, there is a need for proactive ways in management of costs. In addition, he realized that organizations survive depending on their ability to create cost management systems that are sophisticated in a way that they reduction of costs. He observed that, as management of costs has become very essential in survival of organizations; there is a need for new forms of management of costs and more individual needs to be involved in an active way in the process of cost management. Thus, there is increased need for management of accounting information through effective decision making to ensure that the organizations are profitable as well as capable of maintaining and increasing their customers (Shank, 1999). 2.1 Strategic position analysis In environments that are competitive, the managers have to put into consideration a fundamental decision concerning the goals of the organization. This will allow the positioning of the organization in comparison to its competitors. Thus, management accountants needs to have a clear understanding the decision making process to maintain the competitive advantage of the firm. Porter (1980) identified three strategic positions, which could enable the management accountants to bring the business to success. These are cost leadership, service or product differentiation and market niche. Porter (1980) states that cost leadership will require vigorous pursuit in reduction of costs from experience, tight overhead and cost control, construction of facilities of efficient scale, avoiding customer accounts that are marginal and minimization of costs in research and development, advertising, sales force and others. This calls for a great deal of attention in making decision in management of const control in achievement of these goals. Thus, management accountants with vast knowledge in making the most effective decision will allow the organization to achieve the highest profits while selling at the same price with their rivals as well as allowing the firm to compete aggressively on price basis while at the same time remaining profitable. Thomas and Kaplan (1997) give an example of the company that employed the strategy on cost leadership where Carnegie Steel Company’s strategy on operation was push its direct costs below that of its competitors in such a way that the prices it charged would ensure that the there was enough demand required to keep the firm operation at full capacity. The management accountants were required to make the most effective decision making sure that the firm’s direct costs were lowest in comparison to its competitors and then they ensured that the firm made profits while its competitors went down during economic recessions. When the demand was more than the capacity of the industry, the firm raised its prices confidently leading to more profits. 2.2 Product and service differentiation In addition to competition on the grounds of price, the management may also make decisions to ensure that their products and services are always adjusted according to the needs and preferences of the customers. Silver (2008) discussed on the strategy of a firm known as Corning Corporation that employed differentiation of a product to achieve competitive advantage. The firm that aims to be a world leader in specialty ceramics and glass achieved its success with product differentiation strategy based on development, research and innovation in their products. The management accountants ensured that the firm maintained acceptable costs in control of manufacturing and research in order to maintaining a competitive advantage. 2.3 Market niche Specific market niche such as product line segmentation, buyer group and geographic market ensures that the firm will confidently serve its narrow strategic target in an effective manner or more efficient as compared to its competitors in broad competition. The management accountants ensures that the firm makes its achievement either by meeting lower cost in order to meet the target or meeting a particular need’s target. Porter (1980, p 38-39) gave examples of firms that were successful on basis of market niche which include Gulfstream that is successful in business as it focused on designing and building corporate aircraft in such a way that other big firms such as Boeing were left for larger aircrafts. 3. Cost drivers The performance of each activity in an organization leads to consumption of resources, which costs money. For the management accountants to have knowledge on activities and their costs, it is essential to understand how these costs will respond to cost drivers, which can be said to be factors influencing costs. Customer demand is the most basic driver of costs as there is no existence of products or services without customer demand. In order to serve customers, managers make various decisions to take a number of actions. The drivers of costs are divided into organizational, structural and activity cost drivers in the study of managerial accounting. Structural cost drivers involve cost of activities for customer satisfaction under the influence of organization’s location, size, scope of operations and technologies employed. Managers requires understanding that decisions made on structural cost drivers are made in an infrequent manner and once made the course of actions seems difficult to change. The calls for knowledge in making decisions on structure such as determination of store size, type of construction, technology and location. Lahart (2010) provides an example of Coca-Cola Company that operates in many countries making more than 75% of its sales abroad because of successful structural cost decisions. Organizational cost drivers have the influence on costs by its effect on activities and costs for satisfaction of customers’ needs. Managers should consider the previous decisions on structure when making decisions that affect the organizational cost drivers. Such include making decision concerning provision of cost information to employees as well as giving them authority to make decisions and working closely with particular or limited number of suppliers. Arnst (2010) illustrates how a hospital managed the key cost drivers of the organization in an innovative manner with an aim of bringing the costs down as well as achieving profitability. Providence hospital key challenge was to manage the patient’s traffic flow from one level to another such as from one care (patient room) to another (laboratory). It changed the practices of the movement of patients leading to significant saving of costs as well as improved patient satisfaction. This was achieved as patient remained in the same room during all levels of care by moving the equipment. Activity cost drivers involves activities that serve the needs of customers with consumption of costly resources. Management accountants should have the knowledge that basic decision on activities available will be employed to respond to requests of customers will precede the actual activities’ performance. Conclusion Management accountants for successful companies employ a diversity of processes of decision making to a competitive advantage. Thus, strategic cost management is one of the approaches to managerial accounting that has become crucial for management accountants in making decision to ensure the success of the organization by maintaining and increasing the profitability as well as the competitive advantage of the organizations. Through understanding of these processes, the management accountants have the potential to bring the organizations to a success. References Arnst, C. (2010). Radical Surgery, Bloomberg Business Week. P. 12 Cooper, R. (1996). Look Out, Management Accountants, Management Accounting, 2(1), 20–26. Lahart, J. (2010). Divided by a Two-Track Economy: The Wall Street Journal Digital Network (WSJ.com), p. 10 Nagy, A. (2010). Section 404 Compliance and Financial Reporting Quality, Accounting Horizons, (24)3, 441-454. Porter, M. E. (1980). Competitive Strategy, New York: The Free Press, p. 35- 38. Shank, J. K. (1999) Strategic Cost Management: New Wine, or Just New Bottles?” Journal of Management Accounting Research,2 (4), 50. Silver, S. (2008). Corning’s Biggest Bet Yet? Diesel-Filter Technologies, The Wall Street Journal, p. B1-B2. Thomas J., & Kaplan, R. (1997). Relevance Lost: The Rise and fall of Management Accounting. Boston: Harvard Business School Press, p 33–34. Read More