Need of Management Accounting Information - Term Paper Example

Executive Summary This report focus on the “need of Management Accounting Information” where the concentration is derived from the academic literature available on the same and the current environmental scenario in which it operates. Initially the report explains the meaning of Management Accounting Information as reflected by various definitions and explanations of the same. The report provides a comparison of management accounting with financial accounting to provide the readers a clear understanding of the term management accounting information. The comparison itself highlights the importance or need of management accounting information as the same acts an important tool in decision making process and assisting the managers in performing their basic tasks and responsibilities which includes planning, motivating and directing and controlling using management accounting. The report then looks towards the evolution or history of management accounting information along with academic literature available on the same to highlight the need of management accounting information in an organizational context. The report also provides an explanation to the nature, scope and function along with the goals of management accounting information which highlight the major need of management accounting information in a global scenario. The report is not just concentrated on explaining the past information or the current situation of management accounting information but looks towards various recommendations to ensure effectiveness of management accounting information in a proactive manner to target the future developments and plans. Finally the reports end with a comprehensive conclusion to ensure that the readers are well equipped with both theoretical and practical knowledge of the report under study and aims towards future growth and development of management accounting information system along with organizational sustainable development in future years to come. TABLE OF CONTENTS 1.0 Introduction 3 2.0 Meaning of Management Accounting Information 4 3.0 Management Accounting V/S Financial Accounting 4 4.0 History of Management Accounting Information 6 5.0 Literature Review 8 6.0 Nature, Scope and Function of Management Accounting Information 10 7.0Goals of Management Accounting Information 10 8.0 Recommendations 11 9.0 Conclusion 12 10.0 References 14 1.0 Introduction This report aims towards the topic issue on management accounting where the report highlights “the need of management accounting information”. The report has been designed in a synchronized manner to provide a clear understanding of the topic. Initially the focus is on providing an understanding of the meaning of management accounting information by help of standard definitions and explaining the meaning of the same with a comparison of the management accounting from financial accounting to provide a more transparent picture to the readers. The report then moves towards the history and evolution of management accounting information which is equally supported by academic literature to provide to substantiate the study. The report then highlights the scope, nature and function of management accounting information along with goals of management accounting information. Finally the report aims towards future development of management accounting information by concentrating on recommendations to the topic. Lastly the report provides a conclusion of the topic under study to ensure both practical and theoretical meaning to the readers. Every organization small or large has managers who play the key role in making future decisions to ensure growth of the company. Management accounting information unlike financial accounting does not only concentrate only on financial information but takes into consideration the non-financial data as well which makes it important in every decision making of the organization. Basically it is the study of accounting and non financial information in terms of management function. Hence the basic task of management accounting information is to redesign the entire accounting system so that it may serve the operational needs of an organization. The financial and non-financial data are so devised and systematically developed that they become the unique tool for management decision and ensure long term success of the organization along with sustainable development. Let us now look at the various aspects of management accounting information in the following subheads to understand the topic in a more synchronized and comprehensive manner. 2.0 Meaning of Management Accounting Information The Oxford References Online defines Management Accounting Information as the provision of financial and non-financial data which enables the managers who are mostly internal in nature to provide them the required assistance to advice organizations for ensuring better decision making for future development and substantial growth of the organization. In simple terms management accounting information is concerned with providing valuable information to the internal managers to ensure effective decision making and ensure sustainable growth of the company. It aims towards providing both financial and non-financial information keeping in mind the general business environment. Management accounting information aims towards providing managers the assistance in measuring and reporting the information related to economic activity within an organization and further assist managers in performing their planning, directing and motivating and controlling function in a more effective and efficient manner. Management accounting information is used by all businesses, non-profit organizations, governmental agencies and individuals as the same acts as a catalyst in ensuring effective decision making. Thus we see that management accounting information has been designed to ensure effective decision making which forms the most critical and important role in any organization. Further to explain and provide a more clear understanding of management accounting information it is of prime importance to enable readers to provide them with a clear distinction between management accounting and financial accounting information which has been explained as below. 3.0 Management Accounting V/S Financial Accounting People usually get confused to understand the real meaning of management accounting information and bring a wrong notion of financial accounting to be similar with management accounting. Let us have a look at the various differences between management accounting and financial accounting so as to clearly understand the differences between the same and further develop a clear picture of management accounting information and its meaning. Management Accounting Financial Accounting Management accounting information focuses on decisions affecting the future of an enterprise. Financial accounting is more concentrated on summarizing the financial consequences of past activities and performance. Reports are targeted to those who are inside the organization and involved in planning, directing and motivating, controlling and performance evaluation functions. Reports are targeted to those who are outside the organization which includes mainly owners, lenders, tax authorities and different regulators. Timeliness of information is the major requirement for management accounting information. The focus of financial accounting is on the precision of information. It is not mandatory to follow Generally Accepted Accounting Principles (GAAP) while generating reports on management accounting. It is mandatory to follow and develop reports as per Generally Accepted Accounting Principles (GAAP). These are further not under any mandate obligations for external reporting. These are mandate for external reporting. Management accounting information seek to provide detailed segment reports about various departments, products, customers and employees to ensure effective decision making in future. Accounting information is much concentrated on developing summarized data for the entire organization. Management accounting is more directed towards items which form critical items in decision making process of the organization. Accounting information is more concentrated towards objectivity and variability of past data and developing reports accordingly important for stakeholders. Thus, we see the major differences between management accounting and financial accounting information which itself makes the meaning of both the terms clear along with a highlight of the need and importance of management accounting information in context of today’s organizational growth and sustainable development keeping in mind both short term and long term objectives of the enterprise. To further understand the need of management accounting information in an organizational context let us have a look at the history of management accounting information which shall further provide a deeper understanding of the topic along with academic literature supporting of the same to identify the future recommendations and current need and importance of management accounting information. 4.0 History of Management Accounting Information Management accounting information can be traced back to the industrial revolution which occurred during the 19th century. Most of the firms during this period were tightly controlled by few managers and very little mandatory requirements were there in terms of financial accounting. Further there were no external shareholders, little unsecured debts and low obligations from market scenario in preparing financial reports which gave rise to growth of management accounting information. American textile mill owners kept detailed records of cost to improve efficiency and develop a basis for product pricing. There was still no standardized management accounting practices. Later during the 20th century large and integrated companies emerged which created a demand for measuring the performance of the different organizational units. Managers looked towards new ways to measure the actual return on their investments and performance of their different units or departments. The history of management accounting information is further characterized by two different characteristics Firstly management accounting was driven by evolution of organization and their strategic imperatives i.e. when cost control was the major goal of managers, costing systems were developed and they became more accurate further when environmental changes became more prominent focus shifted towards management accounting systems which supported adaptability to environmental changes. Management accounting information saw large innovations which were in fact more oriented and developed by managers towards addressing their own decision makings than concentrating on the decision making process of the organization. Maher (2000:2) states that management accounting information has a short but exiting history as while management accounting concepts can be traced back to the beginning of the industrial revolution, management accounting as a teaching discipline appeared to evolve in the late 1940’s. Now let us look at the timely evolution breakup of the history of management accounting information to ensure a better understanding of the same. The International Federation of Accountants (IFAC,1998), has identified four different stages of management accounting information system in which the same evolved. The same is discussed as under. Stage 1: Prior to 1950, the main focus was on cost determination and financial control which led to the development of budgeting and cost accounting measures. Stage 2: By 1965, the focus shifted from cost accounting to provision of information for management planning and control which led to the development of decision analysis and responsibility accounting technologies. Stage 3: By 1985, the focus was on reduction of waste in the material and resources used in business which led to the development of process analysis and cost management technologies. Stage 4: By 1995, attention is on generation or creation of value through effective and efficient use of resources through the use of improve and advanced technologies which examines the drivers of customer value, shareholder value and lay important concentration on organizational innovations. It should however be noted that though the different stages are identifiable and recognizable, the process of change from one stage to another has been evolutionary in nature. Thus, we see the evolution or history of management accounting information which clearly highlights the need and importance of management accounting information, now let us look at the academic literature of management accounting information to substantiate the further importance and need of management accounting information in an organizational context. 5.0 Literature Review Johnson and Kaplan (1987) in their research concluded that management accounting information system had evolved to motivate and evaluate the overall efficiency on the internal processes in an organization and is certainly not a measure of the profits of an organization. To measure the overall profits and loss financial accounting should be in place and that management accounting and financial accounting information operate in an independent manner. According to Drury (1996), development and advancement in management accounting information were a reason of scientific management movement. Further it was proponents of this scientific movement which was led by Fredrick Taylor which led to improving the efficiency of production process by simplifying the entire production processes which ultimately led to enhancement of profitability. John Corrigan (1987) in his study beliefs that management accounting information has lately emerged as a key component in the professional field and is gaining worldwide popularity at both domestic and international levels. The rapidly changing dynamics in today’s business environment have provided a more intense environment for renewed interest and focus on the role of management accounting information. Mouritsen (1995) in his study conducted on management accounting information describes the role of management accounting in international firms and builds a relationship of the same with strategies of coordination and integration. Further on a global scenario, management accounting information supports a dispersed configuration of the various value-chains located in different parts of the world. Louis (1999), in his study mentioned that management accounting information is the final outcome of some system or processes and the same should be carried out in an proactive manner. He further argued that management accounting information should be involved earlier in the process and the situation limits the management accounting prospect for adding value. Erkki, Laitinen Rolf Leppanean (1996) used case study method to analyze the strategic steering and management accounting information as determinants of global success. The method focused on the case of Nokia Group on a corporate level which described the strategic element of corporate management. He believed that that global success depended on various factors like environment, products, management, strategies and information systems. Brewer, (2000) in his study describes that traditional management accounting information and practices like standard costing and marginal analysis are still prominent. He beliefs that traditional management accounting information when coupled with recent advancements lead to significant challenges for management accounting educators who has the responsibility of organizing the subject matter into a coherent whole. Burns John E, Scapens, R. (2000), argued that management accounting information is also changing with the rapid changing technological and economic environmental changes. He highlighted that various new concepts of proactive management accounting information are increasingly becoming part of business process. He further believed that individuals must be prepared in a proactive manner with organizational backing to change the traditional ways of doing accounting into new exciting challenges in future. Randall (2000), suggested that management accounting information must ensure a proactive lead in furnishing companies with customer oriented information. Further Siegel (2001), explained that management accounting information has made a quantum leap in last decade and has transformed from bean counters and corporate cops to becoming business partners. Granlund (2009), in his researched article discussed the need and importance of theories in management accounting information. He suggested that the theories should be such developed that the same provides justification of their uses and how the same shall be beneficial to the stakeholders. Thus we see a preview of the academic literature on management accounting information which itself suggest the need and importance of management accounting information. To further highlight the same let us now look at the nature, scope and function of management accounting information along with its goals and responsibilities to management accountants. 6.0 Nature, Scope and Function of Management Accounting Information Management accounting information nature involves providing both accounting and non-accounting information to not just the top managers but to all managers at all levels of the organization so as to provide a base for decision making. It is through management accounting information that the management get tools for analysis of its administrative actions to lay suitable stress on possible alternatives in terms of cost, price, profits etc. The scope of management accounting information includes providing valuable information to the internal managers which includes information on various issues like financial accounting, cost accounting, revaluation accounting, budgetary controls, inventory control, statistical methods, interim reporting, taxation issues etc. thus we see the ambit of management accounting information is large to ensure its presence in most critical decision makings. The basic function of management accounting information is to assist and help managers in performing its functions effectively. The major function of management which includes planning, directing and motivating and controlling are synchronized with management accounting information to ensure better decision making. 7.0 Goals of Management Accounting Information As already has been discussed that the major function or goal of management accounting information is to assist managers in performing their basic duties and ensuring effective and efficient decision making. Let us have a look at the same in a detailed manner. Planning: Planning involves a proactive approach of selecting a course of action and specifying and designing strategies accordingly to ensure successful implementation of the same. Management accounting information though its budgetary control and environmental scanning assist managers in performing the planning task by comparing the actual with the standards to ensure highest effectiveness in the planning process. Directing and Motivating: One of the major tasks of managers is to direct and motivate its staff members to ensure growth of the organization. Management accounting information through regular data analysis and rapidly changing to adapt to the changing environment assist managers in directing and motivating employees to a large extent. Controlling: Management accounting information assist managers in controlling process by providing not just budgetary control tools and measures by but providing valuable feedback information to ensure that variances are dealt in an effective manner. Thus we see that management accounting information helps in a planning and control cycle which starts from planning and then moves to smooth information flow though all levels of the management with controlling and feedback and then moving to planning again ensuring sustainable development and growth of the organization. 8.0 Recommendations Management accounting information has largely grown and organizations today understand the meaning, need and importance of the same. There are still gaps in management accounting information which needs to be addressed which has been discussed as under. Management accounting information needs more practical exposure and managers should be made aware about its need and importance with a smooth flow of information at all levels of management. Business decisions are not just limited to financial data, with changing dynamics it is important to develop new technologies and measures in management accounting information to ensure better effectiveness and efficiency of the system. Management accounting information derives its information from various other sources like financial accounting, cost accounting and other records. Hence there is an urgent need of developing a full fledged system to ensure effectiveness and accuracy in the information provided. Management accounting is just a tool of management and in no manner it can replace management which needs to be understood by management accountants. Management accounting information is still in its initial changes and hence is affected by fluidity of concepts, raw techniques and imperfect analytical tools which needs be to prudentially address to make the system more strong and effective. Management accounting information looks towards a break from the traditional system and hence requires more public training and programmes to ensure more popularity of the system. 9.0 Conclusion This report has been prepared on the issue of management where the topic under focus is “need for management accounting information”. The report initially highlights the meaning of the term management accounting information with the help of various definitions and explanations along with a comparison of management accounting with financial accounting to provide a more picture in the mind of the readers. The report then moves towards the history or evolution of management accounting information along with academic literature available on the same to further substantiate the body of the report and highlight on the major need and importance of management accounting information in an organizational framework. The report then moves to explain the nature, function and scope of management accounting information along with the goals and how the same are linked to the basic functions of managers and acts an important tool in decision making process. Finally the report highlights the major gaps still existing in the management accounting information system by providing suitable recommendations as per current organizational environment. The report has been further designed to provide detail analysis of need of management accounting information with focus on both practical and theoretical knowledge related to the same. 10.0 References Burns John E, Scapens, R. (2000) 'Conceptualising Management Accounting Change: an institutional framework', , London, Vol.10, 3-25, 1044-5005 Brewer, Peter C. (2000), An Approach to Organizing a Management Accounting Curriculum. As published in Issues in Accounting Education, Vol 15, No 2, May 2000 Corrigan, J. (1987) The renaissance of management accounting: New initiatives from different perspectives Australian CPA July 1, 1998 Erkki.K Laintinen,Rolf Leppanen,(1999) Shareholders value as a management Tool, Towards integrated performance measurement system in the new Business Development, University of vaasa publications Reports and papers 43,1999 94p Granlund, M. & Malmi, T. 2009. In Search of Management Accounting Theory European Accounting Review. Vol18 Johnson,H.T, Kaplan.R.S. (1987) Professional dominance: The relationship between financial accounting and managerial accounting, 1926-1986 Accounting Historians Journal, Dec 2002 Louis J Sarasohn Luehlfing, Michael S.,.(1996) Fixed assets don't squeak Management Accounting (USA)1996 Mouritsen, J. (1999). The Flexible Firm: Strategies for a Subcontractor's Management Control. Accounting, Organizations and Society. 24. 1. 31-55. Randall J. (2000). Supply chain management New Role For Finance professionals Strategic Finance 82 (2), 29 Siegel, G. 2001. "Quality of Life in Management Accounting,” Strategic Finance in sep 2001 Read More