Management Accounting - Research Paper Example

?Management accounting is an internal process that enables managers to make business decisions. The process of management accounting combines data from both the internal environment and the external environment in order to generate reports as required by the different department heads. Thus the sources of data are both external and internal. The data are crunched using a variety of analytical tools such as the breakeven analysis in order to arrive at management decisions. Therefore management accounting plays an important role in the organizational decision making process. The role of management accounting is to provide information that will enable managers within the organization to conduct the decision making process more competitively. By combining data from a variety of sources, including both the internal environment and the external environment, management accounting enables managers to formulate decisions that will make their company more competitive. Therefore the primary role of management accounting should be to combine data from a variety of sources in order to facilitate the decision making process. Management accounting can be defined as the process of generating reports that enable managers to assess how the company is performing in relation to competitors. By contrast, financial accounting provides reports for external stakeholders such as the shareholders. Financial accounting reports are also prepared according to the generally accepted accounting principles. However such rules are not applicable to management accounting. Thus a management accountant can apply his own discretion in preparing the required report. Management accounting is defined on the basis of several assumptions. The first assumption is related to the goal of management accounting. The goal of management accounting is to assist the management in maximizing the net profit of the company. The second assumption is that the management is able to control the success of the company to some extent so that its performance is not completely dependent upon market forces. The role of management is to apply planning and control to impact upon organizational performance. Management accounting is defined based upon the assumption that it is meant to provide a set of decision making tools that the management will apply to enhance organizational performance. As mentioned before, the role of management is to apply planning and control. Planning and control can be applied in marketing, production or finance (Lillis & Mundy, 2005). Therefore the definition of management accounting must include decision making in marketing, production and finance. Management accounting derives its definition also from the assumptions that the management makes about the accounting department. The management expects the accounting department to provide data that will assist in marketing, production and financial decision making. Finally, management accounting must be defined based upon the assumption that accounting information must be customized to the decision making tool involved. Sometimes this involves defining the nature of the accounting information according to fixed and variable costs (Emsley, 2005). Management accounting as a process must incorporate all these assumptions. The sources of management accounting data can be both external and internal. The role of management is to apply planning and control techniques in influencing the organizational performance. To meet this objective, the management must access data from both the internal environment and the external environment. Management accounting data from the internal environment enables the management to assess the organizational performance. The data from the external environment, such as the data on competitors and demand, enable the management to compare organizational performance with market performance. Thus these sources of data enable the management to understand whether the company is performing above or below the market average. As mentioned before, one of the assumptions underpinning the role of management accounting is that decision making occurs in marketing, production and finance. Therefore these three functions are the sources of data when it comes to the internal environment. Management accounting data must also be sourced from the external environment. These data must be on competition and demand so that the management is able to compare the performance of the company in relation to market performance. The sources of data for management accounting are selected so that the management is able to assess the performance of the company quantitatively. Therefore the role of management accountants is to combine financial data from both internal and external sources to prepare reports that will enable the management to assess the performance of the company in relation to market performance. Internally the data can be sourced from production, sales and other individual business processes as required. External data on competition and demand can be sourced from marketing. Because the process of management accounting does not have to conform to the generally accepted accounting principles, the sources of data are flexible. They are selected according to the decision making requirements. The management makes use of a variety of planning and control techniques to convert the data into critical business decisions. For example, the management can apply the analytical tool of breakeven analysis to arrive at costing and production decisions. The tool of breakeven analysis enables the managers to break down the cost structure into fixed costs and variable costs so that costing decisions reflect the actual scenario more accurately. Variance analysis can also be applied to arrive at decisions about individual business processes. Variance analysis can be defined as the process of comparing actual results with expected results. Variances can be favorable or unfavorable. Therefore the management can conduct the decision making process accordingly. Variance analysis is a tool of budgetary control which indicates to the management which business processes are performing favorably and which processes are not (Tillman & Goddard, 2008). In this instance management accounting data are used to perform variance analysis which facilitates the decision making process. The data are required for decision making about any variances in cost and revenues. Management accounting data are used in different decision making tools such as breakeven or variance analysis. In this manner the management can make sense of cost and revenue figures as they relate to competition. Management decisions about production, marketing and finance can be made according to the results from applying planning and control techniques which must use data from management accounting. The modern business environment is in a constant state of change and this exerts a lot of competitive pressures on a company. Therefore the management has to generate reports on the cost and revenue structure in order to make decisions about whether the company is performing competitively. Management accounting data are used to analyze costs and revenues and decisions are taken accordingly. By applying different planning and control techniques such as breakeven analysis or variance analysis on management accounting data, the management takes decisions about the company’s future. The primary role of management accounting should be to enable managers to maximize the net profit of the company. Management accounting provides data from a variety of sources which can be used in planning and control techniques to facilitate the decision making process. The management accountant can exercise his own discretion in preparing the reports. Because the reports can be prepared in flexible ways, they enable managers to assess the performance of the company more accurately. Therefore when it comes to making decisions about different internal functions, such as marketing, production and finance, management accounting data are used in analytical tools such as breakeven analysis to generate reports about cost and revenues. In this manner managers make use of management accounting data to arrive at business decisions. Inasmuch as management accounting provides data from different sources, both internal and external, the primary role of management accounting should be to facilitate the decision making process. References Emsley, D. (2005). Restructuring the management accounting function: a note on the effect of role involvement on innovativeness. Management Accounting Research. 16, 157-177. Lillis, A. M. & Mundy, J. (2005). Cross-sectional field studies in management accounting research – closing the gaps between surveys and case studies. Journal of Management Accounting Research. 17, 119-142. Tillman, K. & Goddard, A. (2008). Strategic management accounting and sense-making in a multinational company. Management Accounting Research. 19, 80-102. Read More