The Purpose of Management Accounting in a Modern Business Environment - Case Study Example

Management accounting Synopsis The paper will discuss the purpose of management accounting in modern business environment such as corporate planning, cost control, budgeting and pricing. Management accounting is defined as the process of identifying, measurement, accumulation, preparation, interpretation and communication of both financial and non-financial information in order to enable the users to plan, evaluate and control the activities and resources of the business efficiently. Management accounting functions in modern business environment entail strategic planning, coordinating, controlling, provision of qualitative information for decision-making and budgeting. Management accounting is involved in corporate strategic forecasting and planning through identifying the trends in external business environment variables such as economic variables, political stability, technological innovation and shifts in consumer attitudes. In this case, the information will be critical in new product development and demand planning issues such as understanding the required production capacity. The management accounting professionals participate in credit management, risks analysis and capital budgeting through use of accounting concepts such as sensitivity analysis and risk simulation in order project the future expected cash flows and returns of strategic projects. Management accountants offer crucial advice on the pricing strategy of the business through highlighting the relationships between output and prices and advising the management on the best profit maximisation price level that will ensure maximum returns to the shareholders. Management accountants are tasked with brand value assessments and positioning through offering non-financial information on the changing attitudes of the consumers, the brand attributes such as cost effectiveness, quality and consistency in order to increase the product market share. The purpose of management accounting in the modern business environment Introduction The internalisation of the economies and financial markets, increased cross-border transfer of capital and complex taxation regimes characterize the modern business environment. The Chartered Institute of Management Accountants defines management accounting as the process of identifying, measurement, accumulation, analysis, preparation and communication of financial information that is used by the management to plan, evaluate and control the activities of the organisation (Siegel & Shim 2001). Management accountants measures and reports both financial and non-financial information that enables the management to select, communicate and implement strategies in their decision-making. The business organisation acquires resources and hires people and management team is tasked with planning, decision-making, directing activities and controlling. The management accounting activities are supposed to assist the management with information that is critical in decision-making and planning and management accountants form part of the management in decision-making (Atkinson 2007). Accordingly, the function is critical since it assists the management in controlling and directing activities and motivates the employees to attain the organisational goals. Management accounting will measure and communicate the performance of several operations, departments and individual products in the company thus facilitating better decision-making in the organisation. Furthermore, modern activities of management accountants are geared at enabling organisations attain long-term competitive edge in the industry through understanding the changes in external business environment and ensuring continuous learning that ultimately leads to innovation in the business and efficiency (Pandikumar 2007). The modern business environment has witnessed adoption of new management tools and techniques that will enhance the accounting practice and managerial decision-making capabilities. Weetman (2006) asserts that management accounting mainly provides information to internal users who include managers and employees unlike financial accounting that provides information to various extern al stakeholders such as suppliers, customers and regulatory agencies. The information provided by management accounting is unstructured and depends on the need of the information, unlike financial accounting that follows certain acceptable accounting policies and procedures in the preparation of the information (Bowhill 2008). According to Johnson and Schole’s 3 stage model, management accounting is useful in strategic analysis since it identifies the external opportunities and threats and also internal strengths and weaknesses that may affect the organisational performance (Heidmann 2008). Furthermore, management accountants carry out competitive analysis of the business units in order to identity the growth products that should be promoted by the company. Johnson (2013) offers that management accountants participate in corporate planning process through assessing the productivity, market position, innovation, physical and financial resources and employee attitudes. The accountants will identify the current trends on the political, social, economic, technological and ecological environment and advise the top management how to bridge the gaps between the current business situation and desired business position (Bowhill 2008). In this case, managerial accounting information may suggest measures such as improving the share of the existing products, enhancing the rate of new product development, devising new product lines, improving the current production capacity and engaging in manpower planning and training (Pandikumar 2007). Bowhill (2008) is of the idea that management accounting assists the company executives in strategic planning process in modern business environment. Management accountants provide information on the products that should be sold, the lucrative markets and prices that should be implemented in order to ensure profitability. The past performance data provided by these accountants is critical for future planning and prediction of organisational performance. The management accountants participate in planning process both at the strategic and operational levels. Heidmann (2008) postulates that management accounting plays a critical role in the organisation function in modern business environment since management accountants assist the executives in establishing the internal frame of activities and processes in the company. In addition, management accountants outline the departments, business units and sections thus facilitating control and coordination of activities within the organisation. In this case, management accounting assists the modern business organisations to set up internal accounting systems that reflect the organisational structure and ensure efficient delegation of authority and responsibility in the organisation (Pandikumar 2007). Hoque (2005) acknowledges that management accounting assists businesses with cost control through highlighting the costs that are incurred in the production process and setting standards costs for the production process. According to Hansen & Mowen (2006), management accountants assist companies in eliminating wastage and ensuring efficiency through highlighting the standard working hours, the standard prices of raw materials and underutilisation of the organisational production capacity. Management accountants use the production data to prepare standard costs that facilitate comparison with actual costs in order to determine any variances and investigate the unfavourable variances in order to detect any problems that may have led to the variances (Hansen & Mowen 2006). Management accounting practices such as activity-based costing (ABC) is applicable in modern business environment factories and manufacturing and enables the company to optimise the use of raw materials and breakdowns or disruptions in the organisation. In this case, managers are capable of concentrating on the activities that drive costs rather than relying on the labour as the determinant of costs in the company (Pandikumar 2007). Managerial accounting facilitates global manufacturing accounting and cross-border business activities through transfer pricing concepts. The companies are capable of knowing the revenues and costs that are attributable to different departments and business units. In this case, concepts like funds transfer pricing will enable the organisation to attribute different interest risk rates to different bank branches (Rao 2003). The modern business environment is characterised by immigration of labour and increased use of expatriates in senior management positions thus management accountants assist the business in dealing with expatriate compensation and taxation issues. Ideally, some corporate organisations recognise the most taxable income in the tax jurisdictions where the corporate tax rates are low by lowering the transfer prices of the raw materials or goods to the subsidiaries where the tax jurisdiction has the lowest corporate tax rates (Hansen & Mowen 2006). Hansen & Mowen (2006) concludes that modern, management accounting is involved in credit control especially for the businesses that must maintain an optimum amount of cash. The accountants will enable the company to understand the optimum amount of cash balance that should be maintained and optimum stock levels that must be maintained by the company in order to avoid stock outs. According to Sahaf (2009), the ratio analysis will enable the company to identify the old debts and risk customers that should not be extended credit by the company. With globalization, the management accounting concepts and techniques to cater for emerging business demands such as advancements in information processing technologies and increased global competition. Adler (1999) is of the opinion that management accountants do not only provide information, but also participate in decision-making. The management accounting has shifted towards resources management through the application of accounting concepts such as life cycle costing, activity based costing and cost management concepts such as opportunity cost analysis and simulation. According to Ernest and Young survey, management accounting provides the inputs that are required in strategic decision making thus enabling the managers understand the trends in the market such as customer preference shifts and need for new product development (Hansen & Mowen 2006). In this case, management accounting will be useful in providing the non-financial information that is critical in understanding the external business environment in order to guide the organisation’s strategic choices. Management accounting facilitates decision-making in modern business environment through providing timely and futuristic information. Modern business organisations make business decisions under risk and uncertainty situations especially before implementation of the long-term strategic projects. According to Adler (1999), management accountants enable the company to estimate the cash flows, the project life and cost of capital that is involved in the projects and possibilities of occurrence of future events that cannot be quantified. Accounting concepts like risk premium method, standard deviation, simulation analysis, sensitivity analysis, expected value approach and risk analysis enable the organisations to make prudent decisions that will enhance the value of the firm (Hansen & Mowen 2006). For instance, sensitivity analysis will enable the management to understand the impact of the changes in one of the variables on the net present value of the project or the expected cash flows during the lifetime of the project (Chapman 2005). Management accounting professionals participate in the budgeting process through preparation of operational budgets, cash budgets and master budgets of the organisation. The budgets capture the expenses, assets, liabilities and planned revenues. The accountants prepare sales budgets, production budgets and direct labour budgets thus facilitating the preparation of the master budget together with the senior management of the companies (Hansen & Mowen 2006). One of the critical budgeting areas that is undertaken by global firms is capital budgeting that entails consideration of various external environment factors such as inflation and taxation issues and thus management accountants play a critical part in promoting prudent capital budgeting in modern business environment. In this case, the business is capable of understanding the impact of inflation on the costs of capital, the impact of the taxation on the returns of the capital projects and projected cash flows of the organisation (Johnson 2013). In the current business environment, managerial accounting has fostered performance management and measurement in the organisations through combination of both financial and non-financial measures of performance (Adler 1999). The constantly changing economic environment that is evidenced by cycles of recession and economic boom has made it important for firms to use shorter periods in measurement of performance thus management accountants facilitate this requirement through use of non-financial metrics such as economic value added and the balanced scorecard. For instance, the balanced scorecard combines both financial and non-financial metrics of performance planning and evaluation and financial records that are prepared by the accountants are capable of indicating the cash generation rate, the proportion of revenues from new ventures, the market share and customer satisfaction rates (Hansen & Mowen 2006). In addition, the metrics will identity the employee retention rates, employee diversity and integrity, the motivation levels, the extend of learning in the organisation and new process implementation thus providing a general overview of the performance of the business in both the financial and non-financial activities (Adler 1999). Management accounting is used in modern business environment to facilitate communication and motivation of the employees in the company. Accounting reporting systems and management by exception concepts is critical in setting out the hierarchy of formal communication (Adler 1999). In addition, performance reports and budgets communicate the strategic intentions of the organisation and motivate the employees towards a higher performance. Management accounting adds value to the organisations through motivating the employees and management in attaining their performance benchmarks. The information is useful in communicating the performance expectations and goals of the company thus motivating the employees and managers to attain the stated organisational goals. In modern business environment, management accounting assists the organisations to enhance customer value and streamline the supply chain processes (Hansen & Mowen 2006). Management accounting creates value through critical performance aspects that include cost and efficiency such as suggesting the need to outsource some of the non-critical activities, implementing total quality management principles that improve the value creation along all business activities and guiding the management in the selection of production systems that will ensure innovative products to the customers (Gowthorpe 2008). The management accountants are tasked with life cycle costing that entails accumulating all the cost incurred during the product life cycle with respect to various stages of production thus enabling the management to understand how various stages impact on the overall profits of the company. In this case, the management will concentrate on the product life cycle stages that are essential in ensuring high quality products to the customers. Management accounting is used in modern business environment to set the prices and pricing strategy of the company. The pricing strategy considers the factors that will determine the optimum prices, the objective of the pricing decision, competitor prices, and the pricing policy, the relationship between the output and prices and applicable pricing methods. In this case, managerial accounting pricing methods such as mark-up method, cost-plus method and marginal cost method will be critical since managers can understand the contribution of each product and profit margins (Hansen & Mowen 2006). Moreover, the managers will be capable of identifying the revenue maximisation price and profit maximisation price and will therefore select a pricing decision that reflects the strategic goals and objectives of the company. The management accounting information will be useful in realising the target market share and attaining an acceptable return to the shareholders. Bhattacharyya (2011) asserts that modern business organisations conduct brand value assessment and brand value forecasting and management accounting techniques will provide information on brand metrics such as brand consistency, market trends and brand leadership position thus facilitating the brand value forecasting and positioning in the market. Gowthorpe (2008) concludes that emerging managerial accounting concepts such as strategic costing and attributes costing will be useful in analysing the various characteristics of the brands such as timeliness, cost effectiveness and relevance in order to foster other value addition activities and identify cost reduction opportunities in the market. Modern business organisations have taken advantage of advanced management accounting concepts in their production and systems in order to improve the performance through implementation of modern technology (Bhattacharyya 2011). Some of the concepts that are relevant in modern organisations include flexible manufacturing systems, total quality control, just-in-time manufacturing, material resource planning and computer assisted design. In this case, advanced manufacturing technology and managerial accounting concepts are interrelated and assists the companies to function effectively in fast changing economies and global markets that are characterised by advanced use of information systems (Lee & Epstein 2011). The technologies assist the businesses in their cost reduction efforts, innovation and reduction in the product development life cycle. Management accounting enables organisations to understand the impact of competition and select the appropriate competitive strategies. In this case, the business will be capable of knowing the drivers of the competitive advantage in the industry such as the capital outlay requirements, the brand loyalty and economies of scale (Hansen & Mowen 2006). The accountants provide critical information on the capital requirements and production levels that is necessary for the firm to enjoy higher economies of scale and ensure cheaper prices to the customers without incurring losses and losing the market share to the competitors. For instance, break-even concepts identify the marginal prices, the production levels and other factors that are necessary for the business to cover the production costs and avoid making losses in the industry (Lee & Epstein 2011). Conclusion Management accounting is involved in formulating strategy, planning and controlling activities, decision-making, ensuring optimum use of resources and safeguarding the organisational assets. Management accounting plays a critical role in modern business environment by identifying the trends in the external environment, providing useful information for corporate strategic planning and enhancing control of the operations. The management accountants enable modern businesses implement effective organisational departments and business units thus facilitating communication, coordination and organisation of operations. Accordingly, management accounting is useful in profit planning, setting prices and budgeting in the companies. Reference list: Adler, R.W. (1999). Management accounting: making it world class. New York: Routledge. Atkinson, A.A. (2007). Management accounting. New Jersey: Pearson Education International. Bhattacharyya, D. (2011). Management accounting. New Delhi: Pearson. Bowhill, B. (2008). Business planning and control: integrating accounting, strategy, and people. New Jersey: John Wiley & Sons. Chapman, C.S. (2005). Controlling strategy: management, accounting and performance management. Oxford: Oxford University Press. Gowthorpe, C. (2008). Management accounting. New York: Cengage Learning. Hansen, D.R & Mowen, M.M. (2006). Managerial accounting. London: Thomson. Heidmann, M. 2008. The role of management accounting systems in strategic sensemaking. Muchen: Verlag. Hoque, Z. (2005). Handbook of cost and management accounting. London: Springer. Johnson, H.T. (2013). A new approach to management accounting history. New York: Routledge. Lee, J.Y & Epstein, M.J. (2011). Advances in management accounting, vol 10, London: Emerald. Pandikumar, M.P. (2007). Management accounting: theory and practice. New Delhi: Excel Books. Rao, M.T. (2003). Management accounting. New Delhi: New Age. Sahaf, M.A. (2009). Management accounting: principles and practice. London: Vikas Publishing House. Siegel, J.G & Shim, J.K. (2001). Accounting handbook. London: Hi-Marketing. Weetman, P. (2006). Management accounting. London: Prentice Hall. Read More