Management Accounting in Organizational Decision Making - Essay Example

Management Accountancy Management Accounting in Organizational Decision Making Couse Code Student Name Date of Submission Management Accounting in Organizational Decision Making Management accounting plays a significant role in an organization as it supports competitive decision making by collecting, processing, and transmitting information that assists in management planning, control, and evaluation of business processes and organization’s strategy. Information and information system affects organizations by invading the models and management analysis fields. Accounting information provides components and element of an organization that provides the management with information used to process financial events (Zare, et al. 2013). Managers also use the accounting information to make substantiated decisions. This essay will focus on the challenges faced by organizations when making and implementing decisions. The essay will also identify two key management accounting techniques and concepts applied in decision making. Management accounting is geared towards the provision of information to the management who considered it as an informational tool that is significant in making decisions and maximizing profitability. The management has three major roles; planning, organizing, and control (Eierle & Wolfganag, 2013). Management accounting assists in setting future goals by providing information that can be used in making decisions on whether to adopt a new production system, select the organization’s price policy, and appreciation of the invested capital. The interaction between the organizational processes and management accounting assists in the identification of organizational structure and for a better understanding of methods that determines authority. Concerning control, management accounting maintains the verification process of the methods and the extent to which the objectives have or have not been achieved (Diaconou, 2002). Control is one of the basic functions of management within an organization means that the implementation of policies is monitored and performances are evaluated. Management accounting provides the organization with information that is used for studies that allow analysis of deviations from budget and effective decision making. Organizations are faced with numerous decisions in every business day. However, there are general challenges experiences when making these decisions. One major challenge is the ability to filter valuable information and present it in a way that it becomes useful for the managers to make business decisions. While making decision, managers must extract value from various business reports to inform decisions. The extraction of information is limited by availability, consistency, user-friendliness, and accuracy. Organizations face uncertainties about the consequences of the decisions. Every decision has hidden within it a guess about the future and the consequences. The standard theory of rational choices presumes that the individual making a decision must have the knowledge and recognize the possible outcomes of the decision (Agid & Augustine, 2012). Nevertheless, this is somehow impossible as human beings are rational as their cognitive abilities and resources available determine their ability to seek and process information. The universal theory presumes that preferences are consistent and stable. However, with time, preferences change, and become consistent with one another. According to the theory of rational decision making, the decision makers can rationally resolve conflicts through the evaluation of the conflicting alternatives and by choosing alternative that all the decision makers agree upon by the use of decision rule. However, the challenge is that in such circumstances, it is always difficult to come up with decision rulemaking that leads concessions to go perpetually and ultimately results to conclusion with no agreement (Burstein & Holsapple, 2008). This is the reason why managers make decisions by relying on confidence and statu rather that the formal settlements that enable then to reach a compromise. Break-even point analysis is one of the management accounting techniques and concepts. The break-even point is that point at which the sales made by an organization generate enough income to cater for all the fixed costs and expenses. At this point, the incoming revenue of an organization is profit as long as the costs and expenses are not increased and the sales are not reduced. Organizations can use the break-even point analysis to determine if the company generates enough revenue to sustain the expenses and earn profits. As argued by Calin, Man & Nedelcu (2008) calculating the company’s break-even point through break-even point analysis is a significant quantitative tool that can be used by managers as it provides an insight into whether or not the revenue generated from the sale of products or service have the ability to cover the cost of production. The information derived from the analysis can be used by managers to make a various of business decisions such as setting product or service prices, making competitive bids and requesting for loans ()Jarvenpaa, 2009. From an economic point of view, break-even point analysis indicates the number of goods at which the decision made by the managers would become indifferent. At the identified quantity, the profit and costs are balanced. When analyzed closely, the break-even point analysis assists organizations to identify the fixed costs that are in excess. Since there is a direct relation between the break-even point and the fixed costs, the identification and control of these costs help an organization to attain a lower break-even point hence enhancing the organization’s profitability. Apart from being a significant decision-making tool, the break-even point is a planning tool that assists in identifying sales volume that may be required to prevent losses, plan target profit levels, set optimal prices and program the organization’s product inventory requirements. By knowing the number of units needed to be sold to reach the break-even point allows managers to avoid incurring losses over a specific period (Dumitru, 2008). The managers can also know the amount of profit that can be achieved at different sales volumes. This means that any sales above the break-even point become the profit. The managers can use this information to set various sales that exceed the break-even point by setting sales targets that will let the organization to achieve desired profit levels. Organizations consider the price of the product when introducing any product or service to the market. Price setting determines the failure or success of an organization. The break-even point analysis identifies different price levels which assist in product pricing about affordability and price competitiveness. Lastly, managers can use the accounting information from break-even point analysis to schedule product inventory levels (Eierle & Wolfgang, 2013). Companies have to stock enough inventories to ensure that products are available for sale at any time. Managers can plan for the additional stock after conducting the break-even point analysis. Cost accounting is another management accounting technique that presents cost data about product, process, department, and division. The cost data are then compared with the predetermined cost to enable the management to make a decision on the reasons that are responsible for the difference between the costs (Diaconu, 2002). Organization’s management can use the cost accounting technique to control costs by minimizing the costs of products and services with compromising on the quality of the product. Dependable reporting of the real costs, correct projected costs estimation while making managerial judgments and choices is a key constituent for efficient business operations. Cost accounting takes fixed costs, variable costs and step costs into consideration. As Javeenpaa (2009) argue, fixed costs impact the management’s decision making. Organizations with high production levels experience reduced costs as far in relation to the fixed costs. Fixed costs such as insurance are significant while making managerial decisions concerning the optimal production levels as they influence the cost of product, pricing and ultimately, profit levels (Burstein & Holsapple, 2008). An additional significant cost is the variable cost that remains the same on the basis of cost-per-unit but has an increasing total as the volume of production increases. Variable costs are important decision-making tool for the general budgeting decision and planning for financing. Step costs are a combination of variable and fixed cost that has to be considered to avoid significant discrepancies during cost accounting (Cretu & Iova, 2011). The step costs are fixed cost up to a certain limit where they change to a new value. Step costs care always associated with the capacity of machines and batch processing. In case the production volume exceeds a specific limit, costs become substantially new, and the company needs to add an extra machine or produce an extra batch. The inclusion of the step costs in the managerial decision making is to enable the management to avoid exceeding step limits. In summary, management accounting provides information that are important decision-making tool as it helps the organizational management to make decisions that results to reduced costs and higher profits. However, while making this decision, organizations face different challenges such as uncertainty about the consequences of the decisions and inconsistency of the preferences. Also, this essay identified break-even point analysis and cost accounting as the two key management accounting concepts and techniques used by organizational to make decisions. Management accounting is not only useful for the management of various economic entities as it also includes each worker within the entity. The presented issues within this essay maintains the fact that management accounting produces and transmits information regarding activity costs, information needed during budgeting and control of organizational activities. The information provided also sustains the explanation of in-house reports as well as the analysis that are required during decision making, and having an effective asset management. References Ahid, M. & Augustine, A 2012, ‘The Roles and Responsibilities of Management Accountants in the Era of Globalization’. Global Journal of Management and Business Research, 12(15), pp. 42-53. Burstein, F. & Holsapple, C 2008, Handbook on Desicion Support Systems 1: Basic Themes. Berlin: Springer. Călin, O., Man,M., & Nedelcu, M.V 2008, ‘Managerial Accounting, Ed. Didactică şi pedagogică, Bucureşti Călin, O., Manolescu, M., Tudorache, S.,& Turlea, E 2002, ‘Management accounting, Ed. Tribuna Economică, Bucureşti. Creţu D., Iova R.A 2011’ ‘The interdependence functions of managerial accounting’. Scientific Papers Series Management, Economic Engineering in Agriculture and Rural Development, 11(2) Diaconu, P 2002, ‘Managerial accounting’, Ed. Economică, Bucureşti. Dumitru, M.,& Calu, D 2008, ‘Management accounting and cost calculation’, Ed. Contaplus, Ploieşti. Eierle, B., & Wolfgang Sch 2013’ ‘The role of management as a user of accounting information: implications for standard setting’. Journal of Accounting and Management Information Systems, available on-line at ideas.repec.org/…ami/journl/v12y2013i2p155- 189.html. Jarvenpaa M 2009, ‘The Institutional Pillars of Management Accounting Function’, Journalof Accounting & Organizational Change, Vol. 5, No. 4. Zare, I., Nekounam, J., Pirzad, A., Sedaghatjoo, F., & Mosavimoyahar, S 2013, ‘Role of accounting information systems on relevance of accounting information’, Life Science Journal, 10(3s), http://www.lifesciencesite.com. Read More