Traditional Role of the Management Accountant in an Organization - Essay Example

Traditional role of the management accountant in an organization Introduction Management accountant from time immemorial have been the one solely responsible for preparing and analyzing financial statements. His work is mainly to support the management in ensuring that they make credible and viable decisions. His advice is very vital and management is heavily dependent on it. Once the management makes good decisions, the future of the business becomes more certain and it also ensures that the profitability of the business is guaranteed (Epstein & Lee, 2004). The role of the management accountants have been changing and advancing overtime. The roles they currently play have become increasingly huge and difficult. They are the center of the decision making in both business firms and organizations. They are currently solely responsible for setting up and keeping the financial policies as well as being responsible for management of information system. The support they provide is essential because they work together with other management colleagues to ensure that all matters financial are equitably managed. Basically the work of the management accountant is to forecast on the future by ensuring that the advice they give is for the interest of the future growth and stability of the enterprise. They look at how the business is progressing and offer an advice on how problems can be effectively managed and on how to adapt to modern changes in business trends in order to remain relevant in the market industry (Smith, 2005). To achieve this dreams the management accountant look at ways of reducing business costs both operational and production cost and how to set up more and implement more viable strategies. Their work is not limited to specific sections but it cuts across the organizations. Manager’s information need differ with regard to the nature of entities operations and their role within the organization. Much of information that touches on management accountancy is based on both qualitative and quantitative data. This emergence was first instigated by a perceived disconnect between the theory and the practice of management accounting, and more specific on the most common perception that the traditional wisdom of management accounting textbooks is not widely used in practice. However the belief was based on few published work. Yeshmin and Das, research that was carried out in 2009 in Bangladesh showed that managers of the financial institutions are more comfortable when they apply both variance and budgetary control analysis to measure their performance among the fourteen management accounting techniques it also revealed that most of the managers are very much uncomfortable with application of segment reporting (Aver & Čadež, 2009). Within the field of management accounting, there are different techniques and tools and it is what significantly distinguishes traditional from modern day practices in the field in question (Horvat, 1998). The managerial costing approaches they adopt are far more distinct. The management accounting being practiced today borrows heavily from the traditional costing method because it is used in financial statements reporting and in valuations of inventories; it is also featured in preparation of balance sheets i.e. cost of goods sold. Traditional costing accounting provides many answers to management accountants and it also helps them in their dispensation or rather it facilitates their work (Drury, 1992). Traditional costing practices is however limited by their inability to define costing in a more broad terms but it rather defines it with regard to only sales and production volume. It is also worth noting that management accountants were heavily criticized in the early 1980s for being too traditional and failing to adopt or rather advance in their method while the business environment and practices were radically changing. They were accused for being rigid and inability to adopt practices that were relevant to the modern business practices and growth. Management accountant have for long relied on the traditional costing methods in devising its policies and offering advice to the management (Canada, 2010). Variance analysis is the best way of looking at the disparities in the actual and budgeted cost. These analyses are still adopted but they are integrated together with the modern techniques like the life cycle cost analysis. This method realizes the fact that the management decision at the product design stage can have very great impact of drastically reducing the cost of production. The management influences is at its greatest at this stage. Activity based costing have to terms with the reality that in modern factories the costing is greatly determined by the number of activities involved in the production process the more the activities with idle time the more the cost. With this realization they have devised a way to reduce these activities and to increase the efficiency of these activities. The activity based costing as well as lifecycle costing have also realized that cost can be cut down by reducing the breakdowns in machines and other technical challenges rather than concentrating on the cost of the materials (Drury, 1996). The cost implications of breakdowns and other technical challenges are far much greater in the long run as compared to the cost of the materials. Other area of focus to activity based costing is cost drivers. The activities that drives cost rather than focusing on the direct labor for example as a cost. In modern day the most effective method called resource consumption accounting have been designed. It was designed through the combination of the German practice in accountancy together with the activity based accounting methods (Drury, 1996). It is seen as more prudent because it makes it possible to derive costs directly from operational resource data. Management accountant role within corporation today The management accountants have to be consistent with the role of other departments within the corporation (Epstein & Lee, 2011). Their role should be supportive rather than being detrimental to the progress of the corporations. The management accountants work hand in hand with other managers and their work being mainly offering the advice on the best practices that works to minimize cost. They report to the top most management within the organization and thus a strategic partner. They are responsible for managing the financial based information within the organizations. The management accountants that are activity based are the ones that look into the future design a plan and foresee its implementation. They later look into the variance analysis and recommend on the corrective measures to be taken. The management accountants make sure that the cost that is part of the business operations are traceable and that someone who is accountable should be attached to it (Professional Accountants in Business Committee, 2009). The management accountants ensure that the cooperation’s management becomes more accountant to the cost associated with the newly designed product and more so at its product design stage where the influence is greater. Some corporations that operate within the area of information system their main cost is the IT cost and much of the spending goes towards it. In such organizations, with great cost going into IT system the management accountants should ensure that they work together with the IT department in order to ensure that there is transparency in the cost management in that department. In the internal cost analysis once the management accountant establishes the cost drivers it becomes easier to priorities the cost improvement decisions. It is also the responsibility of the management accountant to know the cost factors of the competitors so that the decision they make helps them to stay ahead in the competition (Clinton, Van Der Merwe, & Anton, 2006). Structural cost drivers are the organizations operations that drive the cost of the product. They are the long term decision making focus within the organization and responsible for positioning the organization in the industry and marketplace. This cost drivers often changes with time as the mode of production changes. Management accountant also focus on executional cost drivers. This mainly focuses on the decisions the top management is making and how much it will impact on the organizations growth. It captures broad area including the training of labor force to improve their capacity and by so doing reducing the overall cost of operation (Joint I.C.M.A. /L.R.P.S. Working Party, Sadler, & Robson, 1973). Employees’ should always be empowered through the embrace of programs and vocational training and cost attached to it met by the organization. Sometimes the corporations miss out by just cutting cost in every department without focusing on the overall drivers of cost. Such decisions usually drastically affect the corporations operations. The thing the cooperation should do is the cut the input cost. This can be achieved by moving to countries with cheaper labor cost. In such countries the overall operational cost is greatly cut hence output going at a much cheaper price raising its demand in the market. The cooperation can also negotiate with the supplier on a much long-term contract that will enable it get raw materials at much cheaper prices. Management accountant also focuses on the competitive advantage. They do so by checking on the competitor’s mode of production. Sometimes such information may not be readily available but by looking at their value process one can ascertain their competitive advantages, once the competitor’s advantage are known, the management then advice the top management on the action to take so that the co-operation remains at much more viable competitive advantage position (Abdel-Kader, 2011). Management accountant also prepares periodic financial statements; these statements include profit and loss accounts, cash flows and variance analysis. These statements are mostly meant for internal controls and not for outsiders as with financial accountants. This statement shows the areas that generate more cost in the organizations and in a way advising the management that something has to be done in the department. These statements are well detailed and easier to interpret by the organizations decision makers. In order to come up with these statements, different divisions within the organizations are analyzed and cost related to each department ascertained (Bragg, 2004). Management accountants also are a partner to other departments by working with all of them together with the management team to help make financial decisions. Without management accounting department it will be impossible for the organization or firm to run smoothly. Other departments will be crippled because they will not have the advisor on financial matters. It also ensures that spending is kept in line with the budget. This is key because if spending is outside the budget operations can run to a halt in the future due to lack of finances (Mahesha & Sachindra, 2011). Every other time the management accountant ensures that budget and operations are monitored so that in case of any variance it is analyzed and prober actions taken to harmonize the two. It also inform on the vital strategic decisions and at the same time formulating business strategies. This strategies and policies are mainly long term. It seeks to maximize the profitability of the organization while at the same time ensuring its long term sustainability (Meer-Kooistra, 2001). Every action that the management accountant should recommend will be future oriented. Every other time they advice on the effects of the financial decisions taken. They forecast on the effects of taking certain specific decisions and give reasons as to why such decision might become unpopular and affecting the organizations profitability. Therefore before any decision is taken they must be consulted for further guidance and advisory opinion. Management accountant other primary functions in the analyses of the financial position of the business and participating in the long term planning. In their analysis, they identify the various factors that contributed to the current position of the business enterprise (Fallon & Zgodzinski, 2012). They separate the factors that led to profitability and the ones that increased the cost of operations. They are also the ones that negotiate for major projects and loans. They are the ones who foresee the viability of such projects and grants and advice the business to go for it. They calculate the cost of these loans in the long run and compare it against the benefits that will accrue to the business if they are acquired then coming up with right advice (Peljhan & Tekavčič, 2008). They offer professional judgment on financial matters and advising on ways of improving business performance. Businesses have to be improved with time and the old ways of management should be dealt away with as more effective and prudent methods are discovered. Business performance are improved if methods of management are more predictive and with least cost implications. The management accountants also interpret and communicating financial data to non-financial managers. This helps them to look into their ways of operations and the implications their decision are having on the overall running of the entity. The non financial departments should know the cost implications of their activities and they get such information’s from the management accountant. They liaise with other heads of departments to put the finances and accounts in context. Proper accounting records are very important in decision making and failure of which wrong decisions will be made affecting the running of the business. Right cost should originate from the right departments and if cost are not linked with the departments they originate from it will be very difficult to carry out corrective measures (Horngren, 1978). Management accountants are the ones monitoring and evaluating financial information systems and suggesting improvements where needed. Improvements have to be effected when the current systems is costly to run and management. It also has to conform with modern systems being used by t he competitors. When more management accounting is done the business will be less financially constrained and there will be more profitability and less credit constraints (Institute of cost & works accountants of India, 1966). Some firms adopt a more sophisticated financial analysis system. The use of this different management accounting technique is in need of capacity to forecast costs with a more degree of certainty. There is also increased need for the provision of management accounting education small enterprises management. This is occasioned by the increased growth in their business especially with regard to their area of operations (Bhimani, 2003). There is also increased change in the nature of products and service they offer. For the enterprises that have grown bigger it will not be appropriate for them to avoid using such things as budgets, responsibility centers and overhead allocation methods. The methods of operations keep on changing and it will reach a time where some of the systems currently not used, will become useful and relevant. Conclusion Managers are faced with enormous challenges in running their organizations; some of these challenges are internal while others are external in nature. For example sometimes prices tend to become rigid, employees motivate themselves and start demanding for more wages and other benefits, taxes increase, and governments impose new regulations. Due to this and other more inherent factors, managers just in time realize that costs must be controlled and reduced if continuous profits were to be earned. Therefore, management will soon spring to action to reduce cost and improve on efficiency through the advice of management accountants. They start thinking of efficiency in company operations and lower costs. These results are mush desire and to achieve them management accountant need cost and statistical records of current performance to compare with planned performance as a means of watching and controlling costs. Management accounting practice are very important in order to control cost and to evaluate performance of the business. Quite a number of organizations are emerging all over the world to contribute toward the economic development of various nations. Therefore it is important for them to apply managerial accounting techniques to perform managerial functions. Management accounting technique has evolved over time in different industries. Even today some service organizations are trying to adopt these techniques to improve their overall managerial performance. The latest studies that have been conducted by different research institutes and individuals have shown that in manufacturing industries management accounting usage is at (73.343%) in comparison with the service industry which is at(54.396%). References INSTITUTE OF COST & WORKS ACCOUNTANTS OF INDIA. (1966). the Management accountant. Calcutta, Institute of Cost and Works Accountants of India] HORNGREN, C. T. (1978). Introduction to management accounting = (formerly Accounting for management control, an introduction). Englewood Cliffs, N.J., Prentice-Hall DRURY, C. (1992). Management and cost accounting. London, Chapman & Hall CANADA. (2010). Certified management accountant. 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Changing Role of Management Accounting Practices in Business Valuation - an Accountants Perspective. MANAGEMENT ACCOUNTANT -CALCUTTA-. 46, 1141-1146 Read More