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HOW MANAGERIAL ACCOUNTING ADDS VALUE TO ORGANIZATION
1. INTRODUCTION
Management accounting provides accounting and related information to support the
management of an organization in its internal decision-making. It includes product costing,
relevant costing, cost-volume-profit analysis, capital budgeting, and operational, tactical,
and strategic planning. A major activity included in the management accounting is the
measurement of costs of processes that create value.
Management accounting is performed inside organizations. It is the internal
business-building role of accounting and finance professionals, who design, implement,
and manage internal systems that support effective decision support, planning, and control
over the organizations value-creating operations. Management accounting and finance
professionals directly support an organizations strategic goals. Management accounting
focuses on the real internal economics of the enterprise creating new business, optimizing
existing business processes, and analyzing customer value that create long-term,
sustainable value.
Management accounting is changing rapidly with technology, new analytical tools, and the
pressure of increasing competitive challenges reshaping organizational information
systems.
2. WHO ARE MANAGEMENT ACCOUNTANTS
Management accountants are strategic financial management professionals who integrate
accounting expertise with advanced management skills to drive business performance
inside organizations. They serve as trusted partners to executives in all areas of an
organization, offering the expertise and analysis necessary for sound business decisions,
planning, and support.
Management accountants monitor, interpret, and communicate operating results, evaluate
performance, control operations, and make decisions about the strategic direction of the
organization. They understand the business formula for delivering value to the customer,
arriving at strategies for identifying, developing, marketing, and evaluating a product or
service throughout its entire life cycle. Management accountants create value, rather than
simply measuring it. (Institute of Management Accountants)
Accountants have traditionally concentrated on recording what has happened financially in
the past; however, in managerial accounting, accountants are increasingly involved in
helping to formulate policy for business organizations, providing information for
decision-makers and frameworks for making those decisions. Managerial accountants use
financial accounts in the process of decision-making within a business organization.
Examples of this process would include determining which business activities were least
profitable and then making a decision about whether or not to continue with these business
activities, or estimating future revenues in order to aid decision-making today.
3. THE MANAGEMENT PROCESS IN ORGANIZATIONS
According to Professor Phillip W. Gillet, Jr, Managerial accounting is the process of
identifying, measuring, analyzing, interpreting, and communicating information in pursuit
of an organizations goals.
a. Integral part of process: Managerial accounting is an integral part of the management
process and managerial accountants are important strategic partners in an organizations
management team.
b. Creating value: The management team seeks to create value for the organization by
managing resources, activities, and people to achieve the organizations goals effectively.
c. Focus on internal personnel needs: The focus in managerial accounting is primarily on
the needs of personnel within the organization.
4. MANAGERIAL VERSUS FINANCIAL ACCOUNTING
Both Management Accounting and Financial Accounting shares the same objective i.e. to
provide information to their users. However, there are several differences between the two.
Each field of accounting deals with the economic events of a business. Their interest is
overlap. Determining the unit cost of manufacturing a product is a part of managerial
accounting while reporting the total cost of goods manufactured and sold is part of
financial accounting. The differences are as follows: -
Management Accounting Financial Accounting
Users Is largely used by the people within the organization (internal users). E.g. the
managers who make plan as well as financial decisions. The users of financial accounting
consist of people within the organization as well as people external to the organization.
E.g. investors, customers and suppliers
Reporting regulation framework Not regulated by any framework, since only the
management intends it. Regulated by law and the preparation of report must conform to
requirements of accounting standards other regulatory authorities.
Nature of report Based on combination of historical data, estimates and projection of
future events. Information supplied is based on historical transaction data.
Reporting scope Information included normally focused on certain section of the
organization such as product lines, jobs, departments or divisions. Report focus on all
transactions occurred within the organization as a whole.
Report frequency Report is prepared as it is required. It depends on the management need.
Report is usually prepared annually in accordance to the organizations accounting period.
5. MANAGERIAL ACCOUNTING TOOLS/TECHNIQUES
Today, the management accounting embraces a variety of sophisticated Systems, tools, and
techniques, such as activity-based costing, enterprise value analysis, value-chain analysis,
and the balanced scorecard. Throughout the historical development of the field, the context
remained initially the tangible product manufactured, and later, included services. This can
be justified on the ground that in the beginning the manufacturing sector dominated the
economy; later, the service industry gained its significant share in the economy and thus
required attention from the management accountant.
5.1 ACTIVITY BASED COSTING
Activity based costing (ABC) is a costing method that provides managers with useful
information they need regarding the contribution each customer makes to overall
profitability. It captures quantified cost and time data and translates this into decision
information. It measures process and activity performance, determines the cost of business
process outputs and identifies opportunities to improve process efficiency and
effectiveness.
ABC also makes it very clear that integrated costs associated with the services the
customer demands play a crucial role in determining each customers contribution to net
profit.
Activity-Based Costing also provides a clear metric for improvement. It encourages
management to evaluate the efficiency and cost-effectiveness of program activities. Some
ABC systems rank activities by the degree to which they add value to the organization or
its outputs. This helps managers identify what activities are really value-added-those that
