Thesis on "Value of Managerial Accounting in an Organization"

Thesis 10 pages (2712 words) Sources: 8 Style: APA

[EXCERPT] . . . .

Value of Managerial Accounting in an Organization

Managerial Accounting, simply put, is the procedure whereby we can classify, calculate, assess, understand, and transfer all the relevant data that is needed to help a company attain its short-term and long-term objectives. Managerial accounting can also be called cost accounting. The primary distinction between the concepts and practice of managerial accounting and financial accounting is that the former is chiefly designed to assists the administrative units within the company to make assessments/conclusions and overall control over the company, while the latter is mainly a source of reference and information for peripheral bodies, like stockholders and brokers, outside the company.

The four characteristics that distinguish managerial accounting form other formats of accounting are:

Managerial accounting reports and analyses are private in nature and are only accessible to the administration of the company;

Managerial accounting information is always related to the potential patterns of performance of the company instead of the historical records of performance of the company;

Managerial accounting is primarily designed to help make the administrative and company decisions be made under easier and more aware circumstances;

Managerial accounting is not restricted to typical and contemporary accounting techniques; instead, most of the technologically advanced and practical structures are used for compiling the necessary information (Garrison and Noreen, 1999).

Managerial Accounting Defined

The Chartered Institute of Management Accountants (CIMA) describes the management accounting phenomenon as "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its Resource (economics) resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders', creditors', regulatory agencies and tax authorities."

In another definition, the Institute of Certified Management Accountants (ICMA) explains that the main task of a managerial accountant is to provide an organization's administration and executive offices with the financial and relative statements/reports in such a presentation that the format alone can initially make them make more informed decisions. Furthermore, the ICMA also says that all the information that the managerial accountant collects must include all the factors that could be useful to the organization when delegating responsibility, making or amending policies, and overseeing all the activities within the company. ICMA calls the managerial accountants the "value-creators" for an organization i.e. they channel all their endeavors to increase the overall value of the company in the future. Keeping this is mind, the ICMA states that "Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc."

The American Institute of Certified Public Accountants (AICPA) divide the spectrum of the practical importance of managerial accounting into three sections which include: 1) the 'Strategic Management' which is mainly about creating strategies and marketing patterns for the future endeavors of the company; 2) the 'Performance Management' that involves the progressive analyses of the all performance activities and all the reasons/decisions that precede any pattern within the company; and 3) the 'Risk Management' which, as the name suggests, is all about understanding, identifying and transferring the potential of risks that the company might have when following a certain pathway to the attainment of their goals.

Aims

From the above definitions, the following aims of the phenomenon of managerial accounting can be determined:

Favorable and intelligent utilization of all financial and tangible resources

Designing and practical implementation of the strategies regarding business policies and marketing

Strengthen the decision making process and make it practically successful

Designing and practical implementation of all internal organizational behaviors

Researching all financial endeavors and patterns

Some of the common and important data that managerial accountants collect include:

1) All relevant data on the company's products and services, stock/pricing/marketing strategies etc., as well as the products and services of their top competitors Information on the costs of an organization's products and services.

2) All of the financial statements that are needed to execute effective analyses in the short- and long-term

3) All of the updates on the strategy and the impact of its implementation (Horngren and Foster, 1987; Kaplan and Atkinson, 1989).

Common Managerial Accounting Practices

Through the years, the main use of managerial accounting has been to help an organization make the internal performance of the company superior and consistent. Throughout the 1980s, most of the researches concluded that the domain of managerial accounting had undergone minimal to no changes or improvements which is why the managerial accounting department was pretty much left in the background as other departments of the business sector underwent dynamic changes and gained importance. The widespread realization of the dormant state of the managerial accounting sector and the related criticisms that followed were the foundation for the numerous changes that surfaced in the following years. The concepts of activity-based-costing, the balanced scorecard and bottleneck accounting were all developed due to the heavy demand of change in the phenomenon of managerial accounting transferring it from a conventional and old-fashioned concept to a modern-day concept.

The activity-based-costing phenomenon takes a different approach to study the activities of the business that control the expenses of the company. Here, instead of calculating the costs of the employment, or purchase of raw materials, or marketing costs, the managerial accountant analyses the costs and expenses of the company through the results that the employees gain, and the products that they make using certain raw material or the sales that they get from a marketing campaign. This basically allows the organization to balance the costs with the returns and analyze the profit or loss they are making as well as clearly identify and understand the market opportunities available (Kaplan and Norton, 2001).

Another new concept introduced in the managerial accounting sections was the balanced scorecard. The balanced scorecard is basically a balance sheet of the overall expenses/profits/loss stats and the overall functionality stats that the company goes through based on the overall popularity of the company amongst its clients, the general and specified results of the behaviors and actions within the company as well as the overall creativity and innovation that was done within the company (Kaplan and Norton, 1992). Kaplan and Norton, in their study, explain that the importance of the balanced scorecard lies in the fact that it can be used as an efficient and tactical business plan with the aim of classifying the value-creator factors and elements of the company as well as act as the buffer between the modern strategies and phenomena being introduced and the traditional business setup (Kaplan and Norton, 2001).

The bottleneck accounting setting not only allows the managerial accountants to identify the difference between the anticipated and the real sales or profits made but also allows the company to identify and asses the actual bottleneck (factor or element that slows down or hampers the overall performance) that made the difference between the anticipated and real level of sales end up in making the company face a losing percentage (see also Horngren and Foster, 1987). Hence, through the use of bottleneck accounting, the managerial accountants can also identify the bottlenecks within the company's structure as well as statistically presents the loss that the companies faced because of that bottleneck and the reason behind it.

The overall difference in 'traditional' and 'innovative' or modern managerial accounting formats lies in the overall approach that the managerial accountants take when analyzing and presenting the cost effectiveness of a company. For example, one of the consistent ways that a modern organization identifies the differences in the anticipated sales levels and the actual sales percentages is through the use of the variance analysis methodology. The variance analysis techniques mainly allow an organization's administration to follow a pattern of comparing the anticipated sales ratios with the actual sales during and after the manufacturing process. This system is regularly used in combination with some of the other recently developed techniques, like the activity-based costing (explained earlier) and the life cycle cost analysis (before the final draft of the good or service has been approved for manufacturing), both of which are applied only with a specific goal in mind. These two aspects are taken into account in the variance analysis procedure because any minor changer for the better in either the product or a specified activity of the company can result n superior quality results. While traditionally, the organization would have counted on high profits, which are never a sure thing, to balance out overall expenses of the production, here the organization gets a chance to analyze how they can improve the overall efficiency of the employees or outlook and/or performance of a product in order to somewhat guarantee a higher sales and profits record then what was initially anticipated.

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