How Managerial Accounting Adds Value to Organization

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 organization's value-creating operations. Management accounting and finance professionals directly support an organization's 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 organization's 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 organization's management team.

b. Creating value: The management team seeks to create value for the organization by managing resources, activities, and people to achieve the organization's 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 organization's 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