Posted: May 25th, 2022

Cost accounting and management accounting

Managerial Accounting Can Help Managers With Product Costing

Organizational success depends on manager’s decision-making prowess. Management functions encompass Organization, Planning, Control and Direction, each requiring access to established, and well organized and presented data. Managerial accounting that comprises of different facets of accounting measures helps access to data for identifying, analyzing, and deciding on long-term and short-term measures towards business sustainability and profitability.

Accounting, in earlier times was restricted to and for external sources — market, supply and end-users. Presently, its importance to internal operations (especially works, manufacturing, services etc.) has widened the scope to address both internal and external audience and sources. This has helped create a pragmatic feedback system for the managers to rely on.

Cost accounting and management accounting go hand-in-hand although the latter takes into account both revenues and cost while the former considers only costs for its calculations. Thus, management account allows the flexibility of absorbing intangible, qualitative factors to arrive at decisions required of managerial functions making it a formidable tool to resolve business issues, implement managerial functions, and ensure organizational success.

How Managerial Accounting Can Help Managers with Product Costing

Introduction

Business executives face the option of making many decisions daily. Information on managerial accounting makes data-driven input to important decisions available, which can enhance decision-making overtime. Business managers can build on this strong tool to strengthen their business further by knowing the benefits of management accounting to contexts of business decisions. The management of the company can utilize information on management accounting to decide what should be put on sale and the right price to sell (Clinton, Matuszewski & Tidrick, 2011). For instance, a business manager may not be sure of the right place to focus his marketing strategies and efforts. To assess this decision, an accounting manager could examine the different costs for advertising each of the products. This process is equally relevant to analysis of cost and is a procedure taught in most basic courses on managerial accounting. This same technique can be utilized for determining whether to discontinue or to include new product lines.

Knowledge of primary use of accounting makes information available useful for manufacturing purposes. For instance, a business owner or manager may consider whether to buy or manufacture a component of the primary product of the company. By completing a buy-and-make analysis, the manager can decide on the choices that be more profitable. Business owners or managers make use of such analyses as an important factor in making decisions (Clinton & Van der Merwe, 2006). Other non-financial relevant metrics exist that decide what would be included in the analysis. Information on managerial accounting offers a data-driven look at the right way to grow the business. Financial statement projections, budgeting and balance scorecards are only few of the few examples of information on managerial accounting is used for offering information to enable the management guide the company’s strategies. Data can help managers decide means for sustainable development and can be justifiable depending on the company data’s intelligent analysis, in opposition to impulsive, gut feelings.

Functions of management accounting

The main function of management accounting is to provide assistance for the management in effectively managing its functions. Some of the common functions of the management are organizing, planning, controlling and directing. Management accounting is helpful for everyone performing these functions through the following techniques:

Provides data: Knowledge of Management Accounting is an important resource for planning management. The documents and accounts store a large quantity of data about the past progress, which are important for making future forecasts (Horngren, Datar and Rajan, 2015).

Modifies data: The accounting data needed for making managerial decisions is compiled and classified properly. For instance, figures of purchase representing different months may be classified with the aim of knowing the total purchases made during a given period in terms of product, supplier, and territory.

Evaluates and interprets data: The accounting data is evaluated in a meaningful way for effective decision-making and planning. To this end, the data is reported in a type of comparative form. Ratios are then calculated and possible trends are projected.

Serves as a means of communication: Management accounting offers a means of communicating the management plans of the company upwards, outward and downward by the organization.

Initially, it implies the identification of the consistency and feasibility of the different segments of such plans. At the later stages, it ensures that all parties involved in such plans (which have been agreed upon) are informed of the roles they have to play in such plans (Mongiello, 2009).

Facilities control: Management accounting facilitates the translation of given strategies and objectives into specific goals for accomplishment by a given time and also secures an effective achievement of such goals in a very efficient manner. All of this is possible by a control on the budget and standardized costing which is a very vital aspect of management accounting (Ahrens and Chapman, 2006).

Uses Qualitative information: There is no restriction of management accounting to use financial data alone for helping the management in making decisions as it allows use other (intangible) information. Such information may be gathered from statistical compilations, special surveys and engineering records.

Cost accounting and management accounting

The aim of managerial accounting is to provide relevant information to the managers to enable them make the most appropriate decisions, whereas financial accounting offers information to parties that are not within the organization (Drury, 2015). Normally, any production-in-progress or unsold finished goods is never added to the total costs of sold goods which are compared to the total revenue from sales in a particular period. In any organization that produces a wide range of products or services, it will be important in order to assess the stocks to divide the expenses on each product or service (Davila and Foster, 2009). Costs are shared on each of the products depending on the financial accounting needs, in order to share these costs over a given time frame, between the cost of sold goods and stock (inventory).

The primary aim developing Cost accounting is to provide such information (stated in the preceding paragraph). Company owners as well as executive managers adopt the production costs established for financial accounting for making decisions. In the 1950s, there was a switch of emphasis from the external users to the internal users of data from cost accounting, which resulted in the cost data utilized by the management to be gathered in a way different from the way the data used for financial accounting is collected (Sahay, 2003). A new type of accounting has emerged from this type of accounting-managerial accounting.

Presently, distinguishing between managerial accounting and cost accounting is quite possible. Managerial accounting avails adequate information to employees in an organization to enable them make the right decisions for important managerial activities like control decisions and planning, while cost accounting deals with the aggregation of all costs used for evaluating stocks to meet all external reporting requirements.

Cost accounting employs all accounting procedures that relate to taking records of all expenditure and income as well as preparing periodical reports and statements with focus on ascertaining and controlling the costs. It is, therefore, the official mechanism to determine and ascertain products and services costs. Conversely, management accounting involves gathering, analysis, interpretation, and presentation of all information on accounting that the management considers useful (Ittner and Larcker, 2005). It has close association with management control, which includes the plan, execution, measurement, and evaluation of the organizational performance.

Therefore, management accounting heavily draws on data from cost and other relevant information obtained from cost accounting. Today, on a general note cost account is considered to be distinguished from the supposed internal or management accounting due to the fact that it serves multiple purposes. However, it is possible to distinguish between management accounting and cost accounting in one very vital respect. When compared to cost accounting, management accounting has a much wider scope. Cost accounting primarily deals with data from cost while management accounting on its part deals with the consideration of both revenue and cost (Ittner and Larcker, 2005).

Management accounting is among the most notable accounting information systems, which covers aspects like cost accounting, financial accounting, and every other aspect of financial management. However, it will be wrong to consider it a substitute for any other accounting function. It involves an unending process of cost reporting, financial data and all other important data in an informative and analytical way to management. Since cost accounting and management accounting are complementary in nature, we should not be much concerned with their boundaries. In absence of a suitable cost accounting system, management accounting will most likely become insignificant (Clinton & Van der Merwe, 2006).

Conversely, the management accountant cannot make use of cost data effectively except when it has been conveyed to him in a very meaningful and informative way.

The aspect of management accounting that takes care of bookkeeping is a very useful tool for controlling cost in a small business. It acts as a facilitator for keeping a permanent record of costs incurred in running the business. The reliability and adequacy of such accounting information as contained in the business records concern are relevant for both effective planning and control. For example, the function of record-keeping may be seen as a necessity for making very effective decisions on pricing, if prices are set depending on full-cost plus mark-up, it is important that one should have a verifiable information on the real price of the product on sale. Likewise, even when market-adjusted prices or market prices are adopted, it is also important to keep a record of real costs with the aim of determining the profit margin of the company. Obviously, the importance of correct data influencing marginal pricing decisions is quite evident (Davila and Foster, 2009).

Using standard cost is known to come with the advantage of imbibing a more cost-conscious spirit in an organization. Standards help in determining cost variances. In order to determine possible explanations for this deviation, it is possible to investigate unfavorable variances (Clinton et al., 2011). In this way, it is possible to detect problem areas and deal with them expediently. Nevertheless, the advantages of standard costing system, must at all times, be weighed against the cost of creating it. However, the average costs of instituting and running such a system for a small firm like a local bakery may be somehow prohibitive.

Application of Management Accounting in Management Functions

Taking the functions of the management process into consideration, managerial accounting plays very vital role in helping the managers run their organizations very efficiently, with regards to any of the following functions (Horngren et al., 2015; Drury, 2015).

Management functions

Description

Managerial accounting

Planning

– It is possible to do the planning process on both short-term or long-term; long-term planning takes care of the centralization of the expectations of the management in the future, for about 3-5 years, or longer;

– afterward, long-term plans are changed in urgent needs and in depth plans in the form of a yearly budget.

– help create future plans, making accounting information available used in the process of making, about the products that should be sold, on which market and at what price, and assessing suggestion for capital expenditure.

– plays a very vital role in the entire short-term planning process.

– offers data on past results could especially be useful for future performances.

– creates procedures for budget (planning) and organizes, coordinates and schedules short-term plans on every business section ad ensures there is a harmony among the schedules.

– integrates the different plans into one common plan for the entire business (the master budget), and submits the plan to the top management for approval.

Controlling

– comparing achieved and planned function, so that differences in the original plan can be easily recognized and corrected.

– is functional for the whole control procedure since it draws up reports on performance that measure up the actual budget to the budgeted revenue for every one of the responsibility centers.

– managers are sternly warned against engaging in specific actions that are not in line with the plan

– aid the control activity providing instant action plans and recognizing challenges.

Organizing

– creates the inner frame in which the necessary actions must be undertaken and assign who will execute them

– needs a clear description of executive tasks and positions of authority

-entails delegations

– sectors are linked in a ladder of official structure for communication (vertically) and an employee relationship (horizontally).

– recognizing the organizational structure elements more essential and relevant for suitable operation of the management accounting system makes it possible for the preparation of an in-house system of reporting for this arrangement and recommend a more suitable organizational structure.

– while, the organizational structure deals with authority, duty and proficiency to ensure real performance, managerial accounting designs and implements accounting system for further definition and strengthening of these connections.

Communicating

– institution and sustenance of a well-organized communication and an effective reporting system.

– the reports on performance organized by the accountants convey vital information to the manager, let him see his managerial skills and highlight all issues that need more in depth examination by the “administration by exemption” activity.

Motivating

– controlling human actions to enable the participants identify with the organizational and make decisions in line with such goals.

– an efficient manager is able to get his subordinates motivated to enable them achieve the established objectives by the higher management.

– both the budgets planning and performance reports that are written by the accountants play a significant role in getting the organization staff motivated.

– the budgets are targets that intend motivate the managers to reach organizational objectives.

– performance reports aim at motivating the performance of individuals, by communicating performance information associated with the targets

– the accountant contributes in staff enthusiasm by providing important support in identifying areas that have potential managerial challenges and highlights such issues for detailed examination.

Conclusion

It is vital to acknowledge the differences and to differentiate between three major concepts: cost accounting, financial accounting and cost accounting. Every good manager is expected to know the importance of each of these three concepts. It must be noted that managerial accounting is a very complex process that managers use to make decisions with the aim of achieving the objectives of the organization. Thus, it is important to understand how this procedure affects each of the management functions: planning, organization, communication, control, and motivation. It has been clearly established that the main role of the management accounting in any organization is to give support to all information requirements of the management. The type, structure, size, and ownership form of any organization will influence the role of the management, and therefore, determines the complexity of management accounting. However, the organizational size may alter the degree of sophistication or formality with which the act is performed, or the amount of resources to be devoted to management accounting.

However, the management accounting act remains mostly unchanged. Managerial accounting plays a very vital role in the entire management process, mostly in making providing necessary information to all internal users (persons inside the organization). Without adequate understanding of this ideology, managers will remain uncertain about the results gotten from the process of decision-making.

References

Ahrens, T. and Chapman C.S. (2006). “New measures in performance management” in Bhimani, A. (ed.) Contemporary issues in management accounting. Oxford: Oxford University Press.

Clinton, B.D. & Van der Merwe, A. (2006). “Management Accounting – Approaches, Techniques, and Management Processes.” Cost Management. New York: Thomas Reuters RIA Group.

Clinton, B.D., Matuszewski, L. & Tidrick, D. (2011). “Escaping Professional Dominance?” Cost Management. New York: Thomas Reuters RIA Group

Davila, A. and Foster G. (2009). “The adoption and evolution of management control systems in entrepreneurial companies: evidence and a promising future” in Chapman, C.S., A.G. Hopwood and M.D. Shields (eds) Handbook of management accounting research, volume 3. Oxford: Elsevier.

Drury, C. (2015). Management and cost accounting, 9th edition. London: Cengage.

Horngren, C.T., Datar S.M. and Rajan M.V. (2015). Cost accounting: a managerial emphasis. Harlow: Pearson Education.

Ittner, C. and Larcker, D. (2005). “Moving from strategic measurement to strategic data analysis” in Chapman, C.S. (ed.) Controlling strategy: management, accounting and performance measurement. Oxford: Oxford University Press.

Mongiello, M. (2009). International financial reporting. BookBoon.com.

Sahay, S.A. (2003). Transfer pricing based on actual cost, Journal of Management Accounting Research 15, 177-93.

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