Posted: May 25th, 2022

Value of Managerial Accounting in an Organization

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.

Responsibilities of the Management Accountants within an organization

In the multifaceted business world that exists today, the managerial accountants like any other posting have to tackle more then one task within an organization. Hence, the two significant roles of the managerial accountant in today’s world are: 1) design, structure and manage the organization’s teams’ activities, and 2) analyze and categorize the descriptions of the types of associations and the level of responsibilities that exist within the organization and forward that to the organization’s administration and financed department with suggestions on where the organization can improve overall.

The above extension or explanation of the responsibility of a managerial accounatant mainly highlights the fact that a managerial accountant has responsibilities not only to the finance department of an organization but also the entire team that is working within the organization. Hence, along with the classification, calculation, assessment, understanding, and transferring all the relevant financial data, the managerial accountant is also responsible for helping the business team:

Customer satisfaction reports and assessments,

The balanced scorecard procedures for the overall sales,

In understanding the finances for the creation of a new good or service,

The factors that channel or guide the business activities metrics, and Research on superior functionality strategies (Johnson & Kaplan, 1987).

It is important to note here that the managerial accounting is different from the basic financial accounting because the latter only helps keeps a record of all financial expenditure or balance while the former helps the business design future financial plans (Johnson & Kaplan, 1987).

It is also very important to note here that while in the 1980s the overall importance of the managerial accounting section wasn’t very high and it accounted for a very small part of the business, with the recent developments however, the managerial accounting sector has grown to be a significantly important process to control and channel an organization’s internal activities through a methodology of strict and through monitoring which makes it an integral part of the management control theory of any organization.

Important breakthroughs in Managerial Accounting

Grenzplankostenrechnung (GPK)

Grenzplankostenrechnung (GPK), as the name suggest, is a German structure. This was developed in the 1950s and it primary task was measuring costs of an organization. The GPK, as it is commonly known, was constructed with the intention of giving the organization an efficient and precise categorization of all managerial costs induced and the methods or formulas that were used to conduct the calculations of the costs. The two most popular translations of Grenzplankostenrechnung are the Flexible Analytic Cost Planning and Accounting (Sharman, 2003) and the Marginal Planned Cost Accounting (Friedl, 2005). Most of the books use notably Flexible Plankostenrechnung und Deckungsbeitragsrechnung as the name for the GPK mechanism (Sharman, 2004; Kilger, 2002).

Hans George Plaut and Wolfgang Kilger were the creators of the concept and mechanism of GPK. The former, an automotive engineer, and the latter, an academic, coordinated towards a similar objective which was to design and implement a structure and process that would classify, present a precise and improved set of data on the overall costs of an organization (Sharman, 2004; Kilger, 2002).

Lean Accounting

The lean accounting or lean companies usually comprise of those companies that employ the Toyota Production System. The term was first introduced in the 1990s and became most popular recently in 2005-6. The lean accounting phenomenon mainly denotes that the conventional and old processes of accounting can only apply to businesses that have a mass production structure and does not necessarily apply with the efficiency to the business activities that exist during the production and marketing phases.

Resource Consumption Accounting (RCA)

The Resource Consumption Accounting (RCA) is another important concept within the managerial accounting domain that first surface in 2000. The universally accepted definition of RCA is that it is a flexible, all-encompassing and thorough structure that allows the administration to make decisions for the success of a project based on accurate and verifiable data. RCA underwent efficient developments in 2001 at the Consortium for Advanced Manufacturing-International (CAM-I). The concept was integrated as part of the Cost Management Section and was consistently polished and tried, for the next several years, through the use of numerous surveys, investigative studies, researches and focus groups. This, consequently, led to the foundation of the RCA Institute which served as the launching pad for the RCA procedure into the corporate and business world.

Transfer Pricing

Managerial accounting is also used very regularly within the banking industry with few basic differences in application from the normal corporate world. Some of the fundamental rules and theories that were developed in the business world are carried through in the banking industry; however, the managerial accounting procedures within a bank are more or less specific and specialized. One of the carried through theories of managerial accounting into the banking industry is the concept of transfer pricing. Transfer pricing basically gives each section of an industry a price value based on how much revenue that section is able to generate in comparison to the costs allocated to it.

Within the banking industry, the transfer pricing concept is used under slightly different dynamics as it helps the administration to decide on the interest rates that the bank allocates to each financial activity or loan. For examples, the managerial accountant in a bank will decide the level of percentage that the businesses will receive from the bank based on the percentage of revenue that they bring forward for the back and/or the percentage of financed that the bank will take from the various businesses that use the bank’s service to give funds or have financial transactions with their customers.

Conclusion:

The paper explained the definition of the concept of managerial accounting and explained its value within an organization. The managerial accountant concept is different from the generalized finance accounting phenomenon because of one basic aspect i.e. managerial account plans the financial expensed and direction of financial endeavors for a company in the near or long-term future whereas the general financial accounting oehenomenon mainly keeps an historical record of all the financial expenses and balances that an organization has made over the years of its existence. Alongside this, some of the other aspects of managerial accounting that make it valuable for an organization include: intelligent use of all financial and tangible resources; construction and efficient practical implementation of the strategies regarding business policies, activities and marketing; strengthening the decision making process; strengthening all internal organizational behaviors, conducting research on customer satisfaction; understanding the finances for the creation of a new good or service, amongst others.

References

Friedl, Gunther; Hans-Ulrich Kupper and Burkhard Pedell (2005). “Relevance Added: Combining ABC with German Cost Accounting.” Strategic Finance (June): 56-61.

Garrison, R.H., P.E. Noreen, ‘Managerial Accounting’, Irwin McGraw Hill, 1999

Horngren, C.T. And G. Foster, ‘Cost Accounting, a Managerial Emphasis’, Prentice-Hall, Inc. 1987

Johnson, H.T. And R.S. Kaplan, ‘Relevance Lost: The Rise and Fall of Management Accounting’, Harvard Business School Press, 1987.

Kaplan, R.S., D.P. Norton, ‘The Balanced Scorecard – Measures that Drive Performance’, Harvard Business Review, January – February 1992.

Kaplan, R.S., D.P. Norton, ‘The Strategy Focused Organization’, 2001, Harvard Business School Publishing Corporation.

Kaplan, R.S. And a.A. Atkinson, ‘Advanced Management Accounting’, Prentice-Hall International Inc. 1989

Kilger, Wolfgang (2002). Flexible Plankostenrechnung und Deckungsbeitragsrechnung. Updated by Kurt Vikas and Jochen Pampel (11th Edition ed.). Wiesbaden, Germany: Gabler GmbH.

Sharman, Paul a. (2003). “Bring on German Cost Accounting.” Strategic Finance (December): 2-9.

Sharman, Paul a.; Kurt Vikas (2004). “Lessons from German Cost Accounting.” Strategic Finance (December): p.28-35.

Value of managerial accounting in an organization

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