Executive Summary
Most businesses when starting are very successful and make very large profits in a competitive business environment. After a while, these businesses end up failing within a very short time of their existence in the market. Most of the reasons are not external factors but internal factors. The most commonly cause of failure to this business that start successfully and end up failing is poor cost management. Managers in this kind of businesses only focus on the financial reports in their decision-making and strategic plans of the business. These particular managers fail to understand that financial reports are always historical data that may not reflect on the financial position of the firm. This report is meant to explain the various reasons why using financial reporting in isolation may lead to business failure and to explain why organizations that employs the use of management accounting normally flourishes. The report will also show how costing is done using costing elements from a costing center within six months and how this can help in decision making. The difference between successful and most unsuccessful businesses is because of poor costing technique. It would be important for managers to take a keen interest on the use of management accounting to ensure that they remain competitive in all seasons.
Introduction
Management accounting has very many advantages to those companies that use it. Management accounting involves all management functions such as planning, controlling, directing, communicating and finally motivating. In management accounting managers familiarize themselves with the organizational goals and go ahead to find out how the goals will be achieved. As managers plan they are able to foresee possible future crisis and for that reason, they ensure that proper decision is made to prevent the crisis. Planning also, help managers to establish the best budgeting process for the business.
Management accounting involves controlling functions in the operations of the business. In controlling, managers are able to ensure that the operations of the firm are in line with the plan. Any deviation from the planned process calls for instant corrective measures to ensure conformity to avoid any loss. Control is done in all responsibility centers where a manager has a delegated authority and responsible for performance in that particular responsibility center. When managers find out that there are activities that do not conform to the plan, then it calls for management by exception.
Organizing is another function of management accounting in the business. Management accounting gives the framework for which the activities are to be done and assign the person responsible. Management accountant is expected to provide information on every performance in every segment. Management accounting also ensures that human behavior is influenced through motivation. Assignments are given to the employee with the reward tag on it; whoever meets the target is rewarded. This helps the companies have their employees combine personal interest with the originations interest, which lead to better performance. The final role of management accounting is communication. In all aspect of life, communication is very essential. The same is experienced in the business sector. Management accountants are always the aids of communication in the business by ensuring effective system of communication. This brings into play the Management Accounting Information System (MAIS) whose example is budgetary system. All these roles of management accounting are the backbone of management accounting. In this paper, these roles will help managers make proper and timely decisions end always be ahead of any possible crisis.
Management Accounting a Tool for Cost Control
Most managers who do not have a full understanding of management accounting do not see how management accounting is a tool used in controlling cost. Management accounting has a comprehensive decision making process that is very essential in cost control. The first stage of the seven-stage process is identification of the objective. At this stage management accountant establishes the objective of the organizations to have a guiding aim. The second stage is searching for a course of strategies that can enable the effective achievement of organizations goals. So many strategies are there that can be used to achieve the objective of the firm. At this stage, the management collects as many as they can think. The third stage is to collect information on the identified alternatives. This requires unbiased sources of data that describes the alternatives to ensure that the decision on selection become objective. With full information, the managements are to select the best alternative that will maximize the objective of the business. The selected alternative gets to the implementations stage as one of the budgeting process. The management accounting finally compare the actual result and the planed outcome.
While making decision, management accountant always take care of the business environment. Business environment from which the decision can be made is divided into four environment; certainty, risk, uncertainty, and competitive. Management need to understand risky environment and find away to go about it. Risky environment is the environment where uncertainty can occur or may fail to occur but the probability can be used to predict its occurrence. Uncertainty environment is the environment where the risk is not predictable by use of probability. The decision depends on the risk attitude. The competitive is that environment where the action of the competitor influences the decision-making by the accounting managers. The difference in environment provides different approaches by the management hence the control of cost. This environment also has different characteristics of managers. There is a risk seeker type of a manger. This type of a manager that goes for higher risk anticipating high return, without proper evaluation, this may be a very costly venture. There are managers that are risk neutral; they are concerned with the marginal utility of the firm being positive. Risk averse managers are those managers who believe that something bad is to happen to the business and, therefore, does the highest costing. This difference in the risk managers gives the best environment to control the operation of the business and ensure that the least or none is lost. Every environment calls for a different and unique decision that will ensure that even at the occurrence of any uncertainty the business can remain stable. Only management accounting can help in this case and not financial accounting and this explains why most companies survive even the most turbulent uncertainties when other organizations are forced out of business. This explains the role management accounting is playing in the performance of the business as opposed to the commonly used financial information system, which is only meant for external users and not for the management.
Cost Estimation and Forecasting
Management accounting involves estimation of cost and or forecasting of costs. To have a successful or nearly accurate estimation, there must be a step to follow. The first step is the selection of dependent variable, for example is it the cost or the labour hours that the manager wants to estimate? This is the cost to be predicted, and therefore if it is successfully identified then the cost estimate relationship will be achieved. Having selected the dependent variable, the second stage is to select cost drivers. In most cases, cost driver is the independent. It includes things such as machine hours, direct labour and number of orders. Accurate measurement of this cost drivers are key to successful cost estimation relationship. Data is then collected on the relationship between dependent and independent variable. The collected data is then plotted on the graph to establish the relationship. With the scattered points on the graph, the line of best fit can be identified and the relationship is established. The final step demands that the reliability of the relationship of the cost functions.
Cost Estimation Method
Management accountant use various methods to estimate a cost of operation is the business. Understanding these methods will enable the manager to know which method to employee in a particular project. This is because the methods are applicable in different business types. The first method is engineering method this method uses engineering analysis. They are analyses that are based on observations of a given physical quantity and this is converted to cost estimation. The second method is account analysis. This demands that the each expenditure item is to be classified as fixed, variable, or mixed. Average single unit cost is then selected. A high low method is the third one. In this method, cost of two previous periods are selected and the highest level and the lowest level is joined by a line in a graph
Six monthly cost reports
The table shows the cost of various cost elements for the six different months. It is easier to track the cost of every cost element.
The report recommends management accounting to this particular organization.
