MANAGEMENT ACCOUNTING
Introduction
Management and financial accounting provide platforms for an organization management to provide informed decision and policies. Organization management uses the budget as the accounting tool in formulation and allocation of resources in different organization activities. The managers are the custodian of the budgets under the management and financial accounting. Financial statement and records provide viable financial data that helps in organization management especially in decision-making. Therefore, the study focuses on the management and financial accounting and expounding on objectives of the budget in an organization. The study will also provide the need of using variance analysis in organization management and highlighting the different examples of variance.
Management accounting is defined as the provision of decision making that involve both financial and nonfinancial issues in the organization. This is one of the accounting professions that cover management decision-making through the provision of financial data to advise the organization on development . Management accounting assists in the formulation and implementation of a viable strategy for an organization. The decisions depend on the financial reports and interpreting the organization status depending on the financial statements and records. The management makes the decisions that suit the organization in developing strategies that seek to improve performance.
Financial accounting covers summary, analysis and reporting financial data and financial transactions regarding the organization performance. It consists preparation of the financial reports and statements that are made available to the organization management and other stakeholders for decision-making . Financial accounting comprises the entire system that organization depends on in monitoring and controlling inflows and outflows being assets, liabilities, revenue, and expenses. The main role of financial accounting is the preparation of the financial reports such as income statement and balance sheet records that are used by the investors, suppliers, management and tax authorities among other stakeholders.
Organization investing in the latest software of management accounting and financial accounting helps in boosting operations and performance. The latest software enables the organization to improve its internal operations through analyzing financial data. The latest software is efficient, effective and reliable as they use the data in producing a different set of required results. Management accounting personnel uses these financial results in strategizing on the organization development and performance improvement. Furthermore, the financial accounting depends on the latest software in the development of financial statement and record. Therefore, the software simplifies the accounting role for both financial and management disciplines.
Cost classification and evaluation
Different classifications of organizational cost include the following;
These types of classification of costs help in organization management and decision-making. It is essential for the organization to consider a variety of costs while developing strategies and policies.
Discussing the objectives of preparing budgets
The objectives of preparing budgets to include;
Planning: organizational management, managers are supposed to have a detailed plan that enables in the implementation of both long-term and strategic plans. The budgeting process encourages organization management in planning for the future operations, ensuring the existing strategic plans are refined and finally, enabling the managers in responding to the rising and changing issues. Budgets encourage the management in anticipating any arising problems and ensuring the managers provides reasonable decisions and policies.
Co-ordination: Budgets facilitate coordination that allows different actions of the organization to be consolidated into a common plan. This compels the organization management in examining the relationship that exists among the organizational branches when making decisions and policies in conflict identification and resolutions . These conflicts that are solved by budgeting include manufacturing setting whereby the purchasing manager buying in bulk targeting large discount and production manager avoiding large stock levels. Therefore, with the help of budget, the organization management is in a position of reconciling all the differences that are experienced.
Communication: in ensuring budgetary compliance, all the management arms in the organization are supposed to have a clear understanding of their roles. This helps in budget implementation and managers becoming accountable for their decisions regarding the organization operation. Senior managers use budgets in communicating the organizational objectives down the management chain and ensuring the juniors understands and coordinate to attain organization objectives . The budget preparation procedure and action improve communication among different stakeholders in the organization. Participation in budget preparation and the setting is usually extended to the subordinates in influencing the figures regarding targets.
Motivation: existing budget provides motivation to the organization management to perform to achieve the set objectives. The standards that are set during budget preparation motivate the managers to improve their performance. Therefore, it is important to involve managers in the budget setting process to have a full understanding of budget as a tool to manage their departments.
Control: organization management uses the budgets in controlling all the activities being undertaken. In different departments, managers use the budget as the toll to control departmental activities that they are responsible for handling. Through the analysis of variance, the managers are in a position of identifying costs that do not conform to the organizational long term plan and hence performing appropriate alterations. Furthermore, the management identifies inefficiencies easily and hence performing budget deviation.
Budgets act as controlling mechanism of the organizational resources through ensuring they are properly utilized. This is done by comparing measured resources at a given period with the budgetary expectation to the specific period. The organization management uses this controlling mechanism to all measurable resources and organization activities to improve the performance and productivity.
Through the budgetary control, the organization management highlights variations that arise from expected outcome and hence taking appropriate remedial actions. This is a constant monitoring process that is accompanied by continued updating and amendment through receiving operational feedback from departmental managers.
Evaluation: using the budget as an effective tool, it enlightens and informs management on organization performance regarding meeting the budgetary target. The managers are in a position of setting policies that aim in meeting set targets.
Providing examples for operational budgets
Operational budget is defined as the detailed plan for estimating the organization income being expected through deducting estimated expenses in a short-term period preferable one year. It is a combination of known expenses, the estimated future costs and expected yearly income. The reason of having estimated expenses and revenues is that operational budgets are computed and completed before the accounting period .
The examples of an operational budgets sales budget, manufacturing or production budget, administration budget, overhead budget, and labor budgets. These operational budgets are prepared separately with the aim of creating a plan in different areas or department in the organization.
Standard Costing and Variance Analysis
Standard costing is defined as the process of replacing or substituting actual cost with expected cost in accounting statement and then recording the periodic variances. This variance is obtained from the difference between expected and actual costs. Variance analysis is considered as an important segment in standard cost accounting whereby it breaks down all the variations that exist between actual cost and standard costs. These variances are obtained from diverse components such as material cost variation, production cost variation and labor cost variation among others . This helps the organization management in understanding the reasons for having different costs from the expected or planned and hence taking appropriate corrective actions.
In management accounting, variance analysis provides the difference that exists between budget, plan or standard costs and the amount of actual outcome in both costs and revenues. Variance concept is intrinsically connected to the planned and actual outcome. The analysis helps ion determination of the existing differences and connecting to the organization performance and productivity.
Types of variance
Two categories are used to define types of variance that are effect and nature of underlying amount.
Under the effect of variance, favorable variance, and adverse variance are experienced. Favorable Variance is provided or achieved when the actual results are indicated to be better than the expected outcome, and it is denoted by parentheses letter F that is (F). On the other hand, the advance variance is described when the actual outcome worsens than the actual plan or results. It is also known as unfavorable variance and denoted by parentheses of letter U or A that is (A) or (U).
Under the nature of underlying amount, the user of the variances information helps in determining the type of the variance. There are three categories of variances that are variable cost, fixed production overhead, and sales variances. Under the variable cost variances, it is subdivided into the direct material, direct labor, and variable production variances.
Variance Analysis and management accounting
In management accounting, variance analysis is used as the budgetary tool control as it helps in evaluating the organization performance. The managers consider the difference regarding budgeted, planned and standard amount from the actual outcome or amount incurred. The variance analysis explains the variance difference between actual costs and standard costs that are experienced and allowing good output . The difference in material costs is subdivided into the prices of material and material usage variances. Rate and efficiency variances can be obtained from the actual direct labor and standard direct labor costs. Furthermore, the difference that exists in manufacturing overhead is categorized into spending, efficiency plus the efficiency variances. Variance analysis provides management with appropriate managerial information to understand and realize the present or current costs and hence taking control measures for future costs.
Organization management requires clear variance information in focusing on the future production and performance o the institution. Every department has to consider the budgetary allocation and exercising the variance analysis to control the costs of production. The organization management depends on with the variance outcome whereby they managers make an informed decision regarding development . The budget process tends to guide the management in policy development and allocation of resources depending on expected output. Therefore, it is essential as the manager to understand the application of variance analysis and incorporating to the decision-making and policy development.
Conclusion
Management accounting depends on with financial accounting in analyzing the organization performance, productivity, and decision-making. The organizational management has the role of using appropriate mechanisms in managing all the activities being undertaken by the organization and ensuring they meet standards and set targets. Budget is the management tool that helps in analysis of the resources allocation within the departments depending on the activities of the organization. Departmental managers are supposed to use the departmental budgets allocation in achieving their set targets in production and performance improvement. The objective of the budget is ensuring proper planning and control of the resources within the stipulated platforms. Furthermore, budgets tend to motivate the managers and employees in working toward achievement of the obligations and set targets as they took part in the budget preparation process. Standard costs and variance analysis provide higher understanding of the expected outcome whereby the managers’ uses variances to achieve the actual results. Favorable Variance provides positive results and hence actual outcome surpasses expected outcome. Therefore, managerial accounting is a broad discipline that equips organization management with required skills and expertise in decision-making and policy formulation on the organization interest. Furthermore, managerial accounting contributes to improving in organizational production and performance in both short and long run through the budgetary tool.
Bibliography
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