Introduction
Managerial accounting commonly referred to as management accounting deals with analyzing and making use all the essential accounting information by the management in making informed business decisions. The accounting data used provides the premise on which the decisions of the management will be based. A more thorough definition has been provided by the Chartered Institute of Management Accountants (CIMA). In its definition, CIMA states that management accounting is the discipline that employs identification, determination, analysis, preparation and use of accounting data in planning and executing strategies that will ensure proper use of company resources to attain the goals of the organization . Ideally, each professional body in the field of business or accounting has its own definition. However, there is consensus that managerial accounting is the use of accounting information by management in decision making.
In general, management accounting plays three important managerial roles in the organization. Firstly, managerial accounting is vital in strategic management of the company and determining the direction the company will take in order to attain its goals. Secondly, managerial accounting seeks to optimize the performance and daily running of the organization. Finally managerial accounting contributes to frameworks and policies that help the organization to mitigate risk. It is through such cost management and estimations that will help management determine future trends of the business environment (Hafeezrm, 2009).
Fundamentally, managerial accounting differs from financial accounting in many aspects. Firstly, managerial accounting is mainly concerned with solving future problems and challenges that may face an organization. Managers use accounting information to forecast on future cash flows and expenses and use such forecasts to make decisions regarding on how to run the organization. On the other hand, financial accounting is only concerned with recording historical events of the organization.
The second difference with financial accounting is that management accounting is a model based on some level of abstraction. This is to imply, the kind of result arrived at is based is based in some ideas and not cases. Conversely, financial accounting is based on is based on actual facts and data.
While financial accounting is intended to be used by state regulators, shareholders, tax agents and creditors, managerial accounting is meant to be used by the management only. In this respect, the managers don’t have to provide any proof of the method used to come to a decision. Instead the accounting process is commonly confidential and kept within top level management only. It is not common practice to inform the public strategies used in decision making .
In the past, management used a method known as Cost Accounting in evaluating future business activity that would affect the organization. Geense (2010), explains that cost accounting is a method used to evaluate the expenses which the organization faced in doing business so as to offset that cost from income in order to report profits. Use of cost accounting analyze company costs that would appear in financial statement requires that the method follows the generally accepted principles of financial reporting. This limits the extent to which managers can use cost accounting in making decisions since cost accounting is only focused on inputs directly related to output and sales volume.
This methods is still used by some manufacturing firms however, there are basic variations in the method it is used. To suit other business, the variance analysis is used in conjunction with other techniques such as lifecycle cost analysis. The lifecycle cost analysis is best used for project that is implemented in a sought of lifecycle. For instance some projects take several phases such as initiation, design, execution, testing and completion. Thus variance analysis would compare the actual cost at each stage with the budgeted cost. A mitigating variance is added to the actual cost to keep the proper cash flow.
Managerial accounting also involves Activity Based Costing (ABC). This model of costing appreciates the fact that in modern processes and the associated cost are determined by vital ‘activities’ in the organization. For instance in a factory, the production runs per day or the instance in which production equipment is idle determine the level of output. In this technique, cost saving is not limited to savings in raw materials and labor costs instead most savings is done by optimizing these vital activities. Limiting equipment idle time and break downs will help in producing more output and in essence saving cost. Activities considered found to be key in increasing production are termed as cost drivers.
Other Managerial Accounting Concepts
There are other concepts that have been developed in management accounting. These include Grenzplankostenrechnung (GPK) developed by the Germans which has generally been practiced in Germany for several years. This technique utilizes marginal cost in evaluating operational costs. Other techniques include lean accounting technique. This technique argues that the traditional method of simple cost accounting is appropriate for business dealing with mass production. It argues, in cases of mass production, company’s cost is directly related to the cost of raw material of the business. This technique was successfully tested by the Toyota Corporation in its production system .
The lasted of innovative techniques used in the market is the Resource Consumption Accounting (RCA) technique. This method is define as the dynamic and integrated method guided by principles of the organization to provide comprehensive management accounting information necessary to aid the decision making process. This method was introduced in 2001 and has since been developed to be a reliable managerial accounting technique.
It is interesting to note the above discussion seems to be veered towards manufacturing businesses only. However, management costing is a methodology applied in all fields. For instance, banks and financial institutions do not use raw material in which to apportion cost of doing business. Banks in ascertaining cost refer to the interest rate at which banks will pay their financers. Banks get the money which advance to customers from deposits and other banks. The monies which the banks hold in deposits earn an interest rate. In this kind of business, the cost of operation is deemed to be this interest rate that bank pay to its financers. Therefore managers need to estimate the cost of interest so as to establish the interest they in turn charge on loans the bank advances. Such kind of cost appropriation is referred to as transfer pricing .
Besides, It is important to note that since the introduction and penetration of technology, management paradigms have shifted to using information system that aid managers in the decision making process. Management information systems use people, technology and information to analyze the operations of the company and assist the management in running the organization.
There are several types management systems used in management accounting today. One of these systems is referred to the management information system, which simply analyses all the data in the data in the company and provides a summary of the state of the company (Hafeezrm, 2009). The other kind of management system is the decision support system and the executive support system. While the decision system is used by the middle-level management in making decision concerning daily operation o f the organization, the executive support system uses more detailed information in determining long term decision affecting the organization. The executive support system is used by top level management.
Conclusion
In conclusion, managerial accounting is a wide field. Techniques used in decision planning and execution of resolutions are quite varied. Managers are advised to make good use of managerial accounting techniques in basing their decision.
References
Geense, I. M. (2010). Managerial Accounting. Retrieved Dec 1, 2011, from http://www.managerialaccounting.org
Hafeezrm. (2009). Managerial Accounting - Basic Cost Concepts. Retrieved Dec 1, 2011, from: http://hafeezrm.hubpages.com/hub/Managerial-Accounting-Basic-Cost-Concepts
Hafeezrm (2009, Aug). Managerial Accounting-Decision Making: Relevant Costs & Benefits. Retrieved
From http://hafeezrm.hubpages.com/hub/Managerial-Accounting-Decision-Making-Relevant-Costs-Benefits
