Introduction
Definition of Managerial Accounting
Businesses must implement effective decisions at varying phases of growth through management accounting for a chance of a future. According to an article on the Harvard business Review, businesses mainly go through two main phases of growth: the start-up phase or the mature phase. According to Churchill and Lewis, each of these phases demand and rely on differing strategies that fulfill a need and/or takes the business to the next phase. The techniques used or applied to haul business through these phases are referred to as managerial accounting techniques. The parties responsible for reinforcing managerial accounting techniques in a business are referred to as management accountants. They are tasked with the responsibility of identifying the needs of the business and making strategic decisions that ensure the growth of business. Their responsibility entails budgeting, investment, management and quality control. An ideal management accountant will apply knowledge and make decisions based on the business needs. For instance, a business in the startup phase needs proper budgeting and investment strategies that make economic sense aimed at growth. On the other hand, a business in the mature stage needs to achieve sustainability through cost management practices and quality control.
Role of Managerial Accounting and the Management Accountant in A Business Or
Organization
Managerial accounting entails Identifying – what phase is the business in? – Measuring – what sort of budget will suffice growth? – Analyzing – what sort of investments make economic sense to the business? – Interpreting and Communication information – the business is in the startup phase and will require heavy budget to experience growth and investment in financial instruments a, b and c. These investment instruments could be short term or long term financial instruments. The information available as a result of managerial accounting is used by management accountants for the formulation of alternatives and decisions that endure growth and sustainability of the business. The compound noun ‘management accountant’ comprises of two words: management + accounting. Accounting deals with crunching numbers that provide alternative routes the business can exploit for development. The management bit entails using this information to make financially sound decisions, evaluating the performance of the business and to advice and lead the organization in a positive direction economically. Based on this discussion therefore, the management accountant is tasked with the role of planning, organizing, controlling, advising (communicating) and evaluating the performance of a business.
Ethical Issues/Concerns for the Management Accountant
Management accounts handle sensitive information crucial for planning, organizing, investing and evaluating business performance. There are several models of business that adopt various managerial techniques to excel at each phase of the business. Given the fact that management accountant are at the center-stage of moving an organization from one financial position to another, they are heavily relied on by most businesses and most organizations provide incentives for such efforts. The unpredictable markets and demanding economic market forces compel a business to accommodate pressure. Most people may buckle under pressure and resort to various sub-standard means to achieve set goals. Management accountants can submit to pressure and breach ethical standards for various reasons. Ethical standard dictate the moral obligations of a management accountant in discharging his duties. Take for instance a situation in which an organization needs to acquire more investment for growth of their equities. The C.E.O promises incentives to the management accountant if he/she can achieve that goal. If for instance the expected growth projection was 7% but the financial books read 5%; and if the management accountant inflated the values to win the company more investors and earn himself a bonus, then this represents a serious breach of ethics. Management accountants are required to discharge their duties by abiding to professional ethical standards. Manipulation of financial data can put the company in jeopardy and risk loss of investors and value of equity. As such, they should act professional and employ creative techniques that benefit the business.
Managerial Accounting Techniques and their Application Within A Business Or Organization
Managerial techniques are used by management accountants to further the agenda of their various roles. Take for instance a business in the startup phase – as mentioned and explained at the beginning of this discussion, such businesses aspire for growth. The business will need to acquire assets, a labor workforce and procurement of relevant materials: this is called planning. This means money and the money needs to be used in such a way that it caters for the initial establishment of the business. Marketing the business will also mean an influx of cash. The business will therefore need capital in the initial stages of development: startup phase. The initial investment (capital) will have to be spent wisely: this called capital budgeting. A management accountant therefore enforces the technique of capital budgeting to plan and budget for the needs of the organization in the startup phase: it informs decision making (Pike, R. 1989). Once a plan has been designed to illustrate how the capital will be utilized – the plan has to be evaluated and decisions made on what alternatives to adopt as the final plan. This technique is called decision making and can be used to weigh the cost implications of the alternatives in the plan. At this stage, a management accountant can evaluate the performance of the business and draw projections: this is called standard costing. It is a tool used to show variance between the current values of, say, a good, and the projected cost.
Budgeting
A typical organization earns revenue and has various expenses. Also, an organization also has expenditures and the need to invest. A plan therefore has to be formulated to provide guidance on how to manage these financial dynamics. This plan is called a budget. A budget provides a financial plan that is economically sound and may guarantee benefits if properly adhered to. For instance, Disney theme Park has adopted budgeting practices for several decades and this is one of the reasons why it is one of the most revered parks for nature lovers and kids in the whole world. Most of their procurement processes are carefully defined and sorted out to suit their ends. For instance, in order to ensure a fruitful relationship with most of their procurement companies, these companies have re-aligned their products to suit the requirements of Disney parks all over the world.
Cost Management Techniques
Most businesses are established with a fundamental goal of making profits. It is a fact at the core of their planning decision making and performance evaluations. A typical business entails procurement, production, marketing and sales. The costs incurred due to procurement of raw materials, production of final product and marketing efforts should be lower than the returns made on a sale of good per unit. The net revenue collected, is called profits, and this ensures growth of the business. This practice is called cost management. It is done to ensure the cost of production per unit of goods produced is lower than the cost of final product per unit. A notable company that has advanced the concept of cost management is the coca cola company. The Coca Cola Company was established in the industrial age. It gained popularity over the years and became a global entity. Currently, coca cola drinks are the most preferred soft drinks on the planet. So how did they manage to become a global entity? Coca Cola holdings in the different companies operate independent of each other. They all budget according to the customer preferences in their respective regions. What is remarkable is the relationship between the parent company and these holdings. Coca Cola, has what is called a trade secret: they keep the formula of the initial powder that is used to make soft drinks globally. The various holdings buy the powder from them and use this to make soft drinks. In this manner therefore, the Coca Cola parent company has cut itself from the global roots and thereby cutting off additional expenses such marketing, production (the making of the drink and packaging) and miscellaneous expenses that are bound to arise. The company only controls the powder, thereby effectively managing the cost implications that might arise. They however, get to enjoy a wide multicultural market that enjoys its products. This can also be compared to the Roll Royce Motors Company whose market was affected in 2014. Unlike Coca Cola, Rolls Royce is a motor vehicle company considered royal. Their products are driven by royalty and can only be afforded by the uber rich. However, in 2014, their market was badly affected by a reduction in the sales volume. They implemented cost management by adopting a few practices: they began manufacturing vehicles that could be afforded by rich executives who were excluded before. In order to do this, they began manufacturing standardized vehicle in mass. Rolls Royce vehicles are popular for their hand finishes that make them all unique. However, in order to cut cost, they made smaller vehicles unlike the traditional big motor vehicle they used to make. By venturing into mass production, the cost of production was reduced. This is a classic example of cost management.
Capital Investment Decision Techniques
Capital investment refers to funds invested into the company to advance its objectives. The investment could be long term or short term. The type of investment could also be fixed or movable assets. Take for instance a media house company which is heavily invested in print media. If a new printer that could handle more commercial load of papers to be printed and is faster, the company may consider this investment: decision made based on evaluation of capital investment. If the company acquired this new printer and it furthered their goal of producing more print media: this is a capital investment. The decision to acquire such an asset is based on the long term implications. Capital investment is acquired depending on the stage of business development. This is also where the decision making comes in. If a business for instance is in the startup stages, it will mostly acquire capital investment through venture capital: capital provided by investors optimistic of long term growth of the company. Such companies do not yet possess the kind of traction they need to acquire capital investment in the capital markets. The decision therefore falls to a choice between venture capital and angel investors. A real life example of this can be considered in the Shrimp Taco truck example. If John, a close friend of mine, decided to open up mobile food truck and he lacked the ability to finance the acquisition of paint designs and utensils, he can depend on, us, his friends who have faith in him. He would need utensils to expedite his cooking aboard his truck and a good paint job to attract customers. The paint job has the long term implications of establishing his brand and future popularity. The acquisition of utensils however has short term implications to facilitate cooking aboard the truck. The paint design is also not a fixed or movable asset: rather, it is for establishment of brand which is abstract. If for instance John’s business performed well enough for his to open up several restaurants, then john can acquire capital investment through issuance of equity: that is to say, he can, the organization, give an initial public offer for investment. The size of the portfolio once it is publicly traded should be big enough to facilitate opening of branches in different cities. The decisions made in this case were subject to the stage of development of his business. John made a decision to acquire capital investment from his friends, myself included, in the form of venture capital (Fried, V. H, 1994). The capital investment was used to acquire assets of long term and short term implications. If the business succeeds, then he will be capable of acquiring bank loans – at the maturity phase in the business – to the point of issuance equity.
Conclusion
In conclusion, all businesses – big or small – share the need for managerial accounting practices. Managerial practices entail identifying, analyzing interpreting and evaluating information based on financial data available. Managerial practices also inform the business plan, decision and performance evaluation. Managerial accounting duties are discharged by management accountants. A management accountant makes use of the information provided by managerial accounting practices to formulate a plan for the company, advice the company, organize the company and evaluate the performance of the company. They work in the capacity of advisors mainly in most organizations. Their role is crucial in the development of a company: as such, they must conduct themselves in professional manner that embodies standard ethics.
Management accountants use techniques in the organization that can be of benefit in the long run. Companies can either be in the startup stage or the mature stage. Those in the startup stage heavily rely on budgeting and investment practices to establish the business. A business will decide make use of venture capital to establish itself if it is a startup: like in John’s case. An established business like Roll Royce is publicly traded and can acquire capital investment through issuance of equity.
There are three techniques of managerial accounting practices mentioned in this paper. The first among them, was budgeting: which entails provision of guidance for the allocation of funds as the business develops. The second technique explored in this paper was cost management. A case of Coca Cola was explored briefly in collaboration with Rolls Royce Motors Company to explore the contrast between the two companies in budgeting. Lastly, capital investment decision making skills were explored as a technique of managerial accounting.
References
Anderson, L., & Sollenburger, H. (1992). Managerial Accounting. Cincinnati: South-Western Publishing Company.
DaSilva, J. (2010). CSR Case Studies: Coca-Cola. Retrieved May 12, 2016, from Global Compact Network Vietnam: http://www.globalcompactvietnam.org/upload/attach/coca-cola.case.study.submitted.27-oct-2010.pdf
Eve, C., Stewart, L., Roper, J., & Haar, J. (2011). Sustainability and the role of the management accountant. London: University of Waikato.
Lewis, V. L., & Churchill, N. C. (1983). The Five Stages of Small Business Growth. Harvard Business Review, 1.
Northcott, D. (1992). Capital investment decision-making. London: Academic Press Limited.
Robbins, M. J. (2014). The Most Powerful Mouse in the World: The Globalization of the Disney Brand. Tennessee: University of Tennessee.
Shafer, W. E. (2002). Ethical pressure, organizational-professional conflict, and related work outcomes among management accountants. Journal of Business Ethics, 261-273.
