Introduction
Managers are constantly making decisions that affect the operations and the bottom lines of the business. Such decisions could include the stocks in which to invest, when to introduce a new product into the market, how to optimize the profits of a firm, how to assign employees to various tasks, and when to venture into new markets. Managers require information to make correct and timely decisions. Managerial accounting and financial accounting are potent sources of the information that managers require when making decisions. Managerial accounting entails the identification, measurement, and communication of the economic information that is needed by managers or other people in an organization to make judgments that are based on information and to also aid in decision making.
Of note is that the economic information in the definition above is operationally defined to include information that is both financial and non-financial in nature. For instance, financial information could include the prices of products in the market while the non-financial information could include the market trends. Accounting information is used by managers for different reasons. Although the concept of decision making is the overarching term, there are various elements of the decision-making aspect in which this information is required. This paper broadens this perspective by identifying the information that managers can derive from financial and managerial accounting systems and how this information helps the management team make decisions. The paper will also explore the techniques that the management teams in making the decisions with the aim of determining which method is the best.
Information from Financial Accounting Systems
Managers can draw different types of information from financial accounting systems. Financial accounting systems provide information on profits. This is achieved by comparing the expenses of the business enterprise with the revenues that emanate from core business practices (Iona-Diana, 2013). The cost accounting is part of the financial accounting and contributes to the generation of accurate information. For instance, cost accounting will exclude the information such as the costs incurred when manufacturing products that have not been sold when generating information on the total expenses. This helps managers get an accurate picture of the profits the enterprise made within a certain production period (Iona-Diana, 2013).
Cost information as part of the financial accounting system also helps to evaluate the costs of production in an enterprise with a diversified product portfolio (Iona-Diana, 2013). This action helps the managers determine the cost incurred in the production of individual products as a preamble for the determination of the revenue from different products. The financial accounting systems can also allocate the costs to the products that have been sold and those products that are still in inventory (Iona-Diana, 2013). By determining the costs of the products that have been sold and the products that are held in inventory, managers can acquire a better understanding of how their production methods affect their products.
Using the information derived from cost accounting, the financial accounting systems can give accurate information of the revenue from the core business practices. Additionally, the financial management system can also give information on the revenue from operating activities as well as the expected revenue from the products that are held in inventory (Iona-Diana, 2013). Managers and management teams can use this information for different purposes in the process of decision making.
Information from Managerial Accounting Systems
Managerial accounting entails the provision of the other information that the management staff requires performing the management functions. The managerial accounting process entails the identification, analysis, interpretation, and presentation of information about the strategies employed by the enterprise (Breuer, Frumusanu & Manciu, 2013). It also entails the identification, analysis, interpretation, and presentation of information about the resource optimization. This relates to the manner in which the organization can use the available resources more efficiently to improve their profits (Crosson & Needles, 2011). It also entails the identification, analysis, interpretation, and presentation of information about the employees. This relates to analyzing the competencies of the employees, their motivation, remuneration, work-life balance, productivity, and the needs for training (Breuer, Frumusanu & Manciu, 2013).
Managerial accounting also entails the identification, analysis, interpretation, and presentation of information about the asset protection and planning. This entails the evaluation of the business assets to determine their value, effectiveness, relevance and use (Breuer, Frumusanu & Manciu, 2013). The evaluation of the assets offers information to the management team that enables them to plan for capital investments and resource optimization. This information could include the effectiveness of the production equipment; a needs assessment to determine what else is required, the operational capabilities, and the sufficiency of the equipment considering the production schedules or operational needs of the business (Breuer, Frumusanu & Manciu, 2013).
Use of Managerial and Financial Accounting Information in the Decision Making Process
As highlighted earlier, managers and management rely on information to make decisions every day; decisions that affect the bottom lines and the direction of the firm. The next two sections highlighted the types of information that are derived from both managerial and financial accounting systems. This information is crucial to the decision-making process in the firm as will be fructified in the review of relevant literature in the paragraphs to follow.
Decision-Making in the Controlling Function
The managers in a firm perform various functions. The performance of these functions us dependent on an active flow of accurate information. One of the functions of management is controlling. For the manager to perform the controlling function, adequately there is a need for the planned performance and the achieved milestones. These two sets of information are provided from the managerial accounting systems. The manager can compare the planned performance against what has been achieved over a given period in the production cycle to identify any deviations (Needles, Powers & Crosson, 2013).
The identification of the deviations helps in the decision-making process. For instance, the decision-making process on what controls to institute in a production process benefits from the review of the performance reports. These highlight the comparison of the actual revenue against the budgeted revenue. Managers can make trims in the production process to reduce the costs of production and operational costs to improve the revenue upwards. Managerial accounting systems also give the managers the progress reports on the production cycles (Needles, Powers & Crosson, 2013).
Decision-Making in the Organizing Function
Organizing is one of the managerial functions that the managers of firms have to perform. The organization functions concern itself with the synchronization of financial, physical, and human resources in a firm to achieve the outcomes outlined in the planning phase. It entails achieving the optimal combination of these resources to not only achieve the planned outcomes but also to make a net gain (Crosson & Needles, 2011). The information from the managerial and financial accounting systems is important for the decision making in the organizing function. The manager uses the performance reports of their human resources to determine the best combination of employees for various tasks. This is based on attributes such as skill sets, leadership skills, experience, and initiative to ensure that different units in the firm have the best combination of the human resources to achieve their targets (Crosson & Needles, 2011).
While not done in isolation, managers also use information from the managerial and financial accounting systems to decide on the best combination of financial and physical resources in the firm. For instance, various units in a firm have different capabilities of revenue generation. Various product lines have different capabilities of revenue generation because of differences in the demand for the products. Using this information, managers will make decisions on the allocation of resources such as personnel, time, firm assets, and also how to combine these resources to optimize the outcomes.
Decision-Making in the Planning Function
The planning function of management is concerned with the development of organizational goals and targets, the future direction of the firm, and means and resources through which the goals are to be met. Information from managerial and financial accounting systems is very important in the decision making in the planning function of management. The information of the performance of the firm in the past financial periods or production cycles is required for planning on the future performance of the firm (Needles, Powers & Crosson, 2013).
The establishment of goals and objectives is a progressive exercise that seeks to improve on the performance of the firm in the past accounting periods. Such data can be used in deciding the products to be produced, how much of the products to be produced, the markets in which the products will be sold, the prices for which the products will be sold, and the distribution channels to be used. Additionally, this data is necessary for the decision making on the capital spending to achieve the set goals and objectives. If the managers decide on increasing the amount of product to be manufactured for a given market, the manager also needs to determine whether the firm has the capacity for the additional production (Needles, Powers & Crosson, 2013).
The information from the managerial accounting system helps the manager to decide on whether capital spending on optimizing the production capacity to cater for increased production. Data highlighting the performance of the firm in the previous accounting periods or production cycles is used by managers to decide on the model for performance in the production cycles and accounting periods in the future (Needles, Powers & Crosson, 2013).
Decision-Making in the Communicating Function
While it is not among the list of management functions, the increased relevance of organizational communication to the performance of the organization necessitates a focus on the use of managerial and accounting information in the decision making on communication. The information contained in managerial accounting systems can be used to determine the effectiveness of the communication and reporting system in the firm (Iona-Diana, 2013). It is important for firms to have both vertical and horizontal communication systems as well as a feedback mechanism. The manager can review the effectiveness of these systems to determine where improvements are needed. Based on the results of the evaluation, the manager can decide the best approach to optimize communication in the firm.
The reporting system in a firm is also important to the achievement of the established goals. The importance of the reporting system is predicted by the need for timely delivery of information from the various units and divisions in the firm (Iona-Diana, 2013). When information is delivered in a prompt manner, it can be acted upon appropriately. Given the importance of the information on the decision-making practices in the firm, there is a need to ensure that the reporting system is efficient. The manager in the firm can make decisions on how to optimize the reporting systems by reviewing information generated from the managerial accounting systems (Iona-Diana, 2013).
Decision-Making in the Motivating Function
The motivating function is also not among the list of managerial functions. However, its inclusion is in recognition of the importance of the human resources in the performance of an organization. The manager has the responsibility to ensure that the employees in the organization identify with the mission, goals, and objectives of the firm. This will ensure that the employees are committed to achieving the performance targets of the organization. The performance and budgeting reports that are generated from financial and managerial accounting systems are significant in the motivation of the employees (Iona-Diana, 2013). They highlight the focus areas, the allocation of resources, and also detail the achievements of the various units in the firm. Additionally, the information from the financial accounting systems helps the managers determine the best approach to motivate their employees. For instance, the manager can review the review the budgets and revenue trends to determine the availability of funds to start an employee reward scheme (Iona-Diana, 2013).
The performance reports also serve as a motivation for the employees. Employees are more motivated when they are aware of how they have been performing in the previous periods. It allows the employees and the leaders of various units to use the previous performance reports as a baseline that can be used to plan for improvements in the performance of the individual employees and the units collectively. This is especially important for employees who are engaged on a contractual basis because their contracts are reviewed base on their performance among other factors (Needles, Powers & Crosson, 2013).
Techniques used by Managers in Financial and Managerial Accounting
There are various techniques that are at the disposal of managers. Managers can use these techniques in management accounting to help in decision making. One of the techniques is financial statement analysis. This technique entails the analysis of balance sheets and profit and loss accounts. The information derived from the analysis of the financial statements gives the management a picture of how the business is growing, the health of the business. The managers can also perform a ratio analysis to get an accurate picture of the financial health of the firm (Kaplan, 2010).
Another technique that managers can use is the decision-making accounting. This is a technique that allows the managers to analyze the various alternatives in a given situation to determine which alternative brings the most profit to the firm. Decision-making accounting benefits from the application of the other techniques on the data derived from financial and managerial management systems. For instance, the managers will compare the costs that are involved in implementing the various alternatives. The managers also use the projected revenues from the implementation of the alternatives (Kaplan, 2010).
Using the information on the revenue and costs, the managers can decide on the alternative that results in the most profit for the firm. Another technique used by managers in management accounting is revaluation accounting. As highlighted before, financial accounting seeks to determine the return on the capital investments that are made in the firm (Kaplan, 2010). This technique entails the re-evaluation of all the fixed assets that are used in the production process. The rationale for this technique is to determine the value of the assets that are employed in the production process to determine the actual return in the investment (Kaplan, 2010).
Managers can also use management reporting as one of the techniques. This is a technique that is especially important for lower and middle-level managers. It entails the use of the information generated from the analysis of the balance sheets and the profit and loss accounts to generate a report that can be presented to the executives of the company. The reports contain information that is relevant to the performance of the various functions of management such controlling and also in the decision-making process. Such information includes an illustrated analysis of the strengths and weaknesses of different operating activities in the firm (Crosson & Needles, 2011).
The reports may also contain information on the various alternatives, their economic viability, estimates of the cost, and projections of the revenue to help the executives of the firm make informed decisions. The reports may also contain an analysis of the financial activities of the firm. This analysis would present information on the strengths and weaknesses, alternatives and their viability, and recommendations on the plausible options for the firm in different situations. This information is also crucial to the various functions of management and decision-making.
Conclusion and Reflection
The fact that the techniques discussed above are not used in isolation makes it challenging to determine which technique is superior to the other. A manager will at times require employing more than one technique to get the insight required for a particular situation. For instance, a lower and middle-level manager will need to perform an asset re-evaluation and the analysis of the financial statements to determine the return on investment during a particular accounting period or production cycle. Also, managers will require the combination of various techniques to perform the decision-making accounting.
Financial and managerial accounting are ways of generating the information that manager need in the daily decision-making in a firm. The two concepts lead to different information. Financial accounting systems will give the managers information to do with the profits and other financial information. Managerial accounting systems provide information that relates to the resource utilization, operational activities and other activities of the firm. The combination of the information from these two systems helps the managers make decisions from an informed standpoint.
References
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Apulensis Series Oeconomica, 15(2): 355-366.
Crosson, S. V., & Needles, B. E. (2011). Managerial accounting. Mason, OH: South
Western Cengage Learning.Needles, B., Powers, M., and Crosson, S. (2013). Financial and Managerial Accounting.
Mason, OH: South-Western. Cengage Learning.
Iona-Diana, B. (2013). The role of managerial accounting in the management process.
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Kaplan, D. (2010). Management accounting: concepts and techniques. Retrieved from http://classes.bus.oregonstate.edu/spring- 06/ba422/Management%20Accounting%20Table%20of%20Contents.htm
