Various business traits determine the techniques that are used in managerial accounting decision-making processes. For example, during a business start-up phase, management accountants may deploy budgeting and capital investment techniques. However, in case of a business that is in the mature phase, such accountants may depend on cost management and quality control to make their ultimate decisions.
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However, irrespective of the technique, the decisions should enable an organization to achieve short-term and long-term goals and objectives. Hence, managerial accounting is an important aspect of the decision-making process within any organization. This section provides an overview of managerial accounting.
Defining Managerial Accounting
Management accounting is an important tool for making decisions in an organization. The Institute of Certified Management Accountants (ICMA) defines management accountants as people who deploy their proficient knowledge and talents to prepare and present financial information in a way that makes it possible to arrive at requisite decision on policy construction, development, and control (Clinton & Anton, 2006).
Hence, management accounting refers to the provision and deployment of accounting information by various organizations’ managers to arrive at subtle decisions that can permit them to advance their management and control functions.
Role of Managerial Accounting and Management Accountants in an Organization
To arrive at an appropriate decision, it is important for decision makers to have a realistic prediction of deals, outlays, cash flows, and procurement net margins among other costs. With such forecasts, Porteous and Tapadar (2005) assert that managers make important decisions concerning the future of an organization, including, “decisions on the level of employment, investment, salaries, sales, stock levels, debtors and creditors, and overdraft requirements among others”(p.72).
Indeed, management accounting is responsible for making such forecasts. Accounting management professionals act as strategic partners with the organizations they serve (Sebastian, 2000). They also act as risk management partners. Risk management entails developing practices and frameworks for risk documentation, quantification, risk alleviation, and reporting in the attempt to attain organizational objectives and goals (Sharman, 2003).
As performance managers, management accountants focus on the development of business decisions, which make it possible to increase an organization’s performance.
Ethical Issues/Concerns in Managerial Accounting
Management accountants have the responsibility to observe various ethical issues or concerns in their work. The Institute of Management Accountants prescribes proficiency, concealment, reliability, and believability as key ethical issues of consideration by all financial and accounting managers.
Credibility requires accounting managers to communicate objectively and fairly. They should disclose important information for enhancing users’ understanding of reports, recommendations, and comments that are presented to them (Atrill & McLaney, 2007). Integrity encompasses an obligation for refusal to participate or collude in activities that discredit the accounting management profession.
For example, they should not engage in subversion or the realization of ethical objectives and illegitimate goals of an organization. The ethical concern of confidentiality implies the obligation of not disclosing confidential information without authentication from the owners.
Any manager who wants to acquire private information must seek a legal permission to do so. Competence is an aspect that requires accounting managers to perform their duties in compliance with regulations, technical standards, and the relevant laws and regulations that guide the profession.
Managerial Accounting Techniques and their Application
Decision-making requires budgeting, which is a critical tool that is employed in managerial accounting to facilitate planning. Apart from planning, budgeting also facilities control. For example, in an attempt to cope with the challenges of the previous recession, organizations use budgeting in their planning for various reasons.
For instance, planning involves the establishment of frameworks on which decision-making is pegged in the quest to achieve organizational goals and objectives. Indeed, Porteous and Tapadar (2005) confirm how many organizations deploy budgets in the evaluation of divisional managers’ performance. They also use budgeting to tie bonuses to levels that do not go beyond the set goals.
Investment appraisal involves the evaluation of the attractiveness of any investment proposal. It deploys various techniques such as “the average rate of return, payback period, internal rate of return, and the net present value among others” (Clinton & Anton, 2006, p.788).
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In this context, managerial accounting finds application in an organization as a tool for profitability monitoring. Elements of investment appraisal are crucial in forecasting organizational performance. For example, using break-even analysis, managerial accountants can precisely determine the quantities that are necessary for sale to ensure sustained performance without necessarily making profits.
In investment appraisal, the ability of an organization to break even within the minimal time is crucial. It gives a rough approximation of the time that the business will start making profits (Sharman, 2003).
Cost management is a technique that is aimed at reducing an organization’s costs to achieve optimal profitability. Cost volume profit analysis (CVP) exemplifies how the cost management technique can be applied in an organization. CVP is an essential component of managerial cost accounting. It aids in making interim decisions and elementary instructions.
During the times of economic hardships, the focus of any organization is mainly on covering all its costs without necessarily making profits to ensure that its operations are not brought to a halt (Sharman, 2003). CVP defines the point at which the revenue equals the total expenses. The point forms the basic tenet of a detailed analysis.
Managerial accounting techniques are used as tools for making critical decisions. This section provides examples of how managerial accounting theories and principles are applied in the business world. However, its focus is on only three theories and principles, namely cost management, budgeting, and quality control.
Several techniques may be employed in cost management based on the phase and status of the operations of a given business entity. For example, for an organization that is experiencing operational hardships, for instance, during the recession, management accountants deploy cost management approaches to minimize costs.
The goal is to ensure that companies do not become bankrupt. A service sector organization such as a hotel may illustrate well a real world case of the applicability of the principle of cost management in management accounting. During recessions, organizations experience reduced business profits due to the prevailing minimal economic activities, household incomes, inflation, and employment opportunities.
Indeed, one of the most pronounced impacts of the recession on service sector organizations such as hotels is the declined sales due to the decreased consumer spending (Friedl, Hans-Ulrich, & Burkhard, 2005). A decrease in sales means that hotels need to adjust their costs if they have to survive the recession. Therefore, they need to make sales that are sufficient to service all their expenses (Sharman, 2003).
This scenario underlines the applicability of the CVP under such circumstances. The formula that is applied in managerial accounting for CVP analysis is:
px = vx + FC + Profit
The value ‘p’ denotes the price for each item while ‘v’ is flexible cost per unit. The value ‘x’ denotes the produced units, which have been sold. FC is the total stable rate (Atrill & McLaney, 2007). From this formula, it is clear that apart from determining the break-even point, the CVP defines the appropriate sale mixes.
It also helps in determining the variable charge per item, the unit selling prices, the level of activity, and the total stable price. To this extent, cost management through CVP constitutes an important tool for making key decisions for financially struggling organizations.
The case of Southwest Airlines demonstrates the application of the budgeting technique in management accounting. Established in 1967, Southwest Airlines is a United States major air transport company. It also stands out as one of the largest airlines in the world whose main current success strategy is driven by the low-cost operational strategy (Garrison & Keller, 2005).
As of August 2012, the company employed more than 46000 people. Within the same period, the company recorded about 34000 flights on a daily basis. In mid-2011, the company recorded having carried majority of the US airlines domestic passengers. In fact, at the beginning of 2013, Southwest Airlines had a schedule for flights in 79 destinations across 39 States.
The success of the company in its competitive industry may be explained by different factors such as the effective financial management through budgeting controls. At Southwest Airlines, budgeting constitutes an important aspect of the planning process. It outlines the company’s financial plan.
The company’s management accountants have the responsibility of developing or participating in the development of a budget that incorporates aspects of the ongoing operations of the company, corporate financing, and any expenditure plans. The operational aspect defines various expected sources of the organization’s proceeds and costs.
Capital budgeting at the company entails the contemplation of the disbursement of the financial resources in the procurement of equipment and/or establishment of new facilities, including the purchasing of new planes and cargo-handling equipment.
Financial budgeting involves evaluating Southwest Airlines’ anticipated cash shortages. This strategy facilitates the company to meet its lenders’ obligations and requirements while at the same time demonstrating the necessity for extra financial support.
Managerial accounting is critical to the provision of quality and quantitative data in the financial and operational performance. At the Toyota Company, the tool is used for installing controls and/or planning for operations in a bid to support decision-making at the company.
At the Toyota Company, some of the most important decisions, which management accountants have inputs on relate to quality control and continuous improvement. The quality control measures for the company include waste elimination and a reduction of inventory levels.
Managerial accountants for the Toyota Company embrace quality control, waste minimization, reduction of production complexities, and transparency. Increasing the competitive advantage of the company through quality control rests on the need to satisfy customers.
According to Toyota (2013), this goal is accomplished by, “fulfilling customer demand efficiently and promptly by linking all production activities to real marketplace demand” (Para.2). Its processes are finely tuned so that an assembly sequence only uses only the demanded materials, which are of the right quality and quantity.
Through forecasting, which is a function of managerial accounting, the Toyota Company can predict the anticipated sales that can yield certain profitability levels. For instance, based on the 2012 financial accounting information, the company anticipated regaining its title as the globally leading automaker by raising its sales by 2 percent.
This section has provided working illustrations of how managerial accounting principles have been applied in various corporations. The paper has shown how cost management can be applied in the hotel industry. Southwest Airlines has been used to demonstrate how the concept of budgeting is utilized. On the other hand, the Toyota Company has succeeded in adopting the concept of quality control.
Atrill, P., & McLaney, E. (2007). Accounting and Finance for non-specialists. New York, NY: Prentice Hall.
Clinton, D., &, Anton, V. (2006). Management Accounting – Approaches, Techniques, and Management Processes. Cost Management, 5(3), 786-793.
Friedl, G., Hans-Ulrich, K., & Burkhard, P. (2005). Relevance Added: Combining ABC with German Cost Accounting. Strategic Finance, 7(2) 56–61.
Garrison, G., & Keller, H. (2005). Case Study: Southwest Airlines. New York, NY: Prentice Hall.
Porteous, B., & Tapadar, P. (2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. New York, NY: Palgrave Macmillan.
Sebastian, N. (2000). Taking Control of Costs. London: Prentice Hall.
Sharman, P. (2003). Bring on German Cost Accounting. Strategic Finance, 3(2), 2–9.
Toyota. (2013). Investors: 2012 Financial Results. Retrieved from https://global.toyota/en/ir/financial-results/