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As the CEO of this prestige manufacturing firm, you have asked me to help you monitor and control the companys financial performance. As you have previously expressed that you have some experience in financial accounting, I will explain what management accounting is and how we can implement it in order to better monitor the company's performance.
As you know, financial accounting is "accounting information for a period is collected and simply reported on the financial statements. Financial accounting focuses on reporting the firm's historical results for used by external users." (Garrison, Managerial accounting, 2008) External users include stockholders, suppliers, banks, tax authorities to mention a few. Managerial accounting "is the collections, collation, and analysis of useful information for a firm's internal users: its managers and supervisors. The purpose is to reach conclusion so internal decisions can be made about how to better manage the company. Since management accounting information is for internal only, there are no specific rules on how the information is collected. Each department is entitle to create its own reports. "Managerial accounting includes the following:
Creating annual budgets
Comparing actual results to budgeted results, determining the cause of the differences, taking corrective actions
Analyzing investment opportunities determining which are better investments
(Garrison, Managerial accounting, 2008)
Financial accounting focuses on the history of the company. Statements are required to be produced for the period of 12 months. Financial accounting is strictly required to follow general accept accounting principles (GAAP) "that specify the focus, content, and form of financial statements focus on methods for computing costs rather than how they might be best calculated to support a given decision." (Atkinson, 2007, pg. 29) Most financial accounting information is of a monetary nature. Financial accounting helps in making investment decision. Managerial accounting information focuses on the future of the company. There is no specific time span fixed for producing financial statements. Management accounting information may be monetary or alternative non monetary. The main objective of management accounting are to help manage by providing information that used by management to plan, evaluate, and control. Management accounting helps management to record, plan, and control activities to aid decision-making process.
Management accounting can help our company emphasizes decision making that may affect future production. For example, by tracking the units produced by each employee, we can track any lack of production that we can actually address before production decreases, hence, saving the company time and money. Another great example would be tracking the customers' satisfaction. If we have received any complaints, we can track any trends that can detect any damaged goods.
Responsibility centers are "a specific department that is help responsible for performance or spending. Allows a specific manager to be assigned responsibility for performance and financial results in his/her own department." (White, Powerpoint presentation, 2010) In order to track spending, I believe it's important that responsibility centers should be created. A cost center, which is responsible for cost, can be created for the production department to track spending such as material and labor. To assist the production department, a service center can be created to support the production line for a better flow of the manufacturing and production process.
If internal measures are put in place correctly, it will greatly benefit the company. I recommend applying the measures of The Cycle of Control; planning, execution, monitoring, evaluation, and correcting. "The term control in management accounting and control refers to the set of procedures, tools, performance measures, and system that organizations use to guide and motivate all employees to achieve organizational objectives. A system is in control if it is on the path to achieving its strategic objectives and deemed out of control otherwise" (Atkinson, 2007, pg 314) By applying these measures, you can better track a product's life cycle from when its produced to when it reaches the customers hands.
1. Planning consists of developing an organization's objectives, choosing activities to accomplish the objectives, and selecting measures to determine how well the objectives were met.
2. Execution is implementing the plan.
3. Monitoring is the process of measuring the system's current level of performance .
4. Evaluation occurs when feedback about the system's current level of performance is compared to the planned level so that any discrepancies can be identified and is corrective action prescribed.
5. Correcting consists of taking the appropriate actions to return the system to an in-control state.
(Atkinson, 2007, pg. 314)
By applying the measures previously mentioned, I believe it will give the external users and insight on how our company works and how it is that each quarter our goals are met. By planning ahead we can develop the organization's objective, the activities within the organization's objectives, and how well the objective is met. By doing this the external users will be receiving a far more accurate financial statements. Execution of the objective is implemented, this can have the external users aware of current projects, which can hope for more cash flow. Monitoring the performances of all departments can give timely and consistent information that can help create financial reports such as balance sheets. I believe evaluating and correcting go hand-in-hand. When processes are evaluated it can be corrected at this time before going forward, which can greatly affect the company's performance. Hence, when the company is well monitored, it can detect any mistakes along the way that can save the company money, which are reflected on our financial reports that are viewed by our external team.
1. Garrison, R. H., E,. & Brewer, P. C. (2008). Managerial accounting (12th ed.) New York: Mc-Graw-Hill
2. Atkinson, A. A., Kaplan, R. S., Matsumura E. M., Young, S. Mark., (2004) Management Accointing ( 5th ed.).Upper Saddle River, NJ: Pearson Prentice Hall.
3. White, Tim (2010) Phase 1 Lecture Powerpoint. Colorado Technical University Online.