Defining the functions of management accounting

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Management Accounting is concerned with the provisions and uses of essential data with confidential information of an organisation, to which is provided to the attention of the Company's Managers. This allows the managers to make informed decisions on the behaviour of their company using the comparisons of actual figure against the projected benchmarks. As a result this; thereby enables them to be better equipped in the management and also allows mangers to control the cycle function of the company.

According to the Charted Institute of management accounting, Management accounting is defined "as the process of identifying, measuring, accumulating, preparing, analyzing, interpreting, and communicating the information used by the management to plan, control and evaluate within an organisation to assure appropriate use of and it is accountable for its resources.

Background History

As with many entities in life, Management Accounting also has changed its form as time moved on. Initially during the mid 1920's just before the matching concept was introduced, the Accounting for Processes existed. The main intentions were to focus on operating costs and efficiency of the process. Which then in the 1950's adapted to Cost Accounting, this then moved the focus to the determination of cost control of finance. The evolution of Management Accounting began between 1950 to the 1980 where the focal point was prioritising information provided for control and planning. In mid 1980's ABC(insert what abc stands for) was introduced along with product life cycle management, target costing and also quality investment. This was summarised as Lean Enterprise Cost Management. And finally as time went on in the 1990's Value Based Management was adapted which involved the Balance Scorecard, Creation of customer value and other related concepts including strategy.

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According to The Evolution Of Management Accounting By Robert S Kaplan, He has stated that approximately every cost accounting practice used have been developed by the year 1925, these have shown in real life practices in business organisations. As an attribute to the impressive changes which has occurred in the past century business atmosphere, the management and cost accounting practices that were developed in the earlier days needed be further researched for planning and control of modern corporations. Robert S Kaplan also states that "...there has been little change in designing and putting into action most cost accounting and management control procedures." (Evolution of Management Accounting)

Initially Management accounting and cost was originated for the manufacturing industry use, in order for them to evaluate inventories along with measure the performances, examine the investment of capital and also aid to the determination of the price of products. Traditionally management accounting was needed industries such as the Steel making factories and other labour intensive industries. Management accounting was only concentrated on main cost such as labour, material and allocation of recourses. However as Globalisation increased, Management Accounting also evolved along with it tailor the changes. As other factors such as technology became more advance, early stages of evolution of management accounting began enterprises such as railroad to move their focuses on profit and cost centre along with new measure of performance, which were required to control these enterprises.

Functions of Management Accounting

With reference to "The Performance Measurement for World Class Manufacturing" by Brian H Maskell. The functions of management accounting could be identified:

Traditionally, Standard costing considered as a systematic approach was vastly used by manufactures, it could be said as the prime measurement of performance, where manufacturer were able to compare actual cost to the standard cost set to find any variances. Which then would be pin- pointed to production department and analysed.

Another Function is Budgeting, was a significant element to management accounting. It provided achievement to the company's strategy, as budgets was a comparison tactic used as a primary performance measure.

Decisions upon pricing were another factor of management accounting. Traditionally, accurately detailed information was required regarding the costs of the product. This would be especially applicable to those companies which involve product where price is not determined by the forces of the market.

The forth function of management accounting is analysis of investment. Strategic decisions regarding investment of fixed assets such as plant and machinery, also the commencement or discontinuation of product, were made using techniques such as bases of mainly the Net Present Value and the Return on Investment calculations. Conventionally, management accounting would provide a highly detailed analysis of financial information for these invest decisions to be considered.

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The finally function of management accounting was merge between both managerial and financial accounts, where the inventory valuation where required in order to produce the final statements of a company.

Traditional Accounting practice can be illustrated by the variance analysis. This is still used today in some manufacturing sectors however according to "The Performance Measurement for World Class Manufacturing" by Brian H Maskell. He has quoted "...the client of western manufacturing industry has changed enormously while the technique of management accounting have changed a little." Due to the challenges of the competitive environment form globalisation, the traditional management accounting has evolved severely in terms of adapting to today business environment. Although Variance analysis is somewhat still used in today's world. As techniques' such as life cycle cost analysis and activity-based costing have now evolved in order to adapt to the new lifestyle of firms and companies, in both service and manufacturing sectors. The traditional management accounting techniques had many disadvantages to them, which where the reasons to why they had to evolve. Through the revolution of industries over time, merchant and small business no longer required the use of management accounting as a scheme of tracking business-related trade transactions. As entrepreneurs started making more frequent decisions to expand the organisation and hire more labour, new accounting methods were require supplying the entrepreneurs with financial information of the internal business in order to come to a conclusion regarding these decision makings.

The main cause of why there has been a major evolution in management accounting is due to the lack of time keeping in update the management accounting practices. Despite the rapid change in technology and organisational surroundings over the current decades. Mainly in the manufacturing and services industries, the fact that the implementation of innovative management accounting techniques was severally falling behind. It had been stated that at that time management accounting had 'lost its relevance' (Johnson and Kaplan, 1987). It was said to be absent of 'advanced' techniques as they were not extensively implemented.

Another issue with the traditional management accounting was the lack of relevance within the reports when directly connected to the manufacturing strategy. The quality of the financial reports was not up to sufficient standard for production control and operation of distribution. As time went on cost distortion became another problem. In recent years in depth analyses became less significant as the fundamentals of cost model altered. The product cost was significantly distorted by the method of traditional apportionment which was another disadvantage. Also the separation of cost in terms of fixed and variable along with direct and indirect cost was not as firm as previously.

In order for the manager to improve the figures, the cost accounting would you cost accounting. The traditional methods of calculating the payback period of can hold back the opening of the manufacturing industry. As a result cost accounting was therefore causing an impediment to progress.