Financial reports of accounting nature are organized with an intention of use by external parties like creditors and shareholders. On the other hand managerial accounting reports are meant for managers within the organization.
Management accounting is presented as a loosely connected series of decision making devices by the management accounting writes. Despite lack of any effort by many writers dealing with the issue of management accounting to come up with an integrated hypothesis, there is a high degree of standardization and consistency in presentation methodology (Mowen, 2000).
Theory formulation in terms of ideological models is a practice that is common. Nearly all the books in business administration use some form of conceptual structures to put together the necessities being presented. In economic theory, there are markets, organizational structure models, and managerial functions. In marketing, there are distribution channels and decision making models. Financial statement models are also used in financial accounting as a structure used to teach the basics of financial accounting (Crosson, 2010).
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The practical purpose of managerial accounting is to make sure that the knowledge in any organization is upgraded and consequently reduced any form of risks associated with the process of making decisions. Accountants make reports on the cost of good production, expenses related to the training of employees as well as marketing costs among other activities. Managers use these reports to determine the difference between what they planning to do and what they have actually achieved or compare their performance to other standards (Duchac, 2008).
An assembly line supervisor for instance might be willing to find out how effective or efficient his or her line compared to those of fellow supervisors or productivity in the past. An accounting report that shows inventory, waste hourly average labor costs as well as overall per unit cost together with some other statistics can help the supervisor and other management team to identify and rectify inefficiencies. A detailed report might analyze the assembly line information and approximate trends together with the long term effects of those trends on the general profitability of the organization (Vance, 2002).
Another example is that a product manager for a line of hair care products at a company that makes beauty aids would probably need to know the amount of consumed by each product. In this case, the managers may be assisted to know the benefit of each item by the report that breaks down overhead amount attributable to each product. Certain type of shampoo for instance may be performing very well and earning a lot of money. But a close accounting of the same product's real cost in the organization may show that its contribution to overall income significantly lags that of related offerings in the hair care industry. Equipped with the same information, the product manager is likely to choose to adjust marketing expenditures to strengthen more profitable products, or to focus on reducing expenditure related to shampoo (Roy, 2001).
Due to the need for detailed information concerning specific operations in a company, managerial accounting information, like balance sheet calculations and ratios. Most of the managerial information also differs from financial information in frequency. A number of internal reports are actually generated per month, week or even per day when it comes to information like disbursements and cash receipts. Although their emphasis on critical features of management accounting reports and details, most of the reports are presented in a summary form. These summaries can be read by the company's managers in an efficient manner and identify problems that are likely to come up in specific areas and then analyze details in those particular areas to enable them find a course of action (Warren, 1998).
In the examples described above, just like in most of the management accounting procedures, information meant for managers is used in making decisions on future and also assists in judging effectiveness of the previous decisions and activities. In management accounting, goal setting process, devising a means of achievement and determining resource requirements in the venture is known as "controlling." The person who controls the entity of the accounting department is usually referred to as the "controller". The role of the controller is to play a major role in both controlling and planning issues within the organization (Duchac, 2008).
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Management plans are formally communicated inform of budgets, and the term budgeting specifically means management planning. The controller makes sure that budget development by the accounting section operates well on an annual basis. Budgets are commonly made for various departments and divisions as well as the whole organization. Budgets helps in setting the goals in the organization because they give the impression of the company's objectives and wishes in tangible, specific and quantitative terms (Crosson, 2010).
Once the company's plans and budgets have been established, management accountants start collecting the necessary information generated by the company that shows whether or not the firm is realizing its goals. The accounting section within the company provides its research results in the format of performance results for a particular period of time. This enables the managers to identify areas where there are problems. A company's store manager for instance may decide to use data like the sales volumes and inventory levels to direct promotional and advertising programs (Vance, 2002).
Apart from coming up with routine reports, management accountants also make special reports for other company's management staff to assist them in making decisions concerning proposed projects or issues that come up. Special reports are usually created to evaluate the link between benefits and costs related to various alternatives in the process of decision making. If a company's competitor for instance leaves its prices, the leadership may be forced to ask the accounting section to come up with a report that compares possible competitive reactions like the lowering of prices, changing the product and increasing advertising. Such form of information usually involves prediction and the gathering of outside information (Reeve, 2005).
Management accounting books are based on very specific criteria of the business venture. For instance, all texts believe that the business likely to use management accounting tools is a manufacturing business venture. There is also unanimity in assuming that the way variable costs in relevant range tend to be linear. The result of assuming that variable costs vary directly with the volume is a form of cost classification into variable and fixed. An illustration of the managerial accounting perspective regarding business enterprise and management will assist in putting focus the matter to discuss later in the chapters (Reeve, 2005).
Budgeting is a very important process in any organization. This process helps managers of various departments within the organization to analyze expense limits that are set by the top leadership. Budgeting is also a pivotal tool that helps in the management of cash levels in any organization. This is because the company may not be able to operate in a short term basis if it lacks sufficient funds. An organization's liquidity ratio is the same as the current assets less inventories over the current liabilities. It shows a company's ability to pay back short term loans (Hansen, 2002).
Cash flow evaluation assists the senior management analyze the company's ability to come u with the cash connected to activities. It also shows sources of projects in which the organization invests money. Cash flow evaluation is usually related to cash flows from operating processes, cash flows from financing and investing activities. Cash from financing activities shows funding procedures like bond and stock sales on securities exchange.
Cost variance evaluation is a tool that assists the management analyzes the differences between the actual costs and the budgeted costs. Segment managers together with the departmental heads pay much attention on variance evaluation because high percentage of overage shows cost control systems inadequacy. According to parlance management accounting, the meaning of the term overage is actual costs that exceed budgeted or planned amounts. A control is a series of policies that a segment leader uses to prevent over usage and losses that come as a result of fraud, carelessness, errors and technological breakdowns (Warren, 1998).
Ledger reporting is also an important activity in managerial accounting processes since it helps the company leaders determine the company's financial image. An organization's management usually needs a full series of financial statements that relate to securities exchange commission (SEC) rules. A full set of accounting statements include the balance sheet, profit and loss statement, retained earnings statement and the cash flow statement.
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In conclusion, it is important that every organization considers the process of financial management and accounting as a tool used to monitor the performance of the organization. Without any form of financial activity, any company will not perform as expected. It is also imperative that when a company wants to doo any form of investment, it should first consider the way the organization is faring. The company's capital cost is the most important feature that shows how the company is performing in terms of finance.
An assessment of the Net Present Value of an asset will help the company know its potential when it invests in the property. As for PLC, the machine that will benefit the organization is the one whose cash outflows exceeds the cash inflows. All assets need to be critically analyzed by the company to allow for good investment opportunities. When the company invests without any calculation to determine way the business is suppose to proceed, the likely hood of the investment not performing as expected is very high. All organizations should make sure that the process of financial and accounting auditing is undertaken to put the organization in the safe side.
There is no way an organization can manage to perform and achieve its goals if it is not equipped with the knowledgeable members of the staff who will enable its prosperity. The implementation of the financial and managerial accounting techniques will facilitate good performance of the organization. Members of the staff who are well equipped with the necessary skills will enhance the company's performance and also uplift its economic face. The economic performance of any organization needs good decision making skills that emanate from the knowledge possessed by the members of the staff who have been hired by the company to do so. Decision making process is very important for any business to perform very well.
Crosson, D (2010). Effects of financial and managerial accounting in decision making. New York : NY, Cengage learning.
Duchac, J (2008). Managerial accounting for decision making. Boston: MA, Pearson international.
Hansen, W (2000). Financial management. New Jersey: NJ, Prentice Hall.
Mowen, P (2000). Financial accounting as a tool for decision making process. Chicago: CH, Routledge.
Reeve, K (2005). Financial and managerial accounting systems. Florida: FL, Hill Top.
Roy, J (2001). Financial and managerial accounting for decision making. New Jersey: NJ, SAGE.
Vance, P (2002). Principles of managerial accounting. Boston: MA, ABDO.
Warren, P (1998). Company accounting and finance. New Jersey: NJ, ABC-CLIO.