Practical role of managerial accounting is to increase knowledge within an organization


The practical role of managerial accounting is to increase knowledge within an organization and therefore reduce the risk associated with making decisions. The information produced for managers is used to make decisions regarding the planning and controlling of operations. A decision is concerned with the selection of an action often out of a number of alternatives. In order to choose the right one, decision-makers need some guidance, which is partially provided by information gathered by management accounting. Tools such as activity-based costing/management, budgeting, cost volume profit analysis etc. used by the management accountants are consequently considered as a helpful support. This paper focuses on describing the roles played by the management accountants in various areas in the organisation for decision making.

1. Introduction

Management accounting is concerned with the provision of information to people within the organisation to help them make better decisions and improve the efficiency and effectiveness of existing operations (Drury 2001). It plays a vital role in activities such as planning, directing and motivating and controlling. The main role of management accountant has always been to improve their organisation's performance by providing relevant information for decision making (Baldvinsdottir et. al 2009).

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To achieve desired results managers use cost-volume profit analysis, budgeting, activity based costing, incremental analysis, flexible budgeting, capital budgeting models, inventory models and segmental contribution reporting (Goosen 2008). The management accountant is the primary source of this information. These reports are used by organisation to compare the difference between what they planned and what they achieved or to set benchmarks.

Goosen (2009) classifies decision making as strategic, tactical, long run and short run. He states that primary objective of decision making is to achieve optimum utilisation of business's capital or resources. Effective decision‑making requires relevant information and special analysis of data. Relevant information is provided by management accountant who can improve the quality of the decision-making process.

The fundamental tool in guiding decisions is cost accounting system which determines the cost of goods produced in the organisation (Horngren 2002). Management accounting concepts used for decision-making are built upon this cost foundation.

2. Management Accountant's contribution to Decision making

The management accountant assists organisations by decision-making in many ways. According to Goosen (2008) decision making is defined as choosing a course of action from among alternatives. If there are no alternatives, then no decision is required. He further states that management accountant uses a set of tools that have been proven to be useful in making decisions by the management.

Management accountants are able to contribute to decision making in developing a new product. Rabino (2001) explains that contribution by management accountant to the new product development process is limited to the specific areas. A study conducted by Hughes and Pierce (2006) revealed that the management accountant's contribution tends to be most significant at the business analysis and feasibility stages at the process of developing a new product. Target Cost Management (TCM) is the important tool for those companies which are developing new products to compete on a cost leadership basis. Blocher, Chen and Lin (2002, p. 155) state that the firm has two options for reducing costs to a target cost level:

By integrating new manufacturing technology, using advanced cost management techniques such as activity based costing, and seeking higher productivity, or,

By re-designing the product or service

A management accountant thus helps the managers to decide on reducing the cost and increase the productivity of the organisation.

Another area where management accountant can specifically contribute to make decisions is the management of uncertainty and risk. By using decision-tree analysis, the expected values of cash flows can be determined and they can then be used to calculate the project's expected net present value (Hughes and Pierce 2006). The management accountant can also provide useful information to the decision makers concerning uncertainty and risk by way of a sensitivity analysis (Buyukozkan and Feyzioglu 2004).This enables better informed decision making for the management.

One of the important tools used by management accountants is Activity Based Costing and Management. Gupta and Galloway (2003) explain that ABC /M provide financial and non-financial information and observe the processes to recognize activities that add costs. It gives a wider and realistic image of the cost which allows managers to take strategic decisions based on more accurate information provided by the management accountants. Gupta and Galloway (2003) further state that the ABC/M systems are successfully used in number of corporations such as Tektronix, Hewlett Packard and Zytec. Player and Keys (1995) reported a number of successful executions of ABC/M systems by Arthur Andersen's Advanced Cost Management Team and the researchers involved with the Consortium for Advanced Manufacturing-International. Western Zirconium a 1988 Baldridge Award recipient that supplies its parent firm, the Commercial Nuclear Division of Westinghouse used ABC/M to focus on cost drivers and value-added processes. As a result work-in-process inventory was reduced from $12.3 million to $4.2 million. This was the first-time that product acceptance rose from 34% to 92% and elapsed production time was reduced from 45 days to 10 days (Schneider, 1992).

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Cost Volume Profit (CVP) analysis is a powerful tool used by management accountants. The purpose of CVP analysis is to examine the financial outcome if the specified level of activity fluctuate (Drury 2001).Proctor (2002) states that companies use CVP analysis to determine the number of item to be sold before a profit can be made. Once this target is achieved managers know that they are starting to make profit. Chrysafis and Papadopoulos (2009) states CVP can be used in modernisation and automatisation programs, CVP helps the managers to understand the interrelationship between quantity sold, selling price, cost and profit. CVP can be used as a powerful tool for decision making if the managers use it correctly.

Budgeting is the another technique where the management accountant can assist the managers in making correct decisions. Budgets help managers plan various activities for the future periods. Simons (1995) finds that costs can be controlled by setting budgets and monitoring with constant surveillance. By comparing the actual results with the budgeted amounts for different category of expenses, managers can find out which cost do not conform to their plan and thus require their attention. Budgets are important to the goal-setting function of an organization because they express the wishes and objectives of management in specific, tangible, quantitative terms.

A survey conducted by Ghosh and Chan in 1996 revealed that out of 109 companies in Singapore, 97 percent reported the use of budgets in making decisions. Further to that, 106 companies also use budgets to evaluate performance. These results show that budgets are useful decision-making in the organisation. These companies use budgets in planning and control. Brewer, Garisson and Noreen (2010) explain that budget can be used for planning which involves developing goals, preparing various budgets to achieve those goals as well as controlling which can be used to achieve those goals. However setting low budgets may disrupt the innovative spirit and have a negative impact on employee motivation, which is a key success factor in product innovation.

3. Conclusion

The management accountant plays a key role in organizations today. Their main function is to supply knowledge to decision makers within an organization. Many companies now expect their managerial accounting staff to assist in developing strategies to enhance shareholder wealth and to participate on cross-functional teams with managers from operating departments throughout the organisation.The management accountant is more likely to successfully balance control and support functions to meet the information needs of a wide range of managers across a variety of functional environments. Thus effectively co-ordinating information flows to link different areas of the business (Pierce and Dea 2003). Managers in the organization must understand how to create and use good management accounting information to make correct decisions.