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This research paper aims to discuss the importance of managerial accounting as a branch of management accounting. We will examine questions of what, why, how and for whom on accounting information. Wherein, the chapters are written devoted on a discussion on the intellectual, practical, institutional, and other considerations to accounting information for a company. It aims to introduce readers to the varied important classes of management decisions as well as to show the kinds of accounting reports needed.
Managerial accounting is a branch of accounting with responsibilities of endowing information that a company needs in its decision making in connection with its deployment of resources and exploitation of opportunities. The boundaries of this department should be not rigid. Meaning to say, other departments can make use of its functions and services. Though, it differs from financial accounting, wherein the job of a management accountant weighs in variation with the responsibilities of financial managers. Decision models have been developed within the disciplines of managerial economics and managerial finance in order to supply decision-relevant information.
Lastly, the traditional and leading-edge managerial accounting topics are transformative. Today, there are different techniques used in management accounting, which will be discussed later on the research. The new developments will be presented such as Activity-Based Costing (ABC), Just-in-Time (JIT), and Activity-Based Management (ABM) to reflect transformations in the business environment seen during traditional cost measurement, budgeting and standard costs.
Accounting is made up of varied specializations that can be characterized in a range of ways. It has 3 broad areas: public accounting, governmental accounting and management accounting (Martin, n.d.) Management accounting is the biggest area of accounting with a number of departments like tax accounting, internal auditing, financial accounting, and for this research paper a discussion of managerial accounting. The National Association of Accountants has shared their version of definition of the management accounting. In quote, "Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information utilized by management to plan, evaluate, and control within an organization and to assure appropriate utilize of and accountability for its resources. Management accounting also comprises the preparation of financial reports for nonmanagement groups such as shareholders, creditors, regulatory agencies, and tax authorities." -- (National Association of Accountants, 1981.) It has connecting functions to a company's cost accounting, cost management, activity management and investment management. Wherein, it generates information for the internal users, all levels of management and others members working within the company.
The Management Accounting Dimension
The management accounting needs a multidimensional focus for allowing a company's management accountants to fulfill their duties. Hence, aside from accounting, this department's concern are also areas of organizational, behavioral, decisional, planning and others needing accounting services. An understanding of this explanation is very much needed for the comprehension on the new role of management accountants. Wherein the four areas of concern for directing managers are: customer care, key success factors (cost, quality, time and innovation), continuous growth, as well as value-chain and supply-chain study (Riahi-Belkaoui, 2002.) Management accounting deals with the endowment of information that entitles the different departments of a company in:
Re-search and development
Design of products, services or processes
Being a branch of management accounting, Managerial accounting shares data that appears in its external financial statements to other departments, but they utilized a more detailed approach to this activity, provide data in a regular basis and write this on a lot of varied forms that base results on how the information is to be utilized (Martin, n.d.) A key difference between financial accounting and managerial accounting is that the latter bears reports that are not directly controlled by generally accepted accounting principles (GAAP.)
The Issue of Job Order vs. Process Costing in Managerial Accounting
A primary role for cost accounting is to know the cost of products or services in companies. Like the other methods utilized: average and specific identification or first-in, first-out; last-in, there are different ways needed to value the inventory as well as calculate the product cost for a manufacturing or service setting. Whereas, the first-out method is utilize to know inventory valuation and cost of products sold for a company. The method chosen is reliant on the said product or service together with the company's conversion processes. A cost flow assumption is important in both job order and process costing. It asks for processes in which costs are not predicted and attached to specific units of production.
Both job order and process costing are the two vital cost systems in accounting. In particular, a job order costing system is utilized by manufacturing companies that make small quantities or sets of identifiable products or services (Aker Gulf Marine, n.d.). For example, job order costing is needed by a publishing company producing books and magazines, that produces educational textbooks or by an architectural firm that designs edifices. For this instance, the company is able to tailor goods or services that are inline with government standards for consumers. On the other hand, the services covered by job order costing system are usually user specific, so that there is an understanding and agreement between companies on its type of jobs, which can be the same as engagement, project and contract. What constitutes a "job" from an accounting standpoint? This can be categorized by the steps of its production cycle: planned for but not yet started, manufacture in process, and completed.
Another primary product costing system is the process costing system. It is utilized by manufacturing companies that is able to produce large quantities of homogeneous products like bricks, gasoline, detergent and breakfast cereal. Using these in a situation, the output will be homogeneous. Hence, for a certain time, one unit of output cannot be readily identified with specific input costs, so that there is possible cost flow assumption. This allows accountants from companies to assign costs to products, even if there is no research on actual physical flow of units. Moreover, process costing systems utilize a weighted average or FIFO cost flow assumption in its computations (Aker Gulf Marine, n.d.).
Step-by-Step System Comparison:
Both systems bears the same basic business purposes in terms of assigning material, labor, and overhead costs to products as well as to endow a tool for computing unit product cost.
Both systems make utilize of the same manufacturing accountants. They also cover manufacturing overhead, raw materials, actual work and final products.
The flow of costs in manufacturing accounts is practically the same for both systems.
Labeling costs to products in production should be an averaging process (Borsheim, K., n.d.). Now, in order to gain a hand of this, the easiest possible way in computation of this is to divide a period's departmental production costs with the period's departmental production quantity. This is the formula:
According to Peter Longmore, in quote:
"Process costing is applicable to production involving a continuous process resulting in a high volume of identical or almost identical units of output. While there are a number of complexities attached to process costing, the basic idea involves nothing more than calculating an average cost per unit. As such, the technique is divisible into 3 stages: (1) Measure the productive output in a period. (2) Measure the cost incurred in the period. (3) Calculate the average cost by spreading the total cost across the total output."
Upon comparing the said two factors, the continuous flow of units and the indistinguishable units are seen. Which one is better? The process costing allows a more complicated method. While job order costing is just right for companies endowing products or services that are only produced in limited quantities according to consumer demands and specifications. In contrast, process costing allows an accumulation and assign of costs to the products in manufacture. This costing method is the choice by makers like candle crafters, candy products, bricks, gasoline, paper, and food products as well as a lot more.
Another point to consider is that a job cost sheet is not needed for process costing, because its main tasks are geared on the departments. Instead, a production report is utilized. It is a summary of number of products moving through a department in occasions, and it also allows a computation of unit costs. Moreover, this report can show what costs were exhausted by the department and what disposition was done on these costs. The department production report is a vital document in a process costing system.
Phases of Bank Profitability Reporting
In order for a bank to meet challenges, they use managerial accounting concepts and techniques, which are applied on the current financial reports. Doing so generates goals on the pursuit of profit contribution from the banks varied business units, product lines and customers (Rezaee, 2005.)
Phase One: Responsibility and Profit Center Reporting involves classifying the bank into individual managerial units, which shows it is responsible for clearly identifiable income and expense items. It is more concerned for a bank's profit or loss.
Phase Two: Product Profitability Reporting shows which products are conscientious for the bank's profit or loss.
Phase Three: Customer Profitability Reporting gives importance on how certain customers or customer groups put in to the process of a bank's bottom-line. This act allows managers to assess particular pricing decisions, to perceive market penetration, to think of new products and to establish better ways to handle capability.
Recent Developments in Management Accounting
Activity Based Costing
Activity based costing (ABC) in management accounting defines the process during the time resources achieve costs, activities utilize resources and cost objects like products, services and customers participate in activities (Atkinson et al., 2001). The said resource costs have 2 stages. Firstly, the costs of varied resources are selected in particular activities. Secondly, the costs utilized in activities are interlinked with the objects that have exact costs and participation in the activities.
Just-in-time (JIT) abides by the elements and practices of a philosophy in capitalism (Hutchinson, 2007.) It can be used to any type of company. In addition, its practice elements are germane to recurring manufacturing operations, approximately production and assembly of products. Particularly, JIT is the method of production or inventory scheduling. It is more suitably defined as a philosophy, even if it acts on a series of techniques, since it is considered better than a collection of management practices. The 2 main elements of JIT are attitude and practice. The first one can be applied by any type of company. On the other hand, the second one has restrictions to follow and can only be used by companies with fix manufacturing processes. If seen in an accounting viewpoint, these are companies who prefer using a process cost accumulation method in improving operations.
Activity Based Management
This is a technique originated from ABC, which uses cost information to weigh the whole perspective of an operation in a company. It has a goal of differentiating between value-added costs (necessary) and non-value-added costs (unnecessary), wherein the latter should be lowered in account (Thierauf, 2001.)
The essence of this aspect in management accounting is that it allocates scarce resources, so it implies a choice from the potential items as expenses in specific period of time. Moreover, capital budgeting asks for balance of funds, revenues and costs in the company, wherein there is a decision-making process taking place (Rubin, 2000.) It is through the planning step on the budgeting that properties acquire acquisitions and renovations. The short and long-term operating needs are included in computations of the capital budget reports, which include definition of assets, liabilities and credits. These are the ones that are expected to be seen within the goals of a budget plan as well as the 3-5 years of business plans (Ward Jr., 1994.)
In conclusion, managerial accounting reporting is providing of a framework on reliable, relevant, and useful information which are learning in theory. The decision making process should transform from profit center to customer profitability. Moreover, in a competitive environment, businesses are expected to operate to other industries that also follow measures in internal profitability. As more of them fail, the key to survival will be to rely on the internal performance measures, like management accounting techniques, which will allow definition of problem areas and movement of the management in quick professional reactions.