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How Management Accounting Play A Great Role In Business Growth

1054 Downloads1 I Published: 29 Aug ,2019

Introduction

Management Accounting can be defined as a form of accounting which enables a business to be conducted in a more efficient manner. These include production, operation, and investment in the marketplace.

The duties of a Management Accountant include collecting, recording, and reporting financial data from various units of an organization.

Managers take the help of management accounting techniques to better understand the matters within their organization which aids the performance and controls the functions of the organization.

Management accounting covers the areas of risk management, performance improvement, and strategic management. Its scope to enhance the profit margin of an organization makes it a lucrative field for most of the students.

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Objectives of Management Accounting

Management Accounting is concerned with providing of helpful information and reports so that the overall efficiency of a business can be increased. This provides an opportunity to managers and entrepreneurs to thrive in their domain.

Management accounting deal with the following activities:

Planning and budgeting

Management use management accounting technique to plan what to sell, at what price to sell, how much to sell, cost of production and estimation of profit is made in this step. Management of finance operation, cash required to perform the operation is calculated in this step to keep the organization working properly.

Improved decision making

Whenever management has to decide whether there is a need to start a particular project, they use management accounting skills to estimate the outcomes of their steps which are to be taken by an organization. This helps in improved decision making and this helps to eliminate the losses which may arise in the organization.

Performance estimation

Managers calculate the outcomes of their steps taken and with the help of management accounting skills the performance of various departments of the organization is calculated. Later, necessary steps are taken to improve the performance of the under-performing departments.

Future Investment

Management accounting helps management in future planning using results of the existing plans; they will be able to find the loop holes in the organization and based on that they will be able to improve the process further.

Operation Improvement

Management accounting help to find the flaws in existing operations and based on the result of those operations, further steps are taken to improve them.

Increased Efficiency

Management accounting helps management spot efficient and inefficient sections of an organization and based on the results corrective steps can be taken to improve the efficiency of the least performing departments of the organization.

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Pricing products in a Manufacturing firm

Management accounting plays a vital role in setting up pricing of the products. By categorizing and tracking up the information, management can set accurate per unit price of their products. Management needs this information for strategic planning, improved decision making, competitive strategy and planning and future investment planning.

An overview of present pricing method

There are two conventional approaches which are being followed in numerous parts of the world. One is the process pricing and the other one is job order costing. Process pricing is widely used in various parts of the world. For example, in a company like soda, the price estimated for filling up of soda bottles can be given by unit filling (net cost incurred while filling all the soda bottles in a given time frame divided by the number of bottles filled).

Similarly, in job order costing, unit average of entire production system is taken. This is basically concerned with tracking all cost on an individual product on product basis. This is useful where each unit of production is customized or where there are only a few units produced. In job order exact cost incurred is recorded and is not necessarily averaged with any other unit, since individual unit may be different. Job order is also used outside manufacturing.

Costing Methods

Fixed Cost:

Fixed Cost is the cost which is not changed. These costs are invariant. However, fixed cost is restricted for a given time span. Fixed cost may include the interest on plant set, property, rent, employee salary etc. As the need for more product arises, new plants are set up which is followed by the increasing value of fixed price.

Variable Cost:

Variable cost is directly proportional to the output produced. In terms of manufacturing, fixed cost are generally constant whereas variable cost increases at a constant rate.

Since manufacturers are generally interested in the profit per unit output. So, profit per unit of an output is increased by increasing the variable cost of an item.

Therefore, this is dependent on the manufacturer whether they want to run at the old plant budget or they want to increase their capacity level.

Direct cost:

Direct cost includes the major cost incurred during the production of an item. This includes labour cost, material cost.

Indirect cost:

This is also known as overhead cost. Indirect cost includes the cost of the minor components. This include the plant wide cost such as energy and capital. This also includes the cost of glue, solder and other related stuff.

Standard cost

Standard cost is the most essential cost which is incurred in the production. This is responsible for calculating the budget of an organization.

Standard cost includes the cost incurred in the following:

Labour cost

Labour cost may vary with the individual. Labour cost of an organization can be calculated by calculating the weighted average cost of an individual. For an organization to calculate the budget, labour cost along with the taxes, overtime pay, benefits, contracts etc are included.

Material cost

Material cost includes the cost of material along with the shipping cost, taxes, transportation cost, etc. Sometimes, some unprecedented changes may change the cost incurred. All these things must be included for the calculation of the overall budget of the organization.

Indirect cost / Overhead cost

Indirect cost is the most difficult to predict. These costs are centred within the organization and the production of different products in the plants makes it difficult to estimate them.

Therefore, conventional budgeting scheme is somewhat difficult to predict. And, there is a need for modern approach to eliminate the shortcomings of the conventional approach.

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How to deal with indirect cost?

In an organization, it is difficult to deal with the indirect cost. Even by the end of the year indirect cost is not known in the organization. To overcome with this method industries predetermined indirect cost rate which is assigned to the yearly budget of the organization.

Industries also used cost driver methodology to deal with the same. Once a cost driver is chosen by an organization, cost driver divide up the indirect factory cost by the number of cost driver units. With the help of this predetermined indirect cost rate is estimated which is used for the proper functioning of an organization.

Estimation of indirect cost / overhead cost:

Indirect / Overhead cost is given by: [Estimated total factory indirect cost] / [Practical capacity in cost driver units]

This term will help to find an indirect cost / overhead cost of an organization. With the help of that indirect cost the budget of the organization is made.

Modern Techniques in Management accounting

Modern Techniques which are used in the Management accounting are as follows:

Life cycle costing

Life cycle costing is based on the products entire value chain from the price perspective. The aim is to have a policy which will maximize the return over the object’s total life. The longer an object yields a return, the more successful will that product result.

Black Flush accounting

Black Flush accounting is used where the pricing is delayed until the goods are manufactured. This is generally used at the places where products are manufactured in small quantity. Here, standard cost is eliminated and the overall cost used for the manufacture is considered.

Alternate costing

Alternate costing is also known as Activity based costing (ABC costing). Activity Based costing is based on the number of transactions or events involved in the manufacturing. ABC costing strategy is used by the mangers to improve the organization’s performance. Activity based costing is used for taking strategic decisions like outsourcing, pricing, identification, and process improvement.

Just In Time

Just in time methodology is based on improving a business’s return on investment by reducing the associated carrying cost. According to Just in Time, the raw materials are purchased only at the time when the order is taken. This methodology avoids the production of any surplus item. Only required quantity is manufactured. Therefore, this is an effective technique for increasing the return on investment by reducing the inventory cost.

Throughput accounting

Throughput accounting methodology is based on enhancing the production flow within an organization. Throughput accounting eliminates the bottlenecks in the organization by increasing the production flow. The purpose is to enhance the performance while at the same time decreasing the bottlenecks.

This is done to increase the profit flow within an organization.

Pareto analysis

Pareto analysis is the statistical decision making technique. This is based on 80:20 rule which is by doing 20% work, you can earn up to 80% profit. This methodology is mostly used in the organizations where many possible course of action are available for your problems. This is also known as a problem solving technique.

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Difference between Financial accounting and Management accounting

Financial accounting reports are prepared with the use of external parties such as creditors and shareholders. While Management accounting reports are prepared by the managers inside the organization.

In Financial accounting the focus is primarily on the consequence of past activities while in Management accounting focus is primarily on the improvement of future performance.

In Financial accounting only data summarizing the organization is prepared while in Management accounting detailed reports about employees, customers and products is prepared.

Generally accepted accounting principles needs to be followed in financial accounting. While, these generally accepted accounting principles need not be followed in Management accounting. The focus is mainly on improving the efficiency of the organization.

Financial accounting needs precise information while Management accounting needs elaborate information about the organization's past performance.

Financial accounting seems out to be less time consuming as compared to the management account skills.

Therefore, financial accounting and management accounting are the two separate terms which focuses on preparation of external reports and internal reports of an organization.

Conclusion

Management accounting is essential for the smooth running of an organization. Management accounting focuses on collecting, recording and reporting of financial data of an organization. With the help of this production, operation, and investment methods of an organization will be improved.

Management accounting helps the organization to perform its strategic, time consuming, budgeting, decision making, and performance evaluation effectively. Operation Improvement, efficiency along with the futuristic plans can be effectively taken with the help of this method.

Process pricing and job order pricing techniques are too old and they are having certain flaws in them. Therefore, to eliminate this issue, certain modern techniques have been introduced. These modern techniques will help to eliminate the flaws of the conventional approaches.

Fixed cost, variable cost and indirect cost needs to be properly understood. Life cycle costing, Black Flush accounting, alternate costing, just in time, throughout accounting, and pareto analysis must be implemented to overcome the flaws of earlier conventional techniques.

Moreover, financial accounting and managerial accounting are the two separate terms which needs to be properly understood. Financial accounting technique focuses on report preparation for the external parties whereas managerial accounting focuses on report preparation of internal organization affairs.

References

  • John Freedman, Modern Management Accounting Techniques, viewed 10th November 2016,
  • Kamal Sodhi, Modern Techniques of Cost & Management Accounting, viewed 10th November 2016,
  • Reference For Business, Costing Methods, viewed 10th November 2016,
  • Tutorials Point, Management Accounting – Introduction, viewed 10th November 2016,
  • Accounting Explained, Managerial Accounting, viewed 10th November2016,
  • Sana Ahmed, Difference between Financial and Managerial Accounting (Financial Vs Managerial Accounting), viewed 10th November 2016,
  • Edx, Introduction to Financial and Management accounting, viewed 10th November 2016,
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