Management Accounting In The Business

1. Role of management accounting

According to Ahmed and Manab (2016), in the tough competitive market pressure, managers play an inevitable role in the success of an enterprise. They perform and execute various functions such as business planning, strategic formulation, handling financial business activities to ensure financial security and so on for the continual of regular functionality. In the challenging market era, the role of professional accountant got increased as they perform enormous duties like collecting, recording, storing and reporting financial information and evaluate the same for making decisions for the successful survival and growth. In the opinion of Ward (2012), it has been stated that strategic management accounting (SMA) is the process of emergence of strategic business objectives with that of managerial accounting information to create an excellent model that provide great assistance to the organizations for making smarter decisions. In every organization, there are number of departments’ works like sales, purchase, finance, human resource, marketing and others. It is the duty of managerial accountant to coordinate all the departmental functions to examine the overall performance of the establishments and make smarter and rational planning for the success.

However, on the critical note, Kaplan and Atkinson (2015), argued that the main role of the manager is to assess the funding requirement of an entity, and thereafter, appropriate financial plan needs to developed for the fund collection, its optimum utilization and proper management. It is extremely important for the business organization in order to minimize cost and combat financial challenges and risk due to volatile market conditions like inflation, high cost of borrowings, sudden fall in demand, high cost & many others. It is the most important and crucial thing for the business to have sufficient funds, so that, any risk, uncertainty and financial consequences can be combat successfully. For such, it is the liability of managers to find out all the financial sources and compare all to determine the most effective source of fund. In such regards, they have to make the best capital structure decisions comprising external borrowings and share capital, so that, financial cost can be minimized and profits can be maximized. Appropriate selection of debt and equity funds is necessary because both the sources have different implications, i.e. debt offer tax advantages which is not so with the proprietors fund. However, fixed cost of capital create financial burden which is not brought by the equity capital, on the other hand, debt do not dilute business control whereas shareholders have right to control business decisions. Therefore, right selection of both the sources are necessary for cost management and profit maximization.

In the study of Ionescu (2016), it has been studied that for the SMA, managers, executives, directors and other board members can gather necessary information from either the internal as well as external sources. Internal sources are available inside the establishments like cost records, annual reports, final accounts, constructed budgets & many others that can be easily accessed by them for analytical purpose to make best plan. In contrast, external sources are available outside the business but still provide great assistance to make quality decisions for the performance enhancement. In the competitive arena, strategic and policy formulators has to examine competitors growth strategies, expansion plans, profitability and financial plans as well so that they can modify their own business strategies and policies accordingly to attain success.

In contrast, Nam and Park (2016), stated that forecasting is the most important or essential role played by managers, in which, they create a financial plans about their possible expenditures, revenues, investment and so forth. Financial managers make internal as well as external market analysis for the projection. Internally, they use historical records, consolidated financial statement and future plans, whereas external factors are analyzed to predict uncertainties so that advanced planning can be designed to protect themselves from the possible risk and consequences. Before using internal information, manager must ensure the accuracy and reliability of the data source for making correct, viable and strong plan.

Despite this, Garrison, Noreen and Brewer (2010), assessed that managers create strategies as input which is processed through implementation into the real world to get targeted outcome. To attain the same, utilized both the primary and secondary data sources for making quantitative as well as qualitative evaluation. Here, they not only use internal records to make stakeholders analysis but also make competitors analysis.
Macintosh and Quattrone (2010), criticized that now-a-days, managers face challenges and problems in making the best plans because of competitive pressure and large set of data, which requires more time and efforts for the analysis while, in the practical corporate world, managers do not have enough time and sometimes, have to make big plus quick decisions. It affects the quality of decisions adversely and incorrect or poor decisions may caused business failure as well. Further, in the study of McGowan (2011), it has been founded that it is very necessary for the firms to have excellent, talented and experienced managers who are well-equipped with the exceptional managerial, analytical and financial skills which are useful for performance evaluation and strategic formulation.

The findings of the research carried by Cinquini and Tenucci (2010), discovered that now-a-days, various software are also used by the managers for disseminating, recording, integrating and summarizing the huge data set in the meaningful manner for the data analysis and decision-making purpose. It also overcome the limitation of lengthy or time-consuming managerial process as data are already available into usable form that can be examined by the board members for making best plans and organizational decisions.

On the other hand, Simons (2013), analyzed the role of managers in corporate context and identified that cost-controlling measures, quality assurance policies, technological advancement strategies and others are the key strategies that is implemented by the managers in business for minimizing cost and improving product quality. In such respect, they use various key tools like Total Quality Management, kaizen costing, pareto analysis, run chart, budgeting and others for cost minimization and sales maximization purpose.

However, on the critical note, Nuhu, Baird and Bala Appuhamilage (2017), argued that risk management plan and strategy is of extreme importance in the current volatile market era. In this, managers designs plans to prevent itself from the possible threatening situations that can bring loss to an organization such as operational risk, market risk, legal risk, financial risk, regulatory risk and so on and enable corporation to attain success.

In accordance with Negishi (2014), Burns and Scapens framework founded that strategic management accounting practices in number of organizations have a lots of similarities on the basis of economic and social conditions, whilst, it is differentiated on the basis of distinguish organizational behavior and action implementation. In the study of Scapen, he commented that in the rapidly changing business world, management accounting process is driven and affected by the combination of internal as well as external factors. For instance, making budgets is an internal organizational requirement; however, it is highly affected by the governmental legislations, regulations, changing external market volatility and so on. In accordance with the framework, MA is the process of implementing change in an organization in order to cope up with the changing market conditions so as to bring improvement in performance, competitive strength and success.

Unit 17 Accounting Assignment Level 5

2. Application of the techniques of strategic management accounting in leading performance

According the views of Ziaja and et.al., (2016), strategic management accounting lays more emphasis on the collection of financial and non-financial information. The rationale behind this, both internal and external factors have high eve of impact on the decision making aspect and thereby growth as we as performance of firm. In the recent past, accountants placed emphasis on the collection of internal data for decision making. However, in the highly strategic business environment it is not possible for managers to take appropriate and profitable decision on the basis of internal data. Hence, now with the aim to make effectual decisions accountants consider both internal and external data. Moreover, strategies which are employed by the competitors also have great impact on the growth of firm. However, on the critical note, Gong and et.al., (2016) stated that different firms undertake varied techniques for cost management and control. Further, business units also highly differ in relation to the manner in which they record amount. In this, it is highly difficult for business unit to make comparison of its own financial aspects with others.

In accordance with the views of Nunes and et.al., (2017) both macro and micro factors have significant impact on the performance of firm. Along with this, traditional system or techniques of management accounting have several deficiencies which in turn influence the significance of it. Hence, by considering such aspect now managers prefer to employ the techniques of strategic management accounting. Such techniques include activity based budgeting, capital budgeting, ratio analysis, benchmarking or variance analysis etc. All these techniques provide managers of the business unit with suitable information which in turn assists them to develop highly competent and strategic policy framework.

Gautier and et.al., (2017) assessed in their study that variance analysis is the most effectual techniques of strategic management accounting (SMA). By taking into consideration such tool business unit can make evaluation of the performance of each department. Moreover, in this, manager makes comparison of actual performance with the standard aspects and thereby find deviations. For instance: By comparing actual sales and profit with the predetermined standard business unit can assess the extent to which respective department has made optimum use of financial resources. In this, by evaluating the causes of deviations firm can take corrective measures or actions for making improvement in performance. From assessment, it has been identified that due to the lack of promotional aspects deviations have occurred in sales revenue. In this situation, by placing advertisement on social sites firm can entice the decision making aspect of customers and thereby enhance sales revenue. However, Chen, So and Kuruoglu (2016) criticized that sometimes outcome of variance lead inappropriate decisions. Moreover, when business unit sets high target then it may result into high variances. Hence, to reduce such variance company spends its time and money to the significant level. In this way, variance analysis technique sometimes misguides higher management.

In their investigation, Öker, F. and Adıgüzel, H., (2016) found that by undertaking activity base costing technique managers can allocate cost to each activity in an effectual way. Under such technique, business entity assigns cost to each activity in accordance with their actual consumptions. Such technique enables firm to estimate the cost of individual products in the best possible way. Hence, by using such tool firm can identify non-profitable activities that negatively affect the success of firm. ABB costing technique provides high level of assistance to offer value added services and thereby makes contribution in the attainment of organizational goals and objectives. However, Schutzer, Arthur and Anscher (2016) argued that identification of suitable cost driver is not so easy. ABC technique is highly time consuming and complex activity. Further, activity based costing tool do not comply with GAAP which in turn affects the significance of such method. Moreover, business units following ABB tool requires to maintain two cost systems and accounting book. Company is required to maintain such records for both internal use and external reporting (Pros and cons of activity based budgeting, 2017). By considering this, it can be stated that ABB technique is a time consuming process and it may result into duplication of activities or efforts.

Laviana and et.al., (2016) identified that ABB technique exposes waste and inefficient production activities significantly. It also provides team of higher management with the numeric figures that contribute in devising highly competent plan for the near future. In this way, activity based costing technique assists in boosting both productivity and profitability.  In addition to this, El Alaoui and Lindefors (2016) depicted that by using ratio analysis technique company can develop strategic framework. By calculating ratios business unit can make proper evaluation its financial performance and position in comparison to the previous years. Besides this, it also offers opportunity to the corporation to evaluate its own financial position in against to the competitors. By getting information regarding such aspect business unit can make suitable modifications in the existing policies. Ziaja and et.al., (2016) claimed that by accounting principles and rules which are employed by different companies differ to the significant level. In this, ratio analysis technique does not help in devising suitable strategies.

Further, Gong and et.al., (2016) mentioned in their study that capital budgeting tool is one the main parts of SMA which in turn leads financial performance. Net present value, payback period, average and internal rate of return are the main investment appraisal tools that can be undertaken by business unit for the selection of suitable proposal or project. All these techniques enable firm to take investment decision after making evaluation of its viability or attractiveness. It enables manager to employ money in the profitable proposal after making evaluation of various options available to them. The rationale behind this, NPV technique clearly furnishes information regarding the return which will be generated by firm over initial investment. Further, payback period also highlights the period within which firm would become able to recover initial investment. Hence, after making evaluation of recovery period and return business entity is in position to select suitable proposal.

Simons (2013) assessed in their study that short-termism is highly concerned with the attainment of term profit through the means of short term projects. Hence, authors identified that management team which is recognized as short-termist lay emphasis on the evaluation of share price, revenue growth, gross and operating margin, productivity, unit can and return on capital employed etc.  Hence, after making evaluation of all such aspects manager takes decision and thereby achieve success. However, on the critical note, Ward (2012)  stated that short-termist approach may result into changes in frequent changes in the leadership strategies and framework in the form of takeover. This in turn closely influences the share prices of firm negatively. On the other side, Nam and Park (2016) defined, sub-optimization as a process in which business unit places more emphasis on the improvement of one aspect by ignoring the impact of others. For instance: when business unit undertakes measure to reduce the cost level then there is possibility that revenue and profit will decline. Hence, by keeping such aspect in mind business entity should take decisions. Further, in the dynamic business environment business organization needs to consider critical success factors (CSF) such as customer base, sales, profit, market share etc. while developing framework for the upcoming time period.

Hence, by considering all such techniques business entity can maximize profitability and thereby leads organizational growth.

3. Stating the role of management accounting course for the individuals

In the present era, companies appoint personnel who have ability to deal with all the financial aspects more effectually. In this context, course of SMA is highly significant which in turn helps individual in dealing with the monetary or cost aspects more efficiently. Moreover, in the business unit, main role of accountant is to formulate plans which in turn may result into cost reduction and enhancement of profitability aspect. Course of SMA will help individual in providing higher management with the valuable information regarding selection of proposal, deviation and their causes. In the business organization, management accountant is assigned with the responsibility to assess inefficient product line or activities and make continuous monitoring of cost level.

For this purpose, managers must have proper understanding regarding benchmarking or variance analysis, activity based budgeting etc. Thus, course of management accounting helps individual to develop strategic plan by conducting in-depth analysis of each and every aspect. Hence, by getting expertise regarding all the technique through SMA course one can build his/ her bright future or career in the field of management accounting. Hence, by offering suitable solutions to the team of higher management individual can build its distinct position within the firm.

CONCLUSION

Findings of the report concluded that companies having best quality manager will be able to succeed in the competitive market. It is because, the best business plans, strategies policies, growth as well as financial plans will assist them to compete successfully with the rival firms and build good reputation. Moreover, report also identified that performance evaluating using ratio analysis, variance analysis and other managerial tools enable them to make better growth plans for achieving long-run success.

REFERENCES

• Ahmed, I. and Manab, N.A., 2016. Influence of Enterprise Risk Management Success Factors on Firm Financial and Non-Financial Performance: A Proposed Model. International Journal of Economics and Financial Issues. 6(3). pp.18-63.
• Chen, Y., So, H. C. and Kuruoglu, E. E., 2016. Variance analysis of unbiased least â„“p-norm estimator in non-Gaussian noise. Signal Processing. 122. pp.190-203.
• Cinquini, L. and Tenucci, A., 2010. Strategic management accounting and business strategy: a loose coupling?. Journal of Accounting & organizational change. 6(2). pp.228-259.
• El Alaoui, S. and Lindefors, N., 2016. Combining Time-Driven Activity-Based Costing with Clinical Outcome in Cost-Effectiveness Analysis to Measure Value in Treatment of Depression. PloS one. 11(10). p.e0165389.
• Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education. 25(4). pp.792-793.
• Gautier, G. and et.al., 2017. Variance analysis for model updating with a finite element based subspace fitting approach. Mechanical Systems and Signal Processing. 91. pp.142-156.
• Gong, Y. and et.al., 2016. Effect of the viral protease on the dynamics of bacteriophage HK97 maturation intermediates characterized by variance analysis of cryo EM particle ensembles. Journal of structural biology. 193(3). pp.188-195.
• Ionescu, L., 2016. The Role of the Professional Accountants in Business Administration. In International Conference on Economic Sciences and Business Administration. Spiru Haret University. 3(1). pp.184-188.
• Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
• Laviana, A. A. and et.al., 2016. Utilizing timedriven activitybased costing to understand the shortand longterm costs of treating localized, lowrisk prostate cancer. Cancer. 122(3). pp.447-455.
• Macintosh, N.B. and Quattrone, P., 2010. Management accounting and control systems: An organizational and sociological approach. John Wiley & Sons.

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