FUNCTIONS OF MANAGEMENT ACCOUNTING / FUNCTIONS OF MANAGEMENT ACCOUNTANT IN DECISION MAKING
Functions of management accounting cannot be fully appreciated if a working definition and explanation of what a management accounting is all about is not reasonably provided. To this end, I would like to start this article by providing a brief description of what management accounting is below.
WHAT IS MANAGEMENT ACCOUNTING?
Management accounting is the process of recognizing/ identifying, collecting, collating, measuring, analyzing, interpreting and communicating cost and non cost information that have economic value and relevant to management. This cost and non cost information are usually internal to the business so as to allow the management makes informed, economic decisions.
This is to say that an understanding of management accounting or financial accounting for that matter requires an understanding of the decision making process and being conscious of the users of accounting information and their various needs. Some scholars have attempted to distinguish between management accounting and cost accounting. I will not take that approach here as I cannot see any clear line between cost accounting and management accounting.
Users of accounting information can further be classified into internal users and external users of accounting information. Management accounting is concerned with providing information to those people within the corporation i.e. internal users to help them make better and more economically sound decisions and improve the efficiency and effectiveness of existing operations. That is why accountants are communicators in the business world.
Functions of management accounting
I want to believe that you won’t find it difficult appreciating the functions of management accounting now that an introductory knowledge of what management accounting is has been gained. The remainder of this article will now be devoted to the discussion of ‘functions of management accounting in decision making processes’.
Note that management accounting functions has been given attention in the service industry as the competition from world’s best companies become more intensive.
An efficient cost and management accounting system ought to and should generate information to meet the following requirements:
- Efficient allocation of cost between cost of goods sold and inventories for both internal and external profit reporting.
- Provisions of relevant information that will help managers make better economic decisions.
- Provision of information for planning, control, performance measurement and continuous improvements
Factors that defines the scope, dept and breath of management accounting function
Companies and businesses that existed prior to the 1980s enjoy a lot of protection and operated in an almost uncompetitive environment especially in the western countries where an average managers would look exceptional. Barriers of communication, government legislation, geographical distances, nascent nature of IT, etc restricts the ability of foreign companies to compete in domestic market. This ‘business heaven’ made it acceptable norm for companies to entertain and tolerate wastes.
Typical company and its management will always factor in the excess cost associated with inefficiency into the final cost of products / services and end users will have no choice than to buy as there are no real competitions.
The birth of globalization and e-business/e-commerce/internet commerce opened a new chapter of completion where companies have to compete against the best businesses in the world. Excellent manufacturing at a low cost coupled with high customer service become a major block in business survival.
As if this isn’t enough, product life cycle dramatically dropped reflecting the insatiable quest of customers to get better value for their money- thereby making a herculean task for management of various companies to grasp with the changing competitive environment of business.
Forward thinking businesses and world-class manufacturing companies responded to the above changes quickly by replacing their traditional production systems with new just-in-time production systems and making significant investment in advanced manufacturing technologies (ATM).
Again, the ever growing and insatiable appetite of new generation customers opened yet another challenging task to management to battle with. Nice companies responded to the yarning of customers for overall improved service at a reduced cost by developing what a call “customer satisfaction matrix”. In summary, four sets of targeted activities are designed to meet the needs of customers. They are:
FOUR ACTIONS THAT CAN MAKE YOUR CUSTOMERS HAPPY (customers satisfaction matrix)
- Identification of key business success factors, which include; is being cost efficient, producing high quality products, delivering your products and services to customers on time, and constantly innovating by making adequate investment in your R&D.
- Continuously improving on the above. It is a well known fact that a business cannot stand still just like any other thing that we do in life.
- Empowering your employees. This is no doubt one of the easiest ways of continuously improving. There are so many ways a company can go about motivating their staff. A simple delegation of certain power to employees to decide on matters that concern customers at the front desk is one way that employees empowerment can be done.
- Paying attention to value-added activities. Value added analysis helps a company to identify those activities that does not add value to customers’ satisfaction and try to reduce or eliminate them if possible.
The role of accountants in customer care services has long ago been fully established. Management accounting function will not be in the wrong track if it includes providing quality information about the delivery of customer service.
All these put together is emphasizing on the freshly created demands on management accounting functions to expand its roles by becoming involved in measuring and evaluating the quality of products and services, and constantly seeking efficient ways of managing the value added activities. The importance of accounting and its functions has taken a permanent front seat in the business and investment opportunities venhicle
This is to say that management accounting functions are therefore moving from the traditional emphasis on providing information to managers that only help monitor the activities of employees to supplying the information that will be useful in motivating employees into focusing on continuously improving value-added activities.
On a last note, I would like to sound a warning note to all management accountants that the advent of ERPS (enterprise resource planning system) has posed a serious threat that may make management accountants redundant as this software can perform all the functions of management accounting. ERPS is software that can simultaneously perform all business operations- including accounting and finance function. This excludes the human element of interpretation.
For you as a management accountant to be relevant, you had better start using your spare time to acquire some information interpretation skills which the ERP software cannot do.
As always, learning is the key to all knowledge. Learn new things today by purchasing any of the books functions of management accounting and ERPS implementation displayed below.
Cheers!
[...] contribution analysis is a powerful decision making and budgeting process tool that management accountant functions and managers use to aid most managerial decision making processes. Below are some specific [...]
i appriciat all the work done becouse it has helped me alot in my research thanks.
Welcome Alex, i am glad that you find this article useful.
menn,thank God for this provision,infact this has help my resarch alot,thanks.
You are welcome my bro. I am glad to know that you find this article on the functions of management accountants useful. Cheers!!
excuse me, do you have any idea what is management accounting information system and their functions? do they works just like MIS and AIS? help.. XD
Hi YellowCat,
Management Accounting Information System is similar to both AIS and MIS. The primary and probably the only difference is that MAIS is a dedicated channel of gathering information for Mgt. Control System. The traditional MAIS is the cybernetic system of control. Feed forward system of control was later advocated for to help overcome some of the inherent problems of cybernetic mgt control system. Thanks for asking.
Chinweike.
what a challenge to the whole of accountability on accurant positio
n of fanancial statement of accounting.In which i am student of ADO-EKITI UNIVERSITY,NIGERIA and my discipline is Accounting/Education.
Likewise; the word without MANAGEMENT IN A BUSINESS that is the business has no control and plan.
Thhanks for your participation
Thanks for this can you put side by side the differance between Management and Financial Acc in hw it really affect business operations where should one put more emphassis to
Pls i find this article useful for me. pls i need the function of a cost accountant in manufacturing industry
Sir,
Thank you. I am working and studying for management accounting, Thank you I have got an advaned study about my lesson
This is truely helpful and a very easy reading material which helped me fill up my hunger. I need more of such easily understandable materials on Management Accounting Techniques and issues of management accounting.
Thanks -
Arifeen
Thanks Arifeen. I love to share my experience on management accounting.
Toye, I will be posting an article to answer your question on the 5th of Sept. as I am out on holiday now. Thanks
Keep learning management accounting my dear. Thanks for reading.
Now wants study management accounting so I am Just following your article .thank plz I need a book recommend me to some book
Edem, depending on the area of Management Accounting you are looking at. I always recommend Collin Drury and Emmanuel Clive to new entrants to mgt accounting. Just do a google search on them. Thanks. Chinweike.
i am currently doing BCom management accounting via UNISA in South Africa and i want some advice on how this works in the real workplace please. now i am in between my 1st n second year so if you can give me some company i can apply to for internship at around south Africa.
Thabelo, to be honest with you, I have no much idea about finance and accounting job market in South Africa. However, a quick search in google will give you an idea. Thanks for droping in.
This study aims at evaluating the efficiency of management accounting and management accountant in achieving set objectives of an organization.
It also states the role, functions, advantages and disadvantages of management accountant and management accounting in an organization.
Management accounting is an accounting practice that deals with collection of data suitable for a particular business and analysing such data into an informative manner gearing towards achieving the organizational objectives.
Data can be collected from internal and external environment of the organisation which will attract some benefits and obstacles. It is important that management of accountant should consider these factors when collecting data for information required for decision making because it can make or mar the organization. Therefore, it is the place Management Accountant to initiate strategies to be adopted to achieve these goals.
Every strategy has a stipulated plan designed in line with meet its objective. These plans are inform budgets, short term or long term and systematic control process laid down to maximise profits and maintain high quality.
To achieve the aims of this study, this work will critically evaluate the ways in which management accountant and management accounting contributes to effective business management.
THE ROLE AND FUNCTIONS OF MANAGEMENT ACCOUNTING AND MANAGEMENT ACCOUNTANTS IN AN ORGANIZATION.
The role of management accounting and accountants in the organization is to provide information for competitive decision making. They do this by collecting, processing, and communicating the information to other top managers in the board of directors to help management plan, control, and evaluate business processes and company strategy to achieve set objectives. In most organizations, it is difficult to find an individual within the company with the title of “management accountant.” Rather organizations prefer to have Accountants who operates as financial accountants, costs accountants, tax accountants, or internal auditors. However, the ability to develop and use good management accounting (which covers a lot more ground than the product costing done by cost accountants) is actually an important ability for many individuals, including finance professionals, operational and marketing managers, top-level executives, and information technologists.
Generally, most very large companies prefer to have finance directors that are in the position to control other sub accounting departmental heads, and are involved in the decision making of the organization. These sub accounting heads reports to the finance director who in turn present it in the top management meeting. All of these individuals are responsible for the flow of good accounting information that supports the planning, control, and evaluation business objectives within the organization.
Therefore, it is important to know that Management accountant creates and uses cost, quality, and time-based information to make effective decisions within the organization.
Management Accounting is the key to success for any organization. Its enormous diverse task in an organization cannot be neglected. According to (Richard M. S. Wilson and waifong chua 1993. Pp7) “Management accounting practice, as a set of tasks that people labeled management accountant do, is enormously diverse.” They went further to say that, “research has shown that the job title ‘management accountant’ is not applied consistently in different organizations. Instead it is used to refer to a diverse range of jobs, types of task, level of seniority and responsibility.”
Different organisations, whither small or large businesses, profit or non-profit making organisations apply one form of management accounting function to excel. The functions of management accountant are as follows:
1. Gathering relevant information for decision making. Information is gathered based on potential areas of activity of an organization. E.g., if the aim of an organisation is to protect the safety of its employees, they will source for information that will enable them achieve that objective by providing different safety measures and securities. There is the need to also consider some uncertain environmental factors of such as economic boom, high inflation, recession and the strength of competitors which ‘Drury 2008’, referred these as ‘state of nature’. (According to Drury 2008, pp10.) “The course of action selected by a firm using information presented above will commit its resources for a lengthy period of time and how the overall place of the firm will be affected within its environment that is, the product it makes, the markets it operates in and its ability to meet future changes.”
2. Budget preparation. The preparation of overall budget lies within confines of management accountants. This is because budget planning involves using valuable information gotten from various departments within the organization and its competitive environments having identified the objectives of the organization. It is important that management accountant relates with other heads of department such as financial accountants, cost accountant, production/operation managers, human resource managers and other technical managers of the organization to be able to provide a master budget that is not misleading. Research has proved that where there are scarce resources the managers try to influence their departmental budget to attract more resources allocated to them to carry out their activities. Therefore, management accountant implements the information gotten these various departments after carrying out systematic investigation.
The finance manager furnishes the management accountant with the financial status of the organisation of which without such information the budget may be misleading.
The cost accountant provides cost of materials, cost of labour, fixed cost and variable cost of production which are very important for budget planning.
The production / operation manager. They design the products and the quality expected to achieve to the management account, that them provides control measures to achieve such quality. This can be achieved with the help of research and development department.
The human resource manager gives details of staff and their work designation to the management accountant as to help him check if the organization is over staffed or under staffed. This may increase or decrease cost of production as one major objective of an organization is to maximize profits.
It is also the duty of the management accountant establish the planning processes required.
The planning process of budget takes different stages to achieve. According to Drury 2008.pp352, the different stages for budgeting are
Budget is a very vital tool in business decision making process because the owners of the business or top managers usually rely on budget thresholds or limits, to engage in short-term or long term projects. For example,. Owners of an organization can only go into contract with other organizations as joint venture if the earnings before interest, taxes, depreciation, and amortization which are non-operating cost are determined.
3. Setting up control system. It is the duty of management accountants to set up a strategic control system suitable for the nature of the business.
(According to Collins Drury 2008. : 387)He defines management control system as “the process of ensuring that a firm’s activities conform to its plan and that its objectives are achieved.” He went further to say that control measures cannot be determined without objectives and plan. While (Otley el at 1995, :276) defines management accounting as “a function concerned with the achievement of overall organizational aims and objectives.” With regards to the two definitions, the role of management accounting and accountants cannot be over emphasised as it is a measure for achieving budget.
Management control is applied by management accountant in different ways to cope with the problems in an organization and to achieve purpose. These different types control are as follows:
a. The behavioural or action controls. This where a supervisor is appointed to oversee the day to day activities of the organization and report back its findings. That is to say, that he reports back if the control initiated is understood and are followed.
b. Personnel, cultural and social control. This kind of control ensures that employees have the necessary skills required to attain the set objectives. Where is lacking, the manager organize trainings for employees to understand and apply control measures.
c. Results or output control. Management accountant may not be involve in the supervision of the daily activities but uses the final output produced to check if control measure has resulted to desired quality.
The systems of controls applied to achieve the above types of control are as follows:
i. Cybernetic control systems. This control system is often referred to as thermostat control system which is mechanised and regulated as required by the managements. It is used to monitor the process of output and to dictate when there is deviation from predetermined level so as to adjust input.
ii. Feedback and feed forward control systems. (According to Drury 2008,:392) He described feedback system as “It involves monitoring outputs achieved against desired outputs and taking whatever corrective action is necessary if a deviation exists.” And feed-forward control system as “instead of actual output being compared against desired outputs, predictions are made of what outputs are expected to be at some future time.”
Measuring performance
Assessing risks
Alloca
Thanks, for this easy to read and easy to understand article.
Right now I don’t have much time to write, but thanks again.
thanks for everything but can you send me the essential or ingedient of management accounting,i.e planning, controlling and decision making
Many thanks, the write up is educative, simple and straight to the point. I look forward to more of it. Hope this is not the only medium to interact with you.
Thank you for this publication
Thank you very much for making this companion information available on air. It has gone a long way in helping me in various ways. Thank you.