Concepts of Management Accounting, Capital Decisions

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Management accounting and finance concepts play a very important role in the activities and operations of an organization. Under normal circumstances the performance of an organization can be analyzed in terms of the practices of accounting and finance it employs. As a result the type of management accounting practices together with other factors like costing process, capital structure, acquisition and budgeting process. Therefore the prospects of an organization emanate from the nature and manner in which the above factors are applied in the process of operations.

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Management accounting, for instance is of importance because it has a lot of implication on the decision making function of an organization. Under normal circumstances the success of the organization depends on the nature and quality of the decision making process. Yet the process is informed by various functions, key among them is management accounting. Proper management accounting practices lead to successful decision making which therefore leads to the success of an organization.

The aim of this paper is to take a deeper look at the concepts of management accounting, costing process, cost & capital structure and budgeting process. Thorough analysis will be done with special reference to the American International Group (AIG).

Company Description

American International Group is an American company which deals with insurance. AIG is an international company with several branches and operations around the world. The company also has headquarters in three different locations representing the regions in which it operates. The company has along history of greatness and good performance. It was ranked once among the best business organizations globally.

The company suffered a lot during the crisis that struck the world during 2008. The company made a lot of losses and almost become bankrupt. It was bailed out by the Federal Reserve. As a result a lot of restructuring took place as the company had to redefine itself after the crisis. Therefore the company had to sell some of its branches so as to clear up its liabilities. The company’s history dates back to the year 1919 in China. It was then that Cornelius Vander Starr formed a company for insurance. However when the Chinese revolution took place in the 1949 the company left China.

The company took its base in New York since that time. However AIG experienced a period of expansion during which it opened various subsidiaries in different countries (Dull & Gelinas 2009). This saw the company expand its business to Europe, Asia, Middle East and Latin America. The management of the company was given to Maurice Greenberg in 1962. Since then the company’s style of operation changed since the new management focused more on corporate coverage. Greenberg came up with a new strategy through which agents were eliminated as such taken out of the pay roll. This was done by the inception of independent brokers who received only brokerage.

This improved the face of the company and its performance experienced a skyrocketing boost. Greenberg eventually took over from Maurice in 1968. This was the time when the company was listed and as such became public. However in 2005 the company became associated with a number of cases of fraud through the investigations of various agencies. As a result Greenberg had to resign and another CEO took over. Since that time AIG has experienced a lot of problems with more and more CEO’s coming on board and stepping down.

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Management Accounting Information System

Finance is a very significant component of any organization. The success of an organization emanates from sound financial practices. It is through the practices of finance that proper planning and implementation of the company’s strategy is done. The success of a company therefore hinges upon the success of financial practices put in place by the company (Drury 2008). Data storage therefore occupies a central position in the operations of the company. Through this necessary information is put together, this information can be accessed by the by the management of the company for the purposes of decision making.

Management information system is all about the collection of data concerned with the financial operations of the company. This data is kept in a position in which it can assist the management in the process of decision making. This goes a long way to ensure that the company takes informed decisions and move forward by consolidating its strength and taking advantage of the opportunities available. For instance financial accounting software can go along way in ensuring that effecting the organization of data relevant top financial operations. This in the long run makes the decision making process easier and convenient. This happens since with the information it becomes easier for the management to do thorough analysis of opportunities and come up with decisions that steer the company to greater heights.

American International Group has a comprehensive management accounting system through which the company tracks data on the relevant aspects of finance. This is entrenched in the company’s organizational structure and thus part of its normal operations. As a result the company has an effective decision making mechanism which is primarily based on the management information system. The inception of the management accounting information system dates backs in the early 1950’s when the company had shifted its base from china (Young, 2004).

As a result the company was put under new management which endeavored t change the way operations were done. Due to the complexity of decision making after the expansion of the company to other regions, it was deemed necessary to conceive a system of information that will assist the top management in their decision making roles. As a result an information system was incepted with the aim of tracking the operational events of the company from costs to capital and other relevant aspects. This system evolved into a full-fledged management accounting information system as the demands of the times necessitated.

Capital Decisions

The American International Group (AIG) bases all its capital decision on concrete information from its management accounting information system. The data normally contains all the aspects of operations, costs, accounting and financial operations. As a result this helps the management in the role of decision making. When Greenberg took over as CEO of the company, AIG changed its focus from the traditional decision making to modern methodology of decision making (Dunbar & Kemp 2003). This was complemented by the setting up of the management accounting information system. The systems main task was to inform the management in its role of decision making. The most affected decision by this transformation was the capital decision area. Capital decisions for the company are not based on the narrow consideration of capital and its use.

The company focuses on the sources of the capital in relationship to the operations and activities of the company as relied in the records. The information system is the greatest mark in the arena of decision making. The company is inherently a shareholder venture which obtains its capital predominantly from the stock exchange. Therefore the primary financial market conditions play a great role in the capital decisions of the company. However secondary market sources cannot be underestimated since the company has employed their use on several occasions on the past. The company relies much on the information system it is capital decisions. This has made the company capital decision process to be bore convenient and effective. This has thus pointed to the success pf the company globally.

Capital Acquisition and Structure

Originally weighted average cost if capital was significant in determining the acquisition financial structure cost. It offered a comprehensive indication of the real cost of the whole parameter. AIG traditionally employed this technique through which the analysis of the company’s weighted average cost of capital was done. As a result the company had a very simple way of calculating the capital acquisition and structure. Under normal circumstances the company being a holding company has different capital structure which is based on the operations and running of its subsidiaries. As a result the aggregate capital structure of the company represents the entire capital of all its subsidiaries through which the company carries out its operations. The company’s capital structure based on investors bearing in mind that the company is listed and thus public (Harris 1995).

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The divergent shareholders of the company are the source of capital. Therefore the capital decisions are made in full consultation with the relevant shareholders. Capital acquisition therefore takes the form of shareholder contribution since any push in the capital scenario takes place through the stick exchange or call money. As a result the company’s capital acquisition is a function of the shareholders through the stick exchange. However the company has other forms of capital acquisition. For instances bonds and borrowing have been instrumental in the company’s bid to acquire capital. For instance the company borrows intensively from other financial institution. The recent bailout by the government and Federal Reserve is an example of the company’s borrowing structure.

The American International Group (AIG) has transformed the manner in which it handles its corporate issues. The inception of the management information system was a huge breakthrough as far as decision making of the company is concerned. The Company’s cost structure represents its commercial operations in all aspects. Capital acquisition is inherently based on the investors. As a result all these take place on the stock exchange since the company is listed.

Budgeting Process

American International Group (AIG) puts a lot of emphasis on the process of budgeting. A budget is the most important tool of charting the way ahead for an organization. Under normal circumstances, a budget represents the plan of the organization and as such goes a long way in ensuring that the organization achieves its objectives. Through the process of budgeting AIG sets out the plans for the financial context of the entire year. The company’s budget process involves three distinct phases through which all the requirements are fulfilled. The various stages of the process of budgeting involve the following: planning, budget, implementation and audit. AIG Company conducts a thorough planning process prior to the making of its annual budget. Normally this process takes the longest time compared to the rest. The planning process takes six months during which a through evaluation of the previous budget is done before laying the stone for the next budget. Under planning the companies progress in relation to the previous projection is analyzed. It only after this stage that the company’s development goals are customized to match with the objectives of the last budget. Financial performance of the company occupies a lot of space during this process. After planning the next stage is that of budgeting. Through the budget stage the projections of the company are laid down. Under normal circumstances the company makes budgets of annual nature. The implementation of the plan and projections is the third stage n the whole process. At this level the budget is put into practical manifestation. At this stage certain adjustments are made to accommodate the emerging needs. Audit is the final stage of the companies budgeting process. Through this all the programs that took place during the financial year are evaluated to determine their progress.

The following figure indicates the four stages of budgeting process for the AIG Company.

Stages of budgeting process for the AIG Company
Figure 1. Stages of budgeting process for the AIG Company

Costing Process

Costing is an important parameter in the whole endeavor of any organization. Under normal circumstances costing involves the determining of the finances of the company has been used. The company has to keenly follow the expenditures of its finances. AIG Company is no different either; the company invokes a number of methods through which the costing process is carried out. Under normal circumstances the company emphasizes on the optimal utilization of its financial resources. As a result, AIG engages in the process of costing with the aim of determining the manner in which the financial resources are used so as to reduce the unnecessary expenses. The company mainly uses process costing for the purposes of determining costs. Process costing works well for the company since it has a diverse service profile. Under normal circumstances process costing is used for the determination of costs of companies with a diversified product and service profile. AIG Company deals with insurance as well as financial services; as a result the company invokes the use of process costing. This works well for the company bearing in mind that the company’s main purpose of costing is to determining the overall costs as to bring a reduction in the same.


Each and every organization has a number of procedures and processes through which the achievement of its goals and objectives is done. The American International Group (AIG) is no exception, the company has a number of process through which its endeavor are fulfilled. The paper has taken an analytical look at the various processes involved in the operations of business organization. The paper has discussed most of these processes in details. Emphasis has been given to management accounting, budgeting, information system and costing. Special reference has been given to the American International Group (AIG). Through out the paper the various processes involved in the endeavors of the AIG Company have been discussed. The paper has analyzed the company’s management accounting information system. It has been found out that the company has a comprehensive management information system. This has been significant in the decision making organ of the company. The information so gathered and collected through the system informs and aids the company’s decision making process. The paper also discussed the company’s budgeting and costing process in detail. It was found out that the company has a multifaceted budgeting system which involves four different phases. The company also invokes process costing in its costing endeavors. Through this the company keeps track of its expenses and use of its financial resources. The aim of the costing process is to determine the costs and expenses of the company with the aim of reducing them.


  1. Drury, C., 2008. Management and cost accounting. London: Cengage Learning EMEA.
  2. Dull, R. & Gelinas, U., 2009. Accounting information systems. New York: Cengage learning.
  3. Dunbar, E. & Kemp, S., 2003. Budgeting for managers. Washington: McGraw-Hill.
  4. Harris, E., 1995. Process costing. Washington: Chartered Institute of Management Accounts.
  5. Young, R., 2004. Management accounting. Washington: Prentice Hall.

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BusinessEssay. "Concepts of Management Accounting, Capital Decisions." November 20, 2022.