Managerial accounting is a branch of accounting that is of great importance to any business enterprise. Managerial accounting gives the managers and the internal personnel a summary of all the company’s activities that are of importance to them. Unlike financial accounting which provides the company’s financial data to the external environment such the company’s debtors and creditors, shareholders and many others, managerial accounting is only answerable to the internal organizational environment (Geense, 2005, p.102). As a matter of fact, managerial accounting is majorly concerned with cost analysis of products or services hence responsible for issuance of budgets, costs of products produced and cash flow statements.
This is the back bone of managerial accounting and is used to give the final prices to products after comparison of the cost of raw materials, production costs and all the other overheads involved. Determination of full costs and selling prices are very important aspects of any business enterprise in the world. Most organisations face challenges in trying to figure out which method to use to determine both the full cost and selling price of a product or service offered. The greater challenge is in the apportionment of overheads which has led to two different approaches in allocating them (William, 1999, p.23). These methods are original costing method and activity based costing method. Original costing method and activity based method are vital to the firms in the calculation of cost allocations to the products. Both original costing method and activity based methods have different implications to the price determination. This is due to different approaches in the allocation of resources they use
Original costing method
In original costing method, allocation of cost is done using direct labour. Therefore the use of direct labour makes labour intensive products have higher cost compared to other products (Steven, et al, 2008, p.14). Original costing method fails to give a more accurate cost because it relies on one parameter in the determination of cost the products. Besides, allocations of costs to the activities are done randomly on the basis of labour and machine hours. In original costing method labour is the main factor of production. In this case overheads are charged against the cost of materials and direct labour.
Activity based costing
Activity based costing methods allocates cost using all the activities that are involved in the production like, machine setups, salaries, orders among others. Through the use of activity based costing approach, allocation of costs is more accurate especially in the circumstances where there are no similar rates of direct labour-hours. Activity based accounting approach is more recommendable because it captures all the costs at the activity centres thus it gives a fair cost to each product. Besides activity based costing approach enables decision makers figure out on how they can improve their productivity and also on how to maximize shareholder value. As evidenced in the above discussion, the fact that cost reduction opportunities are available in activity based costing makes it preferable than original costing.
Apart from costing products, management accountants have an obligation of preparing the company’s budget from which the top management make policies based on the prepared budgets. Budgeting therefore involves planning the company’s financial resources so as to meet the objectives and expenditure of the company in terms of quantity. A budget therefore converts the plans and objectives of the organisation into money (Garrison, et al, 2007 p.33). Since a budget is an estimate it should be accurately prepared as it will be used to make important organisational decisions. I n order to successfully implement policies, a precise budget must be prepared.
The budget ensures that any project suggested by the policy does not run out of funds before its completion and it also ensures that the project does not have surplus funds which could be misused. A budget helps in showing the transparency and answerability of the finances of any given organisation. Budgets are thus prepared periodically for the internal departments of the organisation only. At other times, a budget may be required by external financial donors who will in most instances base their decision to give aid on a well prepared and sensible budget. Despite the fact that preparing a budget is a difficult task it is important to ensure that each and every organisation prepares one if at all it wants to be successful.
There are two major technique of budgeting namely:
- Zero based budgeting.
- Incremental budgeting.
Incremental budgeting is a technique in which the accountants use the expenditure figures of the previous year as the base year on which to calculate those of the current year. It is not an efficient method of planning as it does not give accurate results (Steven, et al, 2008, p.4) However, it is appropriate to be used by those companies whose previous year activities are similar to those of the current year. On the other hand, zero based budgeting technique does not rely on data of the previous years. Each year’s budget is dependent on only the activities of the current year. It is thus an accurate method of budgeting since it detailed hence being more reliable. However, it is a very cumbersome procedure because of the details despite its efficiency.
Importance of managerial accounting
All types of business enterprises require management accountants regardless of their size and location (Geense, 2005, p.140). This is because it serves very important functions in the organization especially when it comes to making decisions for the organization. The major function is to provide information that will be used by the organization to plan and make organizational decisions. The information that is provided includes data that is obtained from cash flow statements, budgets and other financial or non-financial data.
The second importance of managerial accounting is that of helping the organisation direct and takes control of the operations of the organisation. The organisation is in a position to control operations since it is able to make a comparison between the planned expected outputs together with the actual results. It therefore gives a basis of argument which is factual hence able to highlight the weak areas and take control of the before they occur.
Managerial accounting also helps the company measure its progress and performance. It is responsible for measuring the performance of managers, departments as well as the employees of the organisation. Once the performance has been measured, they also have the function of rewarding the performing managers, employees or the best departments. As a result of this the different personnel of the organization are motivated into working and hence increased overall performance of the organisation. Eventually the organisation provides quality products or services to the public thus having a good reputation which definitely increases sales of the company.
Lastly, managerial accountants have the duty of evaluating the position of the company in terms of competition. Competition is inevitable in the business world and thus should be put into consideration as it can determine the success or failure of an organisation. Managerial accountants therefore gauge if the enterprise is in a position to face competition from other related organisations. If the company cannot overcome competition then the reasons leading to this failure are tabled after which measures are taken (Garrison, et al, 2007 p.56). They also keep an eye to which that the company is at all times satisfying its customers, retaining and attracting other customers so as to fit into the competitive market environment.
From the above discussion it can therefore be concluded that managerial accounting is an integral part of any profit oriented enterprise. Just like financial accountants, managerial accountants perform important functions in the organisation (William, 1999, p.67). Managerial accounting as seen above is future oriented as it is used to predict the future using the current available data. This is of benefit to the organisation as it gives the organisation the capacity to plan ahead and be able to operate effectively both in the short-run and long-run. One of the major principles used by managerial accountants is the principle of Total Quality Management in which they make sure that they put more emphasis on the quality of the products produced or services rendered. The amalgamation of all aforementioned factors leads to a highly effective and efficient business organisation.
Garrison, R.H., Noreen, E.W., & Brewer, P.C. (2007). ACC 561: Managerial accounting: Custom edition 2010 (12th ed.). Boston, McGraw-Hill.
Geense, M. (2005). Managerial Accounting. Web.
Steven R. Jackson, Roby B. Sawyers, J. Gregory Jenkins (2008). Managerial Accounting: A Focus on Ethical Decision Making. Web.
William, B. (1999). Accounting for managers: Text and Cases, (2nd ed). Cincinnati: South-Western.