Managerial Accounting Importance

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Introduction

Change in the business environment has called for increased care in managerial decisions. Managerial decisions play a major role in the success or failure of an organization. Managerial accounting is one of the most important elements in management decisions. Managerial accounting is sometimes mistaken for financial accounting, but the two are different. Managerial accounting aims to use accounting information for managerial decisions. Unlike financial accounting which aims at providing accounting data for external use, information in managerial accounting is aimed for internal decision making and evaluation. The objectives of managerial accounting are to provide information for decision making, planning, and control (Stienemann, 2009, p.17). The information is also used in deciding on resource allocation as well as performance evaluation. There has been increased interest in the changing roles of managerial accounting in decision-making. Various research studies have aimed at evaluating the role of managerial accounting and managerial accounting systems. This research paper explores how managerial accounting is presently practiced and how it contributes to organizations’ management. From this research, ideas that can contribute to the future of managerial accounting are addressed.

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Background information

Managerial accounting is not a new idea in business management. The idea of managerial accounting dates back to the industrialization period. The basic objective of managerial accounting is to provide individuals in management positions with accounting information to assist them in decision-making. As compared to financial accounting, managerial accounting differs in various areas. Information from managerial accounting is intended for use by organization managers rather than shareholders or creditors (Kaplan & Johnson, 1987, p. 137). Managerial accounting reports are usually confidential. Unlike historical financial accounting, managerial accounting is usually forward-looking. Information in managerial accounting is prepared with reference managers’ needs rather than on accounting standards.

Managerial accounting has experienced significant changes in how it is practiced. In the 1980s managerial accountants were criticized for using outdated principles despite major changes in a business environment. Motivated by these criticisms, there have been significant changes in the practice of managerial accounting. The changes in managerial accounting have resulted in its classification into traditional and innovative managerial accounting practices (Kaplan, 1984, p.63). Traditional managerial accounting makes use of traditional principles while innovative accounting practices have introduced new practices as a response to change in a business environment. The major difference between the two practices is found in how cost accounting is made. Among innovations in managerial accounting is life cycle cost analysis, which is designed with a modern business environment in mind (Northcott, Scapens & Hopper, 2007, p. 93).

Managerial accounting plays an important role in managerial decisions. It adds value to the accounting process by inquiring whether resources are used efficiently in the organization. Managerial accounting does not focus on financial accounting alone but also on other resources used by the organization. In this regard, knowledge, and information, trained personnel, morale, innovative capacities, and committed customers are considered as resources (Lal, 2009, p. 87).

Objectives

Managerial accounting is an important practice in modern business management. The research study aims to explore the correlation between a successful business and effective managerial accounting. The specific objectives of the study are:

  • To find out the nature and scope of managerial accounting in corporate firms.
  • To come up with policy recommendations on how to improve the role of managerial accounting in managerial decisions.

Methodology

A literature review on materials on managerial accounting was conducted. The reviewed literature is compared, analyzed, and discussed to come up with a conclusion and recommendations.

Literature Review

In the recent past, there has been increased interest in the role of managerial accounting in corporate management. Professional accounting bodies such as the Chartered Institute of Managerial Accountants (CIMA) have funded research into the role of managerial accounting in modern management. In United States Institute of Management Accountant (IMA) has sponsored a study into the practice of managerial accounting (Siegel, 1999, p. 73). In Australia, various studies have been made on the changes and role of management accounting in the country. Besides, there is ample literature on the subject. Many scholars are interested in the subject because of the important role managerial accounting play in management decisions. The major object of various studies and publications has been on motivation for changes in managerial accounting, changes in the functions of managerial accounting, and the changes in required skills and practice of managerial accounting.

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Motivation for changes in managerial accounting

According to research conducted by IMA in the US, the rate of change in the practice of managerial accosting had been faster in the period between 1995 and 1999 in the previous period. The study also showed that the rate of change in managerial accounting was going to continue for more than three years. The main contributors to the changes were identified as advancement in technology, globalization, and increased competition. On the organization level, the motivations for change include increased emphasis on customer and supplier relationships, outsourcing, downsizing, teamwork, and the trend toward flatter organizations.

The changes in the business environment have compelled organizations to change how they operate and how management is done. Indirectly, these changes affect the tasks and roles of managerial accounting. This is a result of the fact that managerial accounting has been used to provide information for management decisions (Siegel, 1999, p. 74). Some of the changes, however, have direct effects on the functions and practice of managerial accounting. For example, advancement in information technology has availed more information to managerial personnel and they expect the management accountants to provide the information expeditiously. Advancement in information technology has allowed the use of the technology in managerial accounting.

Managerial accounting and Management d process

Various authors describe the purpose of management as enabling people to have joint performance that is unified by a common value, common goals, correct structure, and enabling training to respond to change. The major role of the management process is to enable the stability and endurance of an organization to changes. This preparedness is ensured through the progressive coordination of resources, activities, and efforts. The process of management includes defining the direction, objectives, and strategies of an organization. The process is also responsible for aligning the processes, organizational structures, and systems to meet the objectives. In addition management process secures commitment and provides control over that lead towards the organization’s goals.

To realize organizational objectives, mobilization and development of capabilities are needed. This is ensured through the effective allocation of resources. The management process constitutes allocation of resources, use of control, and ensuring commitment (Rusell, Siegel & Kulesza, 1999, p.67). Without appropriate resource allocation control and follow-up, their important capabilities will be underused and the objectives of an organization are less likely to be met. In general, management accounting constitutes the part of the management process that is responsible for ensuring efficient use of resources in an organization. Management accounting provides a perspective in management that focuses on the effective use of resources. In addition, it helps other parts of the management process to ensure the overall success of an organization.

Changes in managerial accounting

According to a study made in Australia in 1989, the function of management accounting was described as providing management with accurate and timely information for decision making. According to a study made in the UK, the function was described as to add value to strategy formulation and change in an organization. The role of managerial accounting in adding value to decisions in an organization was reflected in many other definitions (Reid, 2000, p. 26). Apart from changes in the functions of managerial accountants, users of managerial accounting have also changed (Burns & Scapens, 2000, p. 89). The users have changed to include engineers, marketing, human resource personnel, operations, and functional teams. The role of managerial accountants also changed to include giving expert advice, providing analytical data, designing performance evaluation systems, managing complexity, and acting as internal consultants (Innes & Mitchell, 1990, p. 116). From a study conducted in the UK, it was observed that managerial accountants main act as internal consultants. The study also showed that managerial accountants provide important information for decision-making and play a major role in decision-making. According to Binnersley, managerial accountants should be observant of the changes to be prepared for future roles (Binnersley, 1997, p.36).

Analysis and discussion

Managerial accounting is central to the management process. From the literature review, it was observed that there was a relationship between the performance of an organization and managerial accounting. From the literature review, it was also observed that the main function of managerial accounting is to provide data on resource allocation and utilization in an organization.

The management process is responsible for defining the objectives of an organization and laying out a strategy for the attainment of the objectives. The objective and the strategy to meet the objectives are the most important elements to the success or failure of an organization. Setting out objectives that do not conform to an organization’s mission can lead to a wastage of resources. The right objective should be defined to attain the mission and vision of an organization. To define the right objectives, the individuals involved in decision-making must be informed on all elements of the organization. Managerial accounting aims at collecting all important information for decision-making. In addition, managerial accounting analyzes and provides information easily and understandably. This not only ensures that management is informed on past resource utilization but also provided information that predicts the future trend in the organization. This information helps in evaluating the past performance of an organization and providing information for future planning. An organization has more than financial resources; these resources have to be managed effectively for the benefit of an organization. Managerial accounting brings about accountability in resource utilization (Vaivio & Burns, 2001, p.59). Since information is prepared with managers in mind, the information is easy for the managers to analyze. The success of any organization depended on the quality of decisions made. On the other hand, the quality of a decision depends on the information available to decision-makers.

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Management accounting has been changing with changes in the business environment. After criticism for failing to adapt to change in the business environment, managerial accounting has started to change with the business environment. The changes observed include changes in the data collected, the method used in data collection and analysis, and the uses of managerial accountants. By using information technology in data collection and analysis, managerial accountants can provide accurate and timely information for decision-making. The use of technology in data collection has also allowed managerial accountants to have more time to analyze the data as well as participate in decision-making. The changing trend in the roles of managerial accountants shows that they will have more roles in decision-making in the future.

Conclusion and Recommendations

From the research study, it is concluded that managerial accounting plays an important role in the success of an organization. Managerial accountants are more concerned with availing information to assist management in policy formulation, planning, organizing, directing, and controlling of organization activities. For a good decision, information is required. Managerial accounting collects and analyzes important information on resource allocation and utilization. Information from management accounting adds value to decisions made by management.

Globalization, technological advancement, increase in competition, and other changes in the business environment call for expansion of the roles of managerial accountants. In the new business environment, there is needed for better and faster decisions. The main implication from this study is that present and future solutions to management accounting lies in its ability to provide accurate and timely information as required by the management process. Management accountants must be able to use information tools in an organization to provide management accounting information as required in time to time decision making. Apart from technical skills management accountants must have personal skills such as communication, creativity, analysis, and adaptability.

Reference

Binnersley, M (1997). Do you measure up?. Charter 9(1).

Burns, J. & Scapens, R. (2000).Conceptualizing management accounting change: an institutional framework. Management Accounting Research. 11(1).

Innes, J. & Mitchell, F. (1990). The process of change in management accounting: some field study evidence. Management Accounting Research. 1(1).

Kaplan, R. & Johnson, T. (1987). The Relevance lost: the rise and fall of managerial accounting. Massachusetts: Harvard Business Press.

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Kaplan, R. (1984). The evolution of management accounting. The Accounting Review.

Lal, J. (2009). Adv. Management Accounting. New York: S. Chand & Company Limited.

Northcott, D., Scapens, R. & Hopper, T. (2007). Issues in management accounting. New York: Finance Times Prentice Hall.

Reid, G. (2000). The impact of contingencies on management accounting system development. Management Accounting Research.11(4).

Rusell, K., Siegel, G & Kulesza, C. (1999). “Counting More, Counting less: Transformations in the management accounting profession. Strategic Finance 7(3).

Siegel, G. (1999). The Pace of Change in Management Accounting. Strategic Finance, 7(4).

Stienemann, R. (2009). Comparative Management Accounting. New York: GRIN Verlag.

Vaivio,J. & Burns, J.(2001).Management accounting change. Management Accounting Research. 12(4).

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