Decision Making with Managerial Accounting Part 1

DecisionMaking with Managerial Accounting

Part1

DecisionMaking with Managerial Accounting

Decisionmaking is a cognitive process that leads to the selection of the mostoptimum options from a large number of a larger number of theavailable alternatives. Decision making is an inevitable process inmany fields of study, including the managerial accounting. Managerialaccounting is one of the accounting disciplines that involve the useof information by managers to inform themselves about the financialaffairs of the organization before they make decisions that pertainto the organizational matters (Thomson, 2007). In other words,managerial accounting involves the identification, analysis,recording, and presentation of financial data and information, whichis then used internally in the processes of decision making, control,and decision making. Managerial accounting can also be used inmeasuring organizational and employee performance.

Roleof managerial accounting

Theprimary role of managerial accounting is to enhance the internaldecision-making process, which means that managerial accounting isintended to benefit the organizational management and not externalstakeholders. This role of managerial accounting is achieved througheffective collection, analysis, recording, and reporting of financialdata that is sourced from different organization’s units ordepartments (Vincent, 2013). The managerial accountant coordinateswith all departments to analyze all functions of the company andprepare comprehensive reports that can help the management in makingviable decisions. For example, managerial accounting helpsorganizational management in exercising its budgeting role from aninformed point of view. This implies that managerial accounting isperformed to enhance internal management functions only.

Ethicalissues for the management accountant

Managementaccountants encounter issues of ethical concern irrespective of theindustry in which their employer company operates. To this end,management accounts have a primary duty to remain vigilant in orderto reduce chances of violating ethical guidelines governing theiroperations. There are four major ethical issues that are common inthe management accounting profession. First, pressure exerted by themanagement on the management accountant can tempt them to analyze theorganizational financial records in subjective ways in the favor ofthe management (Lister, 2013). For example, the management canpressure the management accountant to produce reports that willindicate a false picture of the organization’s success. However,this has short-term benefits while the long-term effect is thedownfall of the company.

Secondly,greed in the field of management accounting increase the risk ofmanagement accountants engaged in ethical practices, such as alteringthe financial records, which mainly occurs when the managementaccountant colludes with corrupt executives. This is a commonoccurrence that occurs when an accountant focuses more on thepersonal bank account at the expense of the company’s financialrecords (Lister, 2013).

Third,deliberate or unintentional omission of financial records is part ofunethical practices that amounts to the violation of ethicalguidelines. Although the omission of records is not similar to directmanipulation of records and numbers, both of them are equally wrongand should be avoided at all cost.

Theposition of the management accountants as a whistleblower places themin an ethical dilemma. Although the management accountants have anethical duty to report violations, they find themselves in a dilemmabecause such report can result in negative effects to theorganization (including the reduction in the share price and sales)and to individual managers, including retrenchment or imprisonment ifreported cases are serious (Lister, 2013).

Generaldescription of managerial accounting techniques

Break-evenanalysis

Break-evenanalysis is a managerial accounting technique that helps inestablishing the point at which the revenue generated from a givenbusiness will equal the cost of making that revenue (DeBenedetti,2013). It is considered as a supply side analysis because it onlytakes account of the cost of sales. In other words, break-evenanalysis help the management accountants in determining the quantityof a given products that an organization will need to sell in orderto recoup its costs and starting making profit. It calculationrequires the use of variable costs, fixed costs, and unit sellingprice.

Capitalbudgeting

Capitalbudgeting is a managerial accounting technique that is used establishwhether the long-term investment (including the new machinery, newplants, or replacement machinery) of a given organization should befunded. Capital budgeting involves the computation of the futureaccounting profits of each project, cash flows, and the present valueof cash flows for a given period (Mifflin, 2014). Severalcomputational techniques (including the internal rate of return,discounted cash flow, and the net present value) are used in thecapital budgeting. This technique helps the management in justifyingits decision to undertake long-term investment.

Cost-volume-profitanalysis

Thecost-volume-profit analysis is a managerial accounting technique thatis used by the management to make short-run decisions pertaining toeffect of changes in volume and costs on net income as well as theoperating income of an organization (Schneider,2012).In essence, CVP analysis is used to extend the details provided bythe break-even analysis, which in turn helps the management indetermining the point at which total costs will equal the totalrevenue.

PartII

Qualitycontrol

Qualitycontrol is a process used by organizations to ensure that theymaintain the quality of their products and the manufacturing errorsare minimized (Rouse, 2014). Therefore, the main objective of qualitycontrol is to ensure that service performance or the manufacturingfunctions of a given organization are consistent with well-definedquality criteria. Effective quality control requires organizations tocreate an environment for both the employee and the management tostrive for quality improvement and perfection. Different techniquescan be used to achieve quality control, some of which includebenchmarking, training of personnel, and thorough testing of productsto identify any significant variations. Different organizationscontrol the quality of their services and products by establishingquality standards that result in the standardization of theirproducts and effective reaction to quality issues as raised byconsumers.

ToyotaCompany is one of the companies operating in the automotive industrythat produce quality vehicles that are distributed across the globe.It success can be attributed to its quality control policy that isbased on two basic principles, namely quality is a process that iscontinually improved and quality is in-built at all stages (ToyotaMotor Corporation, 2013). Out of the many techniques available forquality control, Toyota applies rigorous check to ensure that no workin progress is passed to the nest production stage or faulty productsreleased to the market. To achieve this, the company involves allmembers of the production teams to ensure that only the quality workis passed on to the next step. In addition, Toyota has adopted newtechnologies that are geared towards ensuring that all products meetthe expected quality standards. For example, the company hasinstalled an intelligent system referred to as “pokayoke”, whichautomatically stops the faulty production that is detected to havesome errors (Toyota Motor Corporation, 2013). For example, the systemdetects when a lesser number of nuts has been tightened and warns theresponsible team of the fault. The system operates similarly to allaspects of production, thus ensuring that errors are minimized in allproduction lines.

Budgeting

Budgetingis a managerial accounting strategy that is used by both the publicand private institutions to forecast their revenue and expenses overa given period. Budgeting force managers to do proper planning of theactivities of the entire company by considering how businessconditions might change in the future and determining what need to bedone at the moment (Vincent, 2013). Budgeting serve differentpurposes, which include resources control, motivating the managementto achieve the budget goals, enhancing accountability, evaluating theperformance of the organizational management, communicating theresponsibilities of different departments, and enhancingaccountability in the organization. The type of budget adopted variesdepending on the type of the organization and the purpose ofbudgeting. The common types of budget include the business start-up,government, corporate, and event management budgets. Although thesebudgets are perceived to be different, they play the same roles offorecasting the revenue and expenses that will be incurred in a givenperiod.

Thetown council of Apple Valley is a public institution that appliesbudgeting in managing the development projects as well as therecurrent expenditure for the town. The council includes the capitaland the operating expenses in its annual budget. Each year, the towncouncil sets certain goals for its annual budget. For example, thegoals of the 2013-2014 budget was to improve the quality of servicesoffered to the residents through capital projects and to enhanceemergency operations within the town (Emick, 2014).

Table1: Adopted budget for Apple Town (2013-2014 versus 2012-2013)

All funds

Adopted 2013-2014 ($)

Adopted 2012-2013 ($)

Operating budget

49,901,384

53,088,446

Transfer out

22,279,568

18,392,905

Capital budget

29,720,800

20,876,070

Total

101,901,752

92,357,421

Source:Emick (2014).

Table3 shows that Apple Town council reports its budget for two financialperiods. This is mainly done for comparison purposes, where thetownship indicates the variance for every budget item. Apart fromserving as a tool to forecast the future revenue and expenses, thebudget helps the township in evaluating its own performance bycomparing the budgeted values with actual values of revenue andexpense incurred at the end of the year.

Costmanagement techniques

Costmanagement is one of the critical aspects that the management shouldconsider, especially when undertaking projects. Cost management is achallenging task because the management account has to regulate awide variety of costs involved in a given project (Henderson, 2013).Different cost management techniques can be used depending on thetype of cost that the management intends to control. For example,time management is a cost management technique that helps themanagement in ensuring that each member of a work team worksefficiently in order to reduce time wastage. Effective timemanagement ensures that the project is completed in time. Minimizingoverheads is also a cost management technique that helps themanagement in avoiding exorbitant overheads, thus reducing theoverall cost of undertaking a given project. Companies may alsoembark on capitalizing on efficient technology. Efficient technologycan serve helps in streamlining the playfield for large and smallbusinesses and reduce the overall cost of doing business (Mann,2014).

AppleIncorporation is one of the companies in the technology industry thathave managed to enhance its competitive advantage through effectivecost management. Although many financial analysts have been focusingon other factors such as Apple’s product differentiation, Rosenman(2011) identified cost management as a unique technique that Appleuses to increase its profitability. Apple Incorporation minimizesoverheads in all its projects and products. The company measures itsoverheads as a cost of the sales and general expenses, and thenconsiders ways in which each of these overheads can be minimized.This has allowed Apple to reduce its expenditure on rent, salaries,and utilities within a period of ten years. According to Rosenman(2011) sales, administrative and sales costs for Apple were 21 % ofthe total revenue in the year 2001, but this value had been reducedto 7 % by the year 2011. Therefore, cost management has allowed Appleto increase its profitability in spite of the still competition inthe technology industry.

Conclusion

Managerialaccounting is an important accounting discipline that helps themanagement to make internal decisions for the best interests of theirrespective organizations. Although managerial accounting is performedfor internal purposes, management accountants should observe ethicalguidelines. Some of the management techniques that accountants canuse include the break-even analysis, capital budgeting, andcost-volume-profit analysis. Other fields of managerial accountingthat managers can use to enhance the profitability andcompetitiveness of their organizations include cost management,budgeting, and quality control.

References

DeBenedetti,J. (2013). Theimpact of management accounting techniques on profitability.Santa Monica. Demand Media.

Emick,C. (2014). The TownApple Valley: Adopted budget 2013-2014.Apple Valley: Apple Valley Tow Council.

Henderson,K. (2013). Projectcost management techniques.Santa Monica: Demand Media.

Lister,J. (2013). Ethical issues facing the accounting profession. SantaMonica: Demand Media. Thomson, C. (2007). Managementaccounting.Montvale, NJ: Institute of Management Accounting Incorporation.

Mann,N. (2014). Four cost management techniques for small businesses.BusinessBee.Retrieved November 24, 2014, fromhttp://www.businessbee.com/resources/profitability/cost-management/4-cost-management-techniques-for-small-businesses/

Mifflin,H. (2014). Capital budgeting techniques. CliffNotes.Retrieved November 24, 2014, fromhttp://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/capital-budgeting/capital-budgeting-techniques

Rouse,M. (2014). Quality control. TechTarget.Retrieved November 24, 2014, fromhttp://whatis.techtarget.com/definition/quality-control-QC

Rosenman,S. (2011, August 3). What Apple does well: Cost management? SeekingAlpha. RetrievedNovember 24, 2014, fromhttp://seekingalpha.com/article/284455-what-apple-does-well-cost-management

Schneider,A. (2012). Managerialaccounting: Decision making for the service and manufacturingsectors.San Diego, CA: Bridgepoint Education.

ToyotaMotor Corporation (2013). Toyota’sapproach to quality.Toyota: Toyota Motor Corporation.

Vincent,V. (2013, August 19). Management accounting: Roles and challengesahead. Journalof Applied Management Research.Retrieved November 24, 2014, fromhttp://www.cmawebline.org/ontarget/management-accounting-roles-and-challenges-ahead/