Business owners and managers are faced with countless decisions every day. There are various questions they have to answer like Where did my Profit go? What’s driving sales? What’s my staff productivity like? How is my business tracking compared to others in the industry? All information they need are provided by management accounting. Managerial accounting provides information to people inside the organization to make the best decisions, which is different from the financial accounting, which deals with information outside the organization.

Function of management accounting

The role of a management accountant is of great importance for a firm’s well-being. Management accounting refers to a function of tracking internal cost for business process that helps owners or managers make decision related to production, operation and investment, thereby leading to business goals achievement. Business owners need management accounting reports to get deep insight into the efficiency of their budget, the cost and their operations which enables them to allocate funds accordingly in production, sales and investment. As a result, even a single miscalculation or underestimation of any business plan by a management accountant can put a company’s future in danger.

management accounting affect management process

Managerial accounting is the process of collecting, analyzing and reporting information about the operations and finances of a business. Thus, managerial accounting plays an important role in the management process, mainly providing information to internal users of organization which enables managers to have data-driven input to make such right decision. Small businesses can leverage this powerful trove of calculations to improve decision-making over time for higher profitability and greater competitive advantage. There are some crucial functions of accounting management including as follows:

  • Margin analysis:  Determining the amount of profit or cash flow that a business generates from a specific product, product line, customer, store, or region.
  • Break even analysis: Calculating the mix of contribution margin and unit volume at which a business exactly breaks even, which is useful for determining price points for products and services.
  • Constraint analysis: Understanding where the primary bottlenecks are in a company, and how they impact the ability of the business to earn revenues and profits.
  • Target costing: Assisting in the design of new products by accumulating the costs of new designs, comparing them to target cost levels, and reporting this information to management.
  • Inventory valuation: Determining the direct costs of cost of goods sold and inventory items, as well as allocating overhead costs to these items.
  • Trend analysis: Reviewing the trend line of various costs incurred to see if there are any unusual variances from the long-term pattern, and reporting the reasons for these changes to management.
  • Transaction analysis: After spotting a variance through trend analysis, a person engaged in managerial accounting might dive deeper into the underlying information and examine individual transactions, in order to understand exactly what caused the variance. This information is then aggregated into a report to management.
  • Capital budgeting analysis: Examining proposals to acquire fixed assets, both to determine if they are needed, and what the appropriate form of financing may be with which to acquire them.

How management accounting helps in management process?

Management accounting plays an important role in each function of the management process: planning, controlling, organizing, communicating and motivating. All these function has impact on the decision-making process and therefore, any manager should get better understanding how to use management accounting information.

Management functions Description Managerial accounting

Planning

  • The planning process can be done both on long term and short term;
  • Long-term planning centralizes the future management expectations, for a period of three or five years, or even longer;
  • Later, long-term plans are converted in immediate needs and detailed plans in the form of an annual budget.
  • Helps establish future plans, providing accounting information used in the decision-making process, about which products should be sold, on which markets and at what price, and evaluating proposals for capital spending.
  • Plays a very important role in the short-term planning process.
  • Provides data on past performance which could be particularly useful as a model for future performance.
  • Establishes budget (planning) procedures and prepares schedules and coordinates short-term plans on all business sections and makes sure that the plans harmonize with one another.
  • Centralizes the various plans into one general plan for the whole business (the master budget), and takes the plan for approval by the upper management.

Controlling

A comparison between achieved and planned performance, so that deviations from the plan can be identified and corrected.
  • Useful for the control process because it draws up performance reports that compare the actual to budgeted revenue for each responsibility center.
  • Managers are warned about those specific activities that are not according to the plan
  • Assist the control function providing immediate action measures and identifying problems.

Organizing

  • Establishes the internal frame in which the required activities must
    be carried out and designates who will perform them
  • Requires a clear definition of managerial responsibilities and
    lines of authority
  • Involves decentralization
  • Departments are linked in a hierarchy of formal communication structure(vertically) and a staff relationship (horizontally).
  • Identifying the elements of an organizational structure more relevant and essential for proper functioning of the management accounting system allows the preparation of an internal reporting system for this structure and suggest a more appropriate organizational structure.
  • The organizational structure is dealing with authority, responsibility and expertise to ensure actual performance, managerial accounting is designing and implementing accounting system to better define and strengthen these connections.

Communicating

  • Establishment and maintenance of an efficient communication and an efficient reporting system.
  • The reports about performance prepared by accountants communicate important information to a manager, show him how well he manages his activities and highlighting those issues that require a more thorough investigation by the “management by exception” activity.

Motivating

  • Influencing human behavior so that participants can identify themselves with the goals of the organization and make decisions that align to them.
  • A good manager is able to motivate his subordinates to achieve objectives established by the upper management
  • The budgets (planning) and performance reports that are prepared by accountants have an important influence in motivating organization staff.
  • The budgets are targets intending to motivate managers to achieve organizational objectives.
  • Performance reports plan to motivate individual performance, by communicating performance information linked to the targets
  • The accountant participates in staff motivation by providing valuable assistance in identifying the area with potential management problems and highlighting those issues for a detailed investigation.

Which reports does management accounting provide?

A management accountant shall coordinate with all related department information which includes estimation of cost of raw material, labor, manufacturing, sales and advertising, social media networking, lobbying and company’s internal operation cost to make an overall analysis of company’s functioning capital and availability of funds to CEOs or managers of organization. Thus a CFO is a source of information required by directors and CEOs to take decisions.

Here are a few common types of managerial reports.

Account receivable aging reports

Does your business rely heavily on extending credit? Then an account receivable aging report is vital to your operations. This report breaks down the remaining balances of your clients into specific time periods allows managers to identify the debtors and identify issues in the company collection process.

If your company has many debtors, you may need to a complete rehaul to tighten up credit policies as cash flow is critical to the operations of any business. A company should always know who owes them what.

Performance reports

Performance Report Example of Managerial Accountant

The performance of a whole company, each department and each employee are considered at the end of each term in performance reports. These reports are used to make important decisions about the company’s future. Under-performers are sometimes let go and individuals who achieve or over-achieve their goals are rewarded for their commitment to the business. Performance reports can show flaws in workflow setups if let’s say for example a whole department is somehow not performing to a certain capacity. A performance report is an important tool to stay on track a company’s mission.

Cost managerial accounting reports

Managerial accounting determines the costs of articles that are manufactured. All raw material costs, overhead, labor and any added costs are considered, and those totals are divided by the amounts of products produced.

A cost report offers a summary of this information. This report offers showcases the cost prices of items versus their selling prices for managers. Using these reports, profit margins are estimated and monitored.

Better optimization of resources can be achieved by having this understanding of all expenses, including inventory waste, hourly labor costs, and overhead costs.

Other managerial accounting reports

Other managerial reports that are vital to every business include order information reports, project reports, competitor analysis and many other similar reports.

These reports are either created internally or outsourced through professionals depending upon your company’s capability to handle reporting requirements. To make the most informed decision companies and managers must have access to authentic data and credible managerial accounting reports.

Get your business on the right track today by learning more about managerial accounting reports with GA’s management accounting outsourcing service. Contact us via the hotline or leave your information here, GA Advisor will contact you as soon as possible!


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