role of management accounting for Bravo plc and discusses its use as an effective management tool. Management accounting, also called managerial accounting, is concerned with providing information to managers inside Bravo, those who direct and control its operation.
For management accounting to have strategic value, it must accomplish the three strategic objectives of quality, cost and time. Management accounting achieves its objectives by providing information that links the daily actions of managers to Bravo strategic objectives; by enabling Bravo mangers to effectively involve the entire extended Bravo enterprise of customers and suppliers in achieving strategic objectives; and by taking a long-term view of Bravo's organizational strategies and actions. Once Bravo managers understand the benefits to their organization that management accounting provides, they can use the information that is generated to make better decisions and improve the company's performance (Bell, Ansari, Klammer and Lawrence, 2010).
The Institute of Management Accountants (IMA) defines management accounting as the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information, which is used by management to plan, evaluate, and control operations within an organization. Management accounting ensures the appropriate use of, and accounting for, an organization's resources. With respect to Bravo's deteriorating performance, the management accountant plays a role in identifying and helping to correct areas of underperformance (Siegel & Shim, 2006).
One of the areas that management accounting can help with is the unhealthy rivalry and tensions between divisional managers. All managers should expect their performance to be measured and evaluated and compensated, so it helps to achieve their buy-in if the reporting system can be shown to be fair, reasonable and accurate. The accounting manager is responsible for promoting the use of accounting tools and techniques that accomplish these goals.
Unlike financial accounting which is concerned with providing information to stockholders, creditors, and others external to Bravo, management accounting focuses on providing information for managers inside the organization. Because of this difference in orientation, there are different activities involved in managerial accounting, even though they rely on the same underlying data. Planning is an important part of Bravo's managers' jobs, and therefore, managerial accounting has a strong future orientation.
Another key difference between financial and managerial accounting is the emphasis on precision for the former. Managerial accounting must be appropriate for the problem at hand, for example, identifying the issues affecting Bravo's performance; timely estimates that are useful for making decisions are often more important than precise figures. Because of this requirement for relevance, management accounting often focuses on non-financial elements, like customer satisfaction measurement. Management accounting also focuses more on segments of a company, such as product lines, sales territories, departments or any other categorization that Bravo managers might find useful.
Generally accepted accounting principles (GAAP) play a less significant role in managerial accounting, again because the audience is not external users. The common ground rules that GAAP set forth enhance comparability and help reduce fraud and misrepresentations, but they add little to the types of reports that are most useful in internal decision making. Also, management accounting information is proprietary; public companies are not required to disclose management accounting data nor much detail about the systems that generate the information.
A final distinction between financial and managerial accounting has to do with the optional status of the latter. Unlike financial accounting which is required by the SEC and tax authorities, managerial accounting is not mandatory and is required only in that it produces useful information. There are no regulatory bodies or outside agencies to specify what must be done. Bravo management alone determines what is useful for planning, control and decision-making purposes.
It should be noted that one of the limitations of management accounting is that it is only as good as its design and implementation. For some companies, the internal control and record-keeping may be burdensome. Bravo may wish to take advantage of software that is available to streamline business processes or customize reports. Another limitation is that, just as with financial accounting or any other accounting activity, there is the potential for fraud or human error that can result in misleading information.
In Bravo's case, they need to be sold on the benefits of making better decisions and their ability to perform better when they are guided by superior information. If for example Bravo aspires to be the number one producer of widgets in their market, then each manager can use management accounting information to understand how his specific responsibilities and performance contribute to or detract from Bravo's ability to meet its goals. Or, if Bravo aspires to be the number one servicer of widgets in their market, then Bravo managers may find it helpful to review customer satisfaction metrics.
Managerial accounting practices have evolved over time. In recent decades new managerial accounting practices such as activity-based costing and the balanced scorecard were developed. Unlike traditional managerial accounting, activity-based-costing deemphasizes direct labor or raw material as cost drivers, and concentrates instead on activities -- such as the number of production runs per month -- that drive costs (Geense, 2005). Activity-based-costing can give Bravo's managers a clearer picture of their cost drivers and their opportunities to reduce costs.
A balanced scorecard is a set of financial measures, operational measures on customer satisfaction, internal processes and the organization's innovation and improvement activities. Bravo managers can use the balanced scorecard to identify the value drivers of their organizational strategy and align them to the company's strategy (Geense, 2005).
Like all companies, Bravo must make decisions about how to allocate scarce resources, and it is the management accountant's job to facilitate this process. The scope of management accounting includes measuring and reporting information about economic activity within Bravo, for use by its managers in planning, performance and operational control. The planning function can be used to decide what products to make, as well as where and when to make them; to determine the materials, labor, and other resources that are needed. Management accounting is also used to evaluate the profitability of individual products and product lines, and to determine the relative contributions of different managers and different parts of Bravo's organization. Information that management accounting produces is also useful for operational control, that is, knowing how much work-in-process is on the Bravo factory floor, and at what stages of completion, assists the line manager in identifying bottlenecks and maintaining a smooth flow of production (Caplan, 2009).
There are various ways in which management accounting tools can help Bravo make meaningful and timely management decisions. Analyzing financial accounts allows managers to compare Bravo's performance to previous reporting periods, or to its competitors. Ratios provide a tool for making comparisons, and can be used for both financial and non-financial data (Financial and Managements Accounts, 2010).
Analyzing activity ratios for Bravo can help evaluate the utilization of assets in the business. In general, the greater the utilization of assets, the greater is the rate of return that is earned. There are various ratios to measure the activity of receivables, inventory and assets.
Accounts receivables ratios include both the accounts receivable turnover as well as the average collection period. The accounts receivable turnover ratio reveals the number of times Bravo collects accounts receivable during the period in consideration. It equals net sales divided average accounts receivable. Average accounts receivable for the period is the beginning accounts receivable balance plus the ending accounts receivables balance divided by two. If Bravo sales vary greatly during the year, then this ratio needs to be properly averaged to avoid distortion. This ratio tells Bravo managers if they are collecting receivables quickly enough; conversely an excessively high ratio may point to a too tight credit policy. Also, given that Bravo divisions trade with each other, it is possible that its management accounting needs to focus on reporting these transfers of assets from one division to another to make sure these activities are appropriately accounted for (Siegel and Shim, 2006).
The average collection period is another useful activity ratio, reporting the number of days it takes to collect receivables. Bravo managers should compare this ratio to what is common within the industry. When collection days increase, there is a danger that customer balances may become uncollectible. Also, if there is an increase in the collection period, it may indicate that Bravo is selling to marginal customers (Siegel and Shim, 2006).
The operating cycle is the number of days it takes to convert inventory and receivables to cash, therefore a shorter operating cycle is desirable for Bravo. Operating cycle equals the average collection period plus the average age of inventory. Bravo managers may also find it helpful to compare this number to industry averages or competitor's data if available; if the operating cycle rends too high, it can indicate that more funds are being tied up in noncash assets (Siegel and Shim, 2006).
Total asset turnover is a useful ratio to appraise Bravo's ability to use its asset base efficiently to obtain revenue. Total asset turnover equals net sales…