Value of Managerial Accounting in an Organization

Introduction to Managerial Accounting

Managerial accounting, simply put, is the procedure by which an organization can classify, calculate, assess, understand, and transfer all the relevant data needed to help a company attain its short-term and long-term objectives. Managerial accounting is also commonly called cost accounting. The primary distinction between managerial accounting and financial accounting is that the former is chiefly designed to assist the administrative units within a company in making assessments and decisions and maintaining overall control, while the latter is mainly a source of reference and information for external parties — such as stockholders and brokers — outside the company.

The four characteristics that distinguish managerial accounting from other formats of accounting are:

First, managerial accounting reports and analyses are private in nature and are only accessible to the administration of the company. Second, managerial accounting information is always related to the potential future performance patterns of the company rather than its historical performance records. Third, managerial accounting is primarily designed to help administrative and company decisions be made under easier and more informed circumstances. Fourth, managerial accounting is not restricted to typical and contemporary accounting techniques; instead, technologically advanced and practical structures are used for compiling the necessary information (Garrison and Noreen, 1999).

Defining Managerial Accounting

The Chartered Institute of Management Accountants (CIMA) describes management accounting as "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities."

In another definition, the Institute of Certified Management Accountants (ICMA) explains that the main task of a managerial accountant is to provide an organization's administration and executive offices with financial and relevant statements and reports presented in a format that alone can enable more informed decision-making. Furthermore, the ICMA also states that all the information a managerial accountant collects must include all factors that could be useful to the organization when delegating responsibility, making or amending policies, and overseeing all activities within the company. The ICMA calls managerial accountants the "value-creators" for an organization — that is, they channel all their efforts toward increasing the overall value of the company in the future. With this in mind, the ICMA states that "Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc."

The American Institute of Certified Public Accountants (AICPA) divides the practical importance of managerial accounting into three sections: (1) Strategic Management, which is mainly about creating strategies and marketing patterns for the future endeavors of the company; (2) Performance Management, which involves the progressive analysis of all performance activities and all the reasons and decisions that precede any pattern within the company; and (3) Risk Management, which involves understanding, identifying, and communicating the potential risks that the company might face when following a certain pathway toward its goals.

Aims and Key Data in Managerial Accounting

From the above definitions, the following aims of managerial accounting can be determined:

Favorable and intelligent utilization of all financial and tangible resources; designing and implementing strategies regarding business policies and marketing; strengthening the decision-making process and making it practically successful; designing and implementing all internal organizational behaviors; and researching all financial endeavors and patterns.

Some of the common and important data that managerial accountants collect include:

(1) All relevant data on the company's products and services, stock, pricing, and marketing strategies, as well as information on the products and services of top competitors. (2) All financial statements needed to execute effective short- and long-term analyses. (3) All updates on strategy and the impact of its implementation (Horngren and Foster, 1987; Kaplan and Atkinson, 1989).

Common Managerial Accounting Practices

Through the years, the main use of managerial accounting has been to help an organization make its internal performance superior and consistent. Throughout the 1980s, most research concluded that the domain of managerial accounting had undergone minimal to no changes or improvements, which is why the managerial accounting department was largely left in the background while other departments in the business sector underwent dynamic changes and gained importance. The widespread recognition of this dormant state and the criticisms that followed were the foundation for numerous changes that surfaced in subsequent years. The concepts of activity-based costing, the balanced scorecard, and bottleneck accounting were all developed in response to the heavy demand for change, transforming managerial accounting from a conventional, old-fashioned concept into a modern one.

Activity-based costing takes a different approach to studying the business activities that control a company's expenses. Rather than calculating the costs of employment, raw materials, or marketing in isolation, the managerial accountant analyzes the company's costs and expenses through the results that employees achieve, the products they make using certain raw materials, and the sales generated from a marketing campaign. This allows the organization to balance costs with returns, analyze profit or loss, and clearly identify market opportunities available (Kaplan and Norton, 2001).

Another concept introduced in managerial accounting is the balanced scorecard. The balanced scorecard is essentially a summary of overall expense, profit, and loss statistics alongside overall functionality statistics, based on the company's standing among its clients, the general and specific results of behaviors and actions within the company, and the overall creativity and innovation accomplished within the company (Kaplan and Norton, 1992). Kaplan and Norton explain that the importance of the balanced scorecard lies in its capacity to function as an efficient tactical business plan — classifying the value-creating factors and elements of the company while acting as a bridge between modern strategies being introduced and the traditional business setup (Kaplan and Norton, 2001).

The bottleneck accounting approach not only allows managerial accountants to identify the difference between anticipated and actual sales or profits, but also enables the company to identify and assess the actual bottleneck — that is, the factor or element that slows down or hampers overall performance — responsible for the gap between anticipated and real sales levels that causes the company to face a loss (see also Horngren and Foster, 1987). Through bottleneck accounting, managerial accountants can identify bottlenecks within a company's structure, statistically present the losses the company faced because of those bottlenecks, and explain the reasons behind them.

The overall difference between traditional and modern managerial accounting formats lies in the approach managerial accountants take when analyzing and presenting a company's cost-effectiveness. One consistent method by which a modern organization identifies differences between anticipated and actual sales is through variance analysis. Variance analysis techniques primarily allow an organization's administration to compare anticipated sales ratios with actual sales during and after the manufacturing process. This system is regularly used in combination with other recently developed techniques, such as activity-based costing and the life cycle cost analysis — the latter applied before the final version of a good or service has been approved for manufacturing — both of which are applied with specific goals in mind. These aspects are incorporated into variance analysis because even minor improvements in either the product or a specified company activity can yield superior quality results. While traditional organizations would have counted on high profits — which are never guaranteed — to balance overall production expenses, the modern approach gives organizations the opportunity to analyze how they can improve overall employee efficiency or product performance, thereby working toward a higher sales and profits record than what was initially anticipated.

Conclusion

This paper has explained the definition of managerial accounting and its value within an organization. The managerial accounting concept differs from general financial accounting in one fundamental respect: managerial accounting plans financial expenditures and directs financial endeavors for a company in the near or long-term future, whereas general financial accounting primarily maintains a historical record of all financial expenses and balances that an organization has accumulated over the years of its existence.

Alongside this, other aspects of managerial accounting that make it valuable for an organization include: intelligent use of all financial and tangible resources; construction and efficient implementation of strategies regarding business policies, activities, and marketing; strengthening the decision-making process; strengthening all internal organizational behaviors; conducting research on customer satisfaction; and understanding the finances involved in creating a new good or service, among others.

References

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