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³Asking the question why we need accounting is like asking a farmer why we need rain.´

(MoneyInstructor.com, 2005).

Managerial Accounting has become the most intellectually challenging area in the field of

management, and the most turbulent one. All these new accounting theories and practice aim

at turning the accounting data into information highway for management decision-making

planning development and process. Moreover, Weygandt, Kimmel, & Kieso (2008) has

defined that an effective managerial accounting system should be able to assist managers in

planning, directing and controlling by providing information that would change the decision

on hand and add overall value to the enterprise.

Nowadays, managerial accountants are far from playing a passive role as information

providers, whereby they have to take proactive role in both the strategic and day-to-day

decisions that confront an enterprise. Per study conducted by Tayles, Pike, & Sofian (2007),

they have found that firms need to invest heavily in intellectual capital1 (IC) in the evolution

of its management accounting practices. This shows that management accounting practices is

important for the firm to perform. The list of management accounting practices mentioned in

this study are reporting & decisions, performance measurement, budgetary control and capital

investment.

This essay will explain on the importance of managerial accounting process in organization

to successfully carrying out the day to day as well as long term activities and goals.

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Managerial accounting is an alternative term for management accounting which defined as

the process of preparing management accounts that provide accurate and timely key financial

and statistical information required by managers to make day-to-day and short term decisions

(BusinessDictionary.com, 2010).

Siegel (2000) mentioned that adding value means helping managers run the business. It

means providing relevant information for business decisions, explaining how the information

impacts the decision, and participating in the decision-making process. Management

accountants know that they are adding value because people seek their advice for a variety of

business decisions because they look at trends and do in-depth analysis so that we can say

what the implications are, make better predictions, consider all the alternatives, and

understand the consequences and the pros and cons of each alternative.

While organization, refers to a company, business, firm, or association

(BusinessDictionary.com, 2010).

As such, in other words, the topic on how managerial accounting add value to the

organization can refer to on how does by preparing management account which provide

accurate and valuable information can help managers run the organization mainly in helping

them during the decision making process. 

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There are three fundamental processes for successfully carrying out day to day as well as

long-term activities which are planning, directing, and controlling. Thus, the managerial

accounting helps an organization in providing information and guidelines to managers for

preparation of the budgets and decision making for their departments. This will help in

directing and controlling operational activities by providing timely feedback on the current

operations as well as impact of past decisions. Once the budget has been set, this may

motivate managers and other employees towards organization goals in which this is in

relation with the budget and goals set. The next key importance is the ability to measure

performance of the sub-units, activities, managers and other personnel with the entity for

rewards etc. Last but not least, managerial accounting will help organization to construct the

SWOT analysis2 and analysing the organization¶s competitive position to know their standing

now and in the long run.

From a management accounting point of view the primary purpose of management is to make

decisions that may be classified as marketing, production, and financial (Grooan, 2009). The

tactical decisions which must be preceded by strategic decisions provide the historical data

from which the accountant prepares financial statements. In addition to the statements

summarizing historical transactions, financial statements may be regarded as a descriptive

model for decision’ making. As an example, a historical cost has always served as a very

useful measure of performance, control, and critical managerial decisions (i.e. make or buy,

sales mix, etc).

 

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©very item or element on the financial statements is the result of a decision. For each

decision, there exists a management accounting tool that may be used to make a good

decision. However, the management accounting tools can be used only if the management

accountant is successful in providing the information demanded by the particular tool

provided with high IC adopted by the personnel.

Noted that management accounting picks up data from cost database and prepare reports for

the management to facilitate decision making. Both financial and non-financial data are used

in the reports. In the non-financial data, both numerical and non-numerical information are

used. While numerical information consist of operational statistics such as units produced,

raw materials consided and labour hours used, the non-numerical or qualitative information

pertain to customers satisfaction, employees moral, access to markets and image of an

organisation.

For a particular decision, different types of cost and benefits are considered. Called relevant

costs, these have a bearing on the future and differ under various decision alternatives. If any

of these qualification is absent, it would be an irrelevant cost.

After considering the relevant information and making a good decision (though the good

decision may not always be the best decision), managerial accounting is also important as it

will assist managers in directing and controlling operational activities. How? Of course by

adopting activity-based costing method (ABC). ABC? is an approach to manage a business

that involves identifying all major operating activities, determining what resources are

consumed by each activity and the cause of the resource usage, and categorizing the activities

as either adding value to a product or service or not adding value. ABC benefits both strategic

planning and operational decision making because it provides financial and operational

performance information at the activity level that is useful for making decisions about

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business segments, such as product lines, market segments, and customer groups. It also

helps managers eliminate waste and inefficiencies and redirect resources to activities that add

value to the product or service.

This grounded theory case study of an insurance company by Norris & Innes (2002) found

that managers generally were favourably disposed towards Activity Based Costing (ABC)

method. A first proposition or hypothesis emerging from this case study was that non-process

managers had a poor understanding of the ABC information, and used it infrequently. In

contrast process managers understood the ABC information and used it frequently. As a

result, although the non-process managers were still in favour of the ABC information, they

considered that it made their job harder. In contrast the process managers considered that the

ABC information made their jobs easier whereby ABC information assisting in various ways

such as helping managers to understand better the causes of their costs.

Another key purpose of managerial accounting is to motivate managers and other employees

to direct their efforts toward achieving the organization¶s goals. In addition to planning for

the future, managers must oversee day-to-day activities and keep the organization functioning

smoothly. This requires the ability to motivate and affectively direct people. Managers assign

tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and

make many small decisions that affect customers and employees. In effect, directing is that

part of the manager's work that deals with the routine and the here and now. Managerial

accounting data, such as daily sales reports are often used in this type of day-to-day decision

making.

This motivates managers to achieve the organization¶s goals by communicating the plans,

providing a measurement of how well the plan was achieved, and prompting an explanation

of deviations from the plan. An example of achieving goals is through budgeting. The budget

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indicates the top management¶s desire to allocate resources and emphasize certain activities.

Another way to motivate employees to assist in achieving the organization¶s goals is through

empowerment. ©mployee empowerment is the concept of encouraging and authorizing

workers to take the initiative to improve operations, product quality, customer service, and

reduce costs.

One study conducted by ©ker (2009) shows that recently, the effects of MAS (Management

Accounting System) and budget participation has positive effects on managerial performance

increment. ©specially, budget participation is seen as a technique to persuade managers about

budget goals and to increase organizational effectiveness.

Budget participation will increase acceptance and commitment of subordinates towards

budget decisions and targets, on the other hand, makes possible to share information about

internal and external condition of organization with subordinates for top management. So, by

process of exchanging, disseminating and discussing information between top managers and

subordinates, job relevant information of managers and quality of decision can increase. In

one sense, budget participation constructs an environment that makes possible to get broad

scope and timely information by subordinates and in this environment decision-making

process can get easy and become effective.

Thus, subordinates are able to get broad scope and timely information about whole

organization and take right position to reach organizational targets by considering their own

departmental duties more clearly.

In addition, using broad scope and timely information together with participation to budget

setting process can enhance managerial performance of subordinates. When subordinates can

obtain broad scope and timeliness information about all organization, they get a clear

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understanding about their job and environment and this understanding decrease

organizational risk in the market.

Once these managers and employees clear with their goals, and motivated them to perform,

one way to measure the effectiveness is by performance measurement. According to Kaplan

& Norton (1996), the Balanced Scorecard translates an organization's mission and strategy

into a comprehensive set of performance measures and provides the framework for strategic

measurement and management. Traditionally, most organizations look at their corporate

performance by reviewing the financial aspects. However, financial measures alone are not a

balanced view of the critical success factors of any organizations, mainly because financial

measurements tend to measure the past. Therefore, what if an organization knows what has

happened, if there are no explanations of why it has happened. In addition, underlying

rationale in today¶s organizations is not just to measure the financial outputs but what

influenced the financial inputs with which the productivity of employee can be generated

continuously. One way is by conducting process performance.

Measuring the process performance will enhance the company activities, subunits, managers

and other employees within the organization. Furthermore, one of the critical roles of

managerial accounting is to identify and eliminate (or at least try to minimize) non-value

adding activities throughout the value-chain. This can be related with the Just-In-Time (JIT)

method3. The ultimate goal is to promote value-adding activities. The mismatch between

strategies and tactics, largely unintentional, with the overall goals and objectives of the

organization trigger most of the non-value adding activities in operations. Non-value adding

activities lead to higher production costs, inefficiencies, and hence the loss of profitability.

Therefore, to remain relevant and to create value, performance measurement systems (PMS)
 
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must attempt to minimize this mismatch. Any misalignment at strategic levels gets amplified

into a much larger mismatch of the goals at tactical operational levels.

Take this as an example on how important is the CFO's role in financial planning which it

cannot be overemphasized. A solid financial plan, authored by the C©O and CFO, provides

the backbone for a healthcare organization, linking the organization's strategic mission and

vision to measurable financial goals. A well-developed financial plan helps the organization

determine the critical relationship between strategy and financial capability and achieve

operating results that ensure financial equilibrium.

Another major concern of an organization is to remain competitive in the market. Sustaining

a competitive advantage is linked to the existence or creation of core competencies. A core

competency is a form of knowledge in the particular organization whereby organization will

normally conduct a SWOT analysis. When an organization has the knowledge to perform a

task better than other organizations, it has a core competency. And it is crucial for an

organization to identify the main core competency activity and to concentrate more to this

particular activity. A core competency has many different forms. A unique work method, a

unique mode of communication, and unique physical possessions can all be considered core

competencies. One case study summarized by Riemer (1995) on Australis Corporation in

1991. The Australis Corporation took on an activity-based costing project to add to a total

quality management initiative in the corporation. The project focused on overhead and non-

factory costs. The key aspect of this project was to increase knowledge of the relationship

between activities and costs in the company.

Phase one focused on cost reconstructions, mainly in the department head level. It

reconstructed costs in terms of activities, processes, and product groups. This was done using

driver analysis. The outcome showed that a number of low-volume products were under-cost

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because setup costs were not being recognized. It also showed other problems such as

packaging costs, maintenance costs, and equipment replacements were not correctly allocated

in certain situations.

Phase two focused on activity-based performance improvements. This phase looked at

activities and performance directly in order to define new activity/cost relationships. Both

non-value and value added activities were examined.

There were three main outcomes to this project. First, it provided a process orientation.

During the project, it was noticed that there were different cultures in different parts of the

corporation. The ABC portion showed how structure dominated process in the company.

Next, it provided a set of diagnostic tools for employees. Staff members were given the

knowledge to evaluate their own activities. Third, the project began the process of sharing

knowledge across departments within the company.

It was proved that management accounting is now being used as a mechanism for strategic

resource management. Together, all types of resources can be examined and a new type of

management through "knowledge" is created in which this has assessed the organizational

competitive position in ensuring the organization¶s long run competitiveness in its industry.

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As a conclusion, managerial accounting analysis is very crucial in managing an organization.

In the 21st century the business environment is changing very rapidly. These changes are

reflected in global competition, rapidly advancing technology, and improved communication

systems. The activities that make an enterprise successful today may no longer be sufficient

next year. A crucial role of managerial accounting is to continually assess how an

organization stacks up against the competition, with an eye towards continuously improving.

In fact, moving away from a historical cost accounting perspective and towards a proactive

cost management is the challenge that an enterprise has to face. Assigning the costs to a

larger number of cost pools that better represent those activities that are responsible for their

birth, portrays the general idea upon which future managerial accounting will evolve.

However, study by Gupta & Gunasekaran (2005), they are not suggesting that the historical

cost-based measures are not needed. We still need these lagging indicators for other reasons.

For example, historical cost-based measures may still be needed to validate contracts (debt)

and to provide a benchmark for long term as well as cross-sectional comparisons.

To recap, there are three fundamental processes for successfully carrying out day to day as

well as long-term activities which are planning, directing, and controlling. Thus, the

managerial accounting helps an organization in the following way:

›? Providing information and guidelines to managers for preparation of the budgets and

decision making for their departments.

›? Assisting in directing and controlling operational activities by providing timely

feedback on the current operations as well as impact of past decisions.



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›? Motivating managers and other employees towards organization goals in which this

is in relation with the budget and goals set.

›? Measuring performance of the sub-units, activities, managers and other personnel

with the entity for rewards etc.

›? Helping managers to do SWOT analysis (Strengths, Weaknesses, Opportunities and

Threats) and analysing the organization¶s competitive position to know their

standing now and in the long run.

So, to conclude, for any business unit starting from the smallest business activity to the

largest multinational business to be succeeded requires the use of managerial accounting

concept and practices (Tripod, 2005). This accounting provides data to owners for

preparation and scheming of rating products and services for customers too. The main focus

of managerial accounting is to help the managers for making better decisions. Because of all

these reasons, businesses and organizations hire on managerial accountants and thereby, they

are becoming integral persons of decision making teams instead of just data providers.



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