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Importance of Management Accounting in Decision Making

Added on - 28 Dec 2019

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MANAGEMENTACCOUNTING
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1SECTION 1......................................................................................................................................11 Importance of management accounting in decision-making...............................................12 Different types of Management Accounting Methods........................................................23 Critical Evaluation of Management methods and their application..................................34 Absorption and Marginal costing........................................................................................4a) Comparative Income Statement...............................................................................4C) Reconciliation of Profit and Loss Statements..........................................................7SECTION 2......................................................................................................................................8PART A...........................................................................................................................................8A budget is a forecast of which is expected to happen within the business during the next year................................................................................................................................................8Comparison and contrasting three planning tools used in management accounting.............9Part B............................................................................................................................................10A...........................................................................................................................................10CONCLUSION..............................................................................................................................11REFERENCES..............................................................................................................................12ILLUSTRATION INDEXIllustration 1: Table 1: Calculation of profits under Absorption Costing........................................5Illustration 2: Table 2 : Calculation of cost per unit........................................................................5Illustration 3: Table 3: Calculation of net profits as per Marginal Costing.....................................6Illustration 4: Table 4 : Reconciliation under Marginal costing......................................................7Illustration 5: Table 5 : Reconciliation as per Absorption costing..................................................7
INTRODUCTIONManagement Accounting being one of the most crucial and critical functions of the organisation.The decision-making process is highly supported by management accounting principles andprocedures further; there are various systems of management accounting. Systems are explainedwith their merits and applications on the organisation. Further this report deals with thecomparison of profits under different methods and their interpretations. Moreover, budgetingimplications are discussed and compared with various planning tools. Various financial problemscan be assessed and solved with the help of management accounting.SECTION 11 Importance of management accounting in decision-makingManagement accounting is a process which provides data to take several decisions in thebusiness. It is a process helps to identify financial information's which leads to formulating betterplan and strategies to make the enterprise more profitable. The importance of the accountinginformation's to take business decisions are as follows:Analysing Growth:The management accounting information gives help to analyse businessperformance as well as growth in the industry where the firm operates (Bowen, Call andRajgopal, 2010). If the firm is not growing in a better way and not profitable compared to aprevious year, then managers are making the proper strategies which lead to increase sales andprofit. Hence, the information is important to analyse growth and take corrective actions.Make or Buy Analysis:the Primary importance of the management accounting information isthat components or raw material of products and services are whether to produce or buy from themarket. For example, in a small enterprise, a component of the product can be make and can buy.From the Accounting, Information Company analyse that in making the component or in producethe component, the high cost is incurred. Which strategy or which technique will incur less costthat will be adopted in the production process. So, it helps to take decisions in the make or buycomponent of goods and services.Activity was Based Costing Technique:The technique is important to the business enterpriseto decide and appoint the best person who can sell the products and services effectively in thebusiness. As well as the accounting information's helpful for the firm to derive the cost incurred1
in every activity of production process. By the information, the firm can know that whichactivity is having the high cost of the amount.The method of Selling:It is very necessary for a business that on which basis the products andservices are to be sold in the market (Schaltegger, Gibassier and Zvezdov, 2013). Theaccounting information gives the data related to various direct and indirect cost associated withthe products. By costs, the firm takes the decision that how much percentage of margin has to becharged and which selling method is to be selected. If the advertisement strategy is being usedthen, the cost is also incurred in the price. So, it can be said that management accounting is veryimportant to decide selling method for sale the products and services.Cost Analysis:Cost is the very sensitive factor of a business entity. Higher the cost and lowproduction are unfavourable for the firm. In the accounting, all the costs are recorded which areincurred to produce goods and services. From the accounting information's management able toderive costs and analyse that whether the cost is high or low. If the cost is unfavourable then themanagement able to take the decision and formulate the strategies to increase sales and revenue(Contrafatto and Burns, 2013). From the information's company able to know that where theproblem is occurring and what the corrective actions should be taken to overcome the problem ofcost increase.2 Different types of Management Accounting MethodsThere are various methods of Management accounting based on different assumptions andfollowing various streamlined processes. However, some of the major methods followed by themajority of the manufacturing units are explained below:Marginal System:Marginal costing is a method under which variable costs are onlyassociated with the units and fixed cost are not allocated. All the costs are classified intofixed cost and variable cost. Marginal as the word depicts is an additional cost incurredfor every one unit produced additionally (Malmi, 2010). Therefore it shows the effect ofthe change in volume on the profits of the firm. As per this method, fixed cost areperiodic cost and are charged directly to the profits for that period. The contribution isarrived after deducting variable costs from the sales, and net profit is arrived afterdeducting fixed costs from the contribution.2
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