The Role of Management Accounting in Effective Decision Making

The provided study emphasizes the critical role of management accounting in facilitating effective decision making within a company. It highlights various planning tools such as incremental based, performance based, activity based, zero based, and priority based budgeting techniques. The study also discusses the importance of inventory management systems, including their definition, benefits, best practices, and more. Additionally, it provides insights into the historical evolution of management accounting and its integration with innovation in management control. Overall, the study underscores the significance of management accounting in solving financial problems and achieving operational efficiency.

MANAGEMENT
ACCOUNTING
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Contents
INTRODUCTION...........................................................................................................................................3
TASK 2..........................................................................................................................................................3
P4. Advantages and disadvantages of different planning tools used for budgetary control....................3
M3. Assessment of different planning tools and their application for preparing and forecasting budget.
.................................................................................................................................................................5
P5. Assessment of management accounting system in respond to financial problems...........................6
M4. Assessment of how management accounting can lead organization to sustainable success...........9
D3. Assessment of planning tools to solve financial problems which leads to sustainable growth and
success of organization............................................................................................................................9
CONCLUSION.............................................................................................................................................10
REFERENCES..............................................................................................................................................11
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INTRODUCTION
Management accounting is the process of identifying, classifying, summarizing, recording,
analysing and monitoring financial information which are used by internal management of the
organization for strategic decision making to attain organizational goals and objectives. This
report will highlight advantages and disadvantages of various planning tools used in budgetary
control. It also includes brief history of evolution of management accounting and assessment of
how organization adapt to various financial problem in reference to ratio analysis, key
performance indicators and benchmarking. It also highlights management accounting system
which are used to solve the financial problems of the organization effectively and efficiently.
TASK 2
P4. Advantages and disadvantages of different planning tools used for budgetary control
Budgetary control is a tool of finance that helps the manager of the company to control cost
of the company which includes budget preparation, department coordination and comparing
actual performances with estimated performances of the company. It helps the company in
controlling cost and maximize the profit of company, it leads to coordination among various
departments of the company and it helps company to achieve economies of scale.
1. Fixed budget: This planning tool of budgetary control is also referred to as static budget.
Fixed budget do not vary with the change in the operation of business. Costs are fixed so
that expenses do not vary with the change in the revenue (Chenhall and Moers, 2015).
Advantages of Fixed budget
 Fixed budget helps in measuring profits and performance of the business
according to the planned budget.
 This type of budget helps in keeping the cost down of business and gives clear
distinct ideas to prioritize important activities which are essential for the growth
and expansion of business (Van der Stede, 2015).
 This budget is easy to use and easier to estimate the amount of tax for the
particular period.
Disadvantages of Fixed budget
 Fixed budget cannot be amended at any time during the financial year, even when
there is a change in the operation of business activity.
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 Fixed budget is do not account for unpredictable events and activities and is
highly inflexible to the change in operations of business.
 This planning tool of budgetary control is not an effective measure to track and
control expenses.
2. Flexible budget: It is a budget that adjusts with change in the volume and activity.
Flexible budget gets altered amid the year for original sales, changes in cost of
production and any other change in business working conditions.
Advantages of Flexible budget
 Variable cost in flexible budgets are characterized as percentages of sales. For example,
if sales somehow increment significantly, flexible budgets would change in accordance
with spending on marketing to gain more profit of unexpected increase in income.
 A flexible budget can detect change in the overall revenue, and the team can take
remedial actions to fix the issue.
Disadvantages of Flexible budget
 It can be tedious to think of exactly how variant those variable costs might be. Time is
mostly at premium during the budgetary season.
 A lot of rules lead to people breaking them as it becomes difficult for them to abide with
them.
3. Incremental budget: This type of budget is prepared by analysing and evaluating
previous year’s budgeted plan by adding some incremental value to the budget which
helps in achieving desired goals and objective effectively and efficiently.
Advantages of Incremental budget
 This planning tool of budget is simple to use and well structured to consistently
operate in a stable manner for attaining long term goal of the company.
 Incremental budget is flexible and ensure there is no large deviation in the budget
as it changes gradually year after year (Advantages and Disadvantages of
Incremental Budgeting, 2019).
Disadvantages of Incremental budget
 This method leads to lack of innovation and stays same with minimum changes in
budget plan.
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 This planning tool encourages higher spending to maintain same amount for the
upcoming budget plan.
4. Zero based budget: It is setting up of a financial plan from the start with a zero-base.
Advantages of Zero-based budget
 Proficient allotment of resources, it does not focus on the past numbers whereas they look
over to the actual number.
 Removes all ineffective and unnecessary activities which results in cost effective ways
and recognizing new opportunities.
Disadvantages of Zero-based budget
 Unyielding and time-consuming work for a company.
 Lack of expertise amongst the employees on the topic
5. Variance analysis: Variance Analysis is the quantitative examination of the deviation
between the actual number and the planned budgeted number. For instance, if you plan a
budget for sales to be $20000 but the actual sales in $18000 then the variance analysis
provides a difference of $2000.
Advantages of Variance analysis
 Combative Lead: Variance analysis assists a company to be proactive in attaining their
business goals and helps in discovering and alleviate any probable risk.
 Recognizing the changes: Sometimes comparing budget with the genuine outcomes may
divert our attention to re-evaluate the target customers (Miller, 2018).
Disadvantages of Variance analysis
 Delayed Process: Management teams needs the feedback as soon as possible but
accounting team assembles variances at the end of the month only.
 Improper Analysis: If planning is not performed taking into account the detailed analysis
of each and every factor then the budgeting process may not astray from the actual
numbers.
6. Cash Budget: Expected flow of cash inflows and outflows which analyses revenues and
expenses of the company.
Advantages of cash budget
 Decision making - It helps the company to know future cash position of the company to
make future decisions.
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 Reduction in cost - It helps company to know their cash deficit and the areas of
operations where cost needs to be reduced.
Disadvantages of cash budget
 Do no considered credit or non-monetary transaction
Advantages of pricing strategies
 Profit maximisation - It helps in maximising the profit of the company and increase in
sales of the company if right pricing strategy is chosen.
 Increase in market share – The correct price strategy helps in increasing the market
share of the company.
M3. Assessment of different planning tools and their application for preparing and forecasting
budget.
Fixed budget is used to measure and evaluate both short term budget plan and long-term
budget plan. Fixed budget helps in forecasting and preparing budget by keeping the cost and
expenses constant with the change in sales or revenue. Fixed budget helps in forecasting both
short term and long-term budget plan for effective decision making.
Flexible budget is useful when cost is aligned with the change in the operations of business
activity. Flexible budget helps in forecasting the change in the budget plan and resources needed
to accomplish the task.
Incremental budget helps is useful in planning orientation and is useful for management to
focus on long term goals of business on a timely manner. This planning tool of budgetary control
helps in forecasting the need and objective of future and accordingly implement changes in the
preceding year’s budget plan.
Zero based budgeting is flexible which helps in lowering the cost and execution of plan in
the most disciplined manner from the scratch. This budget plan helps in preparation and
forecasting of budge by aligning company’s spending with objectives.
Variance analysis is useful identifying the deviations by comparing actual performance
with the budgeted plan. Variance analysis helps in preparation and forecasting budget as it act as
an in-depth control tool for more accuracy and efficiency. Variance analysis is useful in
managing risk.
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P5. Assessment of management accounting system in respond to financial problems.
Management accounting system helps manager in outlining manager in financial decision
making by helping in analysis of balance sheet, income statements, etc.
EVOLUTION OF MANAGEMENT ACCOUNTING
1st STAGE: COST ACCOUNTING (1920-1950):
This is the first phase of management accounting where matching principles of
accounting concept were developed. This phase of accounting focus on determination of cost and
control of finances (Chenhall and Moers, 2015).
2nd STAGE: MANAGERIAL ACCOUNTING (1951-1980)
Next phase after the period of cost accounting is managerial accounting who aims at
providing information to the management which helps in planning, controlling, monitoring and
implementing the desired plan to achieve organizational goals and objective effectively and
efficiently.
3rd STAGE: CAM-I COST MANAGEMENT (1980’s)
This phase of management accounting shifts its focus on reducing cost and achieving
economies of scale by using various cost control tools. This helps in managing inventory and raw
material by analysing product life cycle.
4th STAGE: VALUE BASED MANAGEMENT (1990’s)
This is the current phase of management by completely shifting its focus on creation on
more value to its customer and helps in higher market share and larger customer base (Historical
Evolution of Management Accounting, 2015). This phase of management accounting aims at
adding value to its customers and higher customer base and market share.
Evaluation of financial problem of the organization in context with the ratio analysis, key
performance indicator and benchmarking.
Ratio analysis: It is a quantitative method of analysing company’s financial performance
by using various financial tools (Williams and Dobelman, 2017). There are various financial
ratio like current ratio, liquidity ratio, performance indicator ratio, inventory turnover ratio,
return on capital employed ratio, return on investment ratio, etc. which helps in determining
various aspects of organization.
Critical evaluation of ratio analysis to solve financial problem:
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This tool helps in analysing financial performance of the organization by using various
financial ratios. Ratio analysis helps in identifying and evaluating the strengths and weakness of
the organization. This helps in strategic decision making of the organization to achieve long term
and short term goals and objective.
Key performance indicators: It is a performance metrics used by company’s and
management of the organization to analyse and evaluate the performance and financial position
of the organization. Key performance indicator is important for measuring the performance and
evaluating whether goals and targets are achieved or not.
Critical evaluation of key performance indicators to solve financial problem:
Key performance indicator is quantifiable and helps in solving financial problem of the
organization by keeping employees motivated to focus on key task which are important for the
sustainable growth and success of organization. KPI also helps in highlighting success or issues
related with business and helps in effective decision making. KPI is well defined and can be
communicated throughout the hierarchy of the organization.
Benchmarking: It is a process of identifying and evaluating the actual position of
business by applying best practices to the operations of the organization effectively and
efficiently to achieve long term goals and objectives (Benchmarking, 2018).
Critical evaluation of benchmarking to solve financial problem:
Benchmarking helps in identifying the financial problem by critically evaluating the
performance externally with its competitors and internally with operations within the
organization. In case of any financial problem or deviation benchmarking helps in improving the
performance by practicing more innovation in the operations. This tool of performance metrics
helps solving financial problem by setting a standardized procedure and identifying areas of
improvement (Maas, Schaltegger and Crutzen, 2016).
Evaluation of how management accounting system are used by organization to solve
financial problems.
 Cost control system: It is a type of management accounting system which helps in
minimizing the cost of business and carry out operations in the more economical way to
achieve economies of scale.
Critical evaluation of cost control system to solve financial problems of the organization.
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Cost control system helps in solving financial problem by simply preventing wastage
within its business operations. This system also helps in analysing variance by comparing actual
results with budgeted plan. It also helps in identifying cost drivers which helps in increasing
operational productivity and profitability.
Example: In case of financial problem like high cost in production, management of the
organization uses cost control system to identify the cause of problem which leads to strategic
decision making, cost reduction and lower level of wastage.
 Inventory management system: This management system of the organization helps in
keeping track on the production of the business which leads to ordering, storing and
controlling the inventory for smooth flow and operations of the company.
Critical evaluation of Inventory management system to solve financial problems of the
organization.
Inventory management system helps in solving financial problem by reducing labour
cost, storage cost and dead stock which leads to improved cash flows and effective forecasting
capabilities to enhance transparency and improved supplier relationship (What is an Inventory
Management System? Definition of Inventory Management Systems, Benefits, Best Practices &
More, 2019).
Example: In case of insufficient inventory or raw material in the organization which leads to
lower operational efficiency and productivity. Management of the organization will adopt
inventory management system to keep track of inventory and order raw material on a timely
manner.
 Price optimization system: This is a quantitative analysis of data to determine the
behaviour of customers in respond to varied prices of different products and services.
Critical evaluation of Price optimization system to solve financial problems of the
organization.
Price optimization system helps in solving financial problem by determining the prices
which are best suitable for meeting business objective and maximizing profits.
Example: Rivalry competitor in the market offers products at more attractive price which
leads to higher customer switching rate. Organization strategically adapt to price optimization
system to determine how much the customer is willing to pay for the product and how much
value does it add to product.
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Adaption of management accounting system by IKEA and Starbucks.
 IKEA: It is a multinational retail company which mainly deals in homeware and
furniture. This company adapts to inventory management company which helps in
keeping track of the production process for smooth functioning of organization. This
helps in ordering, storing and controlling accurate inventory.
Advantages Disadvantages
It helps company to get automated in stock
information and let the company know the
sales of the company as inventory management
sync with sales.
It often leads to system crash and business gets
interrupted and the data get lost if they are not
backed by the company.
 Starbucks: It is a coffee shop company which adapts price optimization management
accounting system by determining the behaviour of customers in respond to change in
price of products. This helps company in meeting its objective and profit maximization.
Advantages Disadvantages
This system simplifies the strategy of the
company and enables discipline in pricing
strategy of company.
This system reduce physical audits as
everything is automated but it may create a
problem for company.
M4. Assessment of how management accounting can lead organization to sustainable success.
Management accounting helps in evaluating the variance by comparing actual
performance with budgeted plan which leads to strategic decision making to attain goals
and objective of the organization effectively (Wild, 2017). Management accounting lead
organization to sustainable success by using various cost controls which leads to achieve
economies of scale.
D3. Assessment of planning tools to solve financial problems which leads to sustainable growth
and success of organization.
Planning tools of budgetary control helps in solving financial problems by measuring actual
performance with the budgeted plan to identify deviation at early stage. This helps in solving
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problem effectively on a timely manner to attain operational efficiency and productivity.
This helps in efficient utilization of resources to ensure lower spending (de Campos and
Rodrigues, 2016).
CONCLUSION
From the above study it has been summarized that management accounting plays a
critical part in effective decision making by internal management to attain goals of the company
effectively. This study also concludes that there are various planning tools for budgetary control
which helps in finding out deviation on a timely manner and take necessary corrective actions
accordingly.
This study also highlights various management accounting system and performance
metrics to evaluate financial position and operations of the business and critical evaluation of
how they help in solving financial problems of the company.
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REFERENCES
Books and journals
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
de Campos, C. M. P. and Rodrigues, L.L., 2016. Budgeting Techniques: Incremental Based,
Performance Based, Activity Based, Zero Based, and Priority Based. Global
Encyclopedia of Public Administration, Public Policy, and Governance. pp.1-10.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Miller, G., 2018. Performance based budgeting. Routledge.
Van der Stede, W. A., 2015. Budgeting and management control. Wiley Encyclopedia of
Management. pp.1-7.
Wild, T., 2017. Best practice in inventory management. Routledge.
Williams, E. E. and Dobelman, J. A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
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incremental-budgeting >
Benchmarking. 2018. [ONLINE]. Available through:<
https://www.bain.com/insights/management-tools-benchmarking/>
Historical Evolution of Management Accounting. 2015. [ONLINE]. Available through:<
https://pdfs.semanticscholar.org/9cac/ded8e84907ec54b54d228cd Horngren, C.T.,
Bhimani, A., Datar, S.M., Foster, G. and Horngren, C.T., 2002. Management and cost
accounting. Harlow: Financial Times/Prentice Hall.3f863a3546b58.pdf>
What is an Inventory Management System? Definition of Inventory Management Systems,
Benefits, Best Practices & More. 2019. [ONLINE]. Available through:<
https://www.camcode.com/asset-tags/what-is-an-inventory-management-system/>
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