Explore the origin, role and principles of management accounting.
Increase of competition among the businesses in 1980s resulted in the creation of challenges for the companies which eventually became the reason of examining the management control systems and traditional cost accounting. Management control of decentralized operations changed because of the innovation provided by the reorganization of General Motors (1920) and The DuPont Corporation (1903) which included incentive planning, formal budgeting and evaluation of performance of an organisation by the ROI criterion. Multi-person decision theory models, the application of management science, and discounted cash flow analysis are included in the most recent development made in the evaluation of performance of an organization. The sense of development of financial statements and evaluation of accounting methods took place after the 1920s and this changed happened for meeting new requirements of reporting.
The more focus looking on management accounting on larger scope was started in 1970s because of the pressure exerted by the Japanese automobile manufacturers on European and American countries. This has resulted in making huge changes in the nature of business environment around the world.
4 global principles of the management accounting.
Role which is playing by the management accounting is based on communication. This communication is included in main principles of management accounting because without proper communication effective information could not be shared in organization. Effective decision making process is directly depends on the efficiency of the communication within organization.
Relevance is one of the most important elements in management accounting and it is linked with the relevancy of the information based on which decisions by the management accountants are taken. Relevance of information indicates that how much the cost and financial information is relevant to the cultural and social issues of an organization.
Analysis is another important principle of management accounting because it generates a value for the company. Analysis is carried out on the cost and financial information available to management accountants and based on it decisions for growth and development of company are taken.
Trust is developing by the stewardship concept and the main concern of this principle of management accounting is that management accountants are accountable and ethically responsible to company.
A framework which management apply for estimation of costs incurring on the operational activities of an organization. The estimation of costs of products helps the management to establish better control on cost and it also helps in analysis of profitability of an organisation. Traditional costing system and activity-based costing system are two different methods used in cost accounting system and these techniques are used for allocation of cost to each product. Effective functions depends on the ability of estimating actual costs and this made cost accounting an important tool for identifying the production costs and this system include both the input costs on each activity along with consideration of fixed costs. The performance is measure by this system by first recording and measuring the cost incurred on activities and then the actual results are compared to estimated results. Decisions of changes are taken based on the variances. Inventory control, operating costing, standard costing, marginal costing, and budgetary control are some important analytical tools of cost accounting systems.
Price optimisation systems.
It is process of determining the response of customers to various prices set by the management for the products and these price optimisation systems are based on application of mathematical analysis. The main objective of use of these systems is to identify the level of price which would meet the needs of customers and increase the operating profit of company.
The difference between management accounting and financial accounting
Information of this system is used by the internal managers of company
The basic objective of management accounting is to enhance the effectiveness of data on which the decisions are taken
Information under this accounting system is considered as confidential
Decisions are taken on forward looking approach in management accounting
Managerial needs are identified which guide to compute information for managerial accountants
It is not mandatory to be apply under norms and laws
Management accounting covers different aspects within organization such as products, sales, specific activities, operations, departments and other tasks
Information of this system is used by the external stakeholders of company
External stakeholders specially shareholders take help from financial information to make decisions
Shareholders, regulators and creditors of company are the main user of financial accounting
Financial reporting helps in assessing the performance of an organization on historical perspective
The financial accounting works on the basis of considering norms and standards under general accepted financial accounting.
Financial accounting is important because whole performance is directly linked with the financial reports
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