Functions of Managerial Accounting, Essay Example

Managerial accounting is concerned with fulfilling the information needs of the managers in the organization rather than the stake holders outside the organization.On the other hand, financial accounting deals with the information requirements of stakeholders not involved in the running of the business. It is mainly a method of reporting the results and financial position of a company. It does not play any role in efficient running of a business; rather it provides information regarding the historical events (BPP, 2008). It is mainly concerned with the preparation of Balance Sheet, Income Statement, and Statement of Cash Flows etc.

The combination of all results in shape of the annual report provided to stockholders is the output from the financial accounting system. The basic function of accounting system of an organization is to cater the information needs of both the internal and external stakeholders of an organization. It provides information regarding the cash flow generation to the labor or production cost of a unit of product manufactured. All the external and internal users can draw data from the accounting system of an organization. The information accumulated by the accountinginformation system of an organizationdeal with the economic events of business. The most important similarity between managerial accounting and financial accounting is thatboth are used in decision-making.

Management accounting can specifically provide help to the CEO for controlling the company’s performance. It provides information, which ekes the process of decision making at all the managerial levels (Kupper, 1991). The major role of MA is to focus on planning and strategic decision-making. Managerial accounting providesefficient and effectiveinformation, which contributes to the successful strategic management in an organization.  The basic goal of management accounting is to plan and develop strategies leading to the aims and goals of organizations. Management accounting supports decision making process at all the organizational levels.

The basic source of motivation and control in an organization is to divide it in different responsibility centers. At the highest level, they are known as investment centers where managers are responsible for investment in assets and their use. The performance of an investment centre can be analyzed by measuring the return on capital employed. At the lower level profit centerscould be deployed, where mangers are responsible for the generation of sales revenue and management of production or service cost. Hence profit becomes the appropriate measure of performance. Final and the lowest level of responsibility is the cost centre, where the major source of performance evaluation is the cost but not the profit (Otley, 2002).

There are also internal measures of company’s performance that, if put in place, would allow the CEO, to monitor the company’s performance better. The most important tool is Activity Based costing, which is based on the principle that by controlling activities which consume resources; costs can be controlled at source. The information provided by ABC is then used by ABM for value analysis and performance measurement to eke the process of decision making and planning.Other measures, which can be used are the Balanced score card and Six Sigma.

The internal performance measures explained above can be different metrics or ratios that external users of accounting information can review. Current ratio is the estimation of the capability of a business to pay its debts for the current year by converting into cash within that year. Sales/Capital Employed measures the total asset utilization. It provides information regarding the sales being generated by each dollar’s worth of assets invested in the business. Gearing is calculated by adding all long term debts with normal overdraft and dividing it by Shareholders’ Funds. The main purpose of gearing is to measure the proportion of borrowings to the total capital invested in a business. Higher level of borrowings leads to higher levels of risks for business as the business hasto pay interest with repayment of loan combined with the dividends.

References

BPP, (2008). F3: Financial Accounting: ACCA Study Text, BPP Learning Media, London, p. 57.

Kupper, Hans-Ulrich (1991): Multi-Period Planning in Managerial Accounting: Modern
Production Concepts – Theory and Applications, edited by G. Fandel and G. Zäpfel, Heidelberg et.al. 1991, S. 46-62.

Otley, D., (2002). Business Performance Measurement: Theory and Practice, Cambridge University Press.