Management accounting for managers

Content

Description

1) Management accounting and decision making.

1.1 Management Accounting.

1.2 Decision Making.

1.3 Management and financial accounting.

2) Technical procedures used in management accounting.

2.1 Different Management Accounting Concepts.

2.2 Different tools and techniques used in management accounting.

3) Use management accounting to solve problems and inform

decision-making.

3.1 Apply management accounting techniques to solve business

problems.

3.2 Apply management accounting techniques to inform business

decision making.
1.1 Management Accounting.

The primary objective of accounting is to assist individuals in making feasible

business decisions. All accounting methods, including management accounting,
have a process of locating, quantifying, and analyzing economic data so that users
of such information may make rational decisions.

To help managers carry out their responsibilities of running the company more
successfully and efficiently, management accounting presents a variety of
information, including costs as well as income, profit, investments, etc. As a result, it
gives managers the necessary database to organize and oversee company
enterprise activities. In order for the data to be beneficial when making decisions, it
is essential that the accountant possess a precise comprehension of both its
recipients and their intended use.

1.2 Decision Making.

Decision-making is an important aspect of management that involves choosing the

best plan of action to follow from among alternative options in order to best achieve
an organization's goals. Effective decision-making can help an organization succeed
by allowing managers to make decisions that are in line with the company's aims
and objectives. In order to improve decision-making and the efficacy and
effectiveness of current operations, management accounting focuses on providing
information to those who work for the organization.

A grasp of the decision-making process is a necessity for comprehending

management accounting since information generated by management accountants
must be evaluated in light of its final impact on decision outcomes. The
decision-making or planning process is represented by the first five steps:

● Planning consists of setting goals, looking for alternative options, collecting

data regarding those options, choosing an approach, and putting the decision
into practice.
● The control process, which consists of the final two steps, is what ensures
that the alternatives chosen and the strategies for putting them into action are
carried out. Comparing intended and achieved results, as well as adjusting to
deviations from the plan, are also involved in the process.

1.3 Management and financial accounting.

Accounting is a way that people who are interested in an organization can use to
convey economic facts. According to an analysis of the many users of accounting
data, there are two main groups that can be:
 - Internal: individuals that work for the organization, like managers and
employees.
- External: individuals operating outside the organization, including creditors,
shareholders, and potential investors.

There are two types of accounting, which can be distinguished based on whether the
users of the accounting information are internal or external:

● Financial accounting deals with providing information to parties outside the

organization. Thus, it could be called external accounting.
● Management accounting is focused on giving information to people inside
the organization in order to enable them to make more accurate decisions and
increase the effectiveness and efficiency of current operations. So we can call
it internal accounting.

2.1 Different Management Accounting Concepts.

The scope of management accounting is rather broad, it covers almost evry aspect
of business operation. Some of the concepts related to management accounting:

● Cost accounting is a concept that entails identifying, quantifying, and

examining the costs related to a product, service, or activity. When making
decisions, it offers useful information that may be used to assess the financial
viability of various goods and services, spot areas where money can be
saved, and determine prices. In the operation and management of the
business enterprise, standard costing, marginal costing, analysis of
opportunity cost, differential costing, and other cost methodologies all play an
important part.
● Budgeting involves setting up budgets, resource allocation, planning and
dividing funds for the organization's future operations, projecting sales,
comparing actual performance to the budgeted one, estimating variations,
identifying their causes, etc. It encourages managers' efforts to define
performance goals, prioritize spending, and keep track of development.
Setting definite goals during the budgeting process helps establish several
plans for any upcoming project.
● Variance analysis is applied to compare actual results to anticipated or
budgeted ones. Managers can then take corrective action after identifying the
organizational divisions that are operating effectively or inadequately.
● Internal control: Management Accounting heavily relies on internal control
procedures, such as internal inspection and internal auditing processes that
are previously presented in the business, to evaluate the envisioned
performance and to detect the shortcomings of the organization.
● Planning and accounting for taxes: Management accounting is responsible
for calculating the enterprise's taxable earnings and tax obligations. Analysis
 of the impact of tax provisions on upcoming projects is an element of the
decision-making process that is within the responsibility of management
accounting. However, in order to reduce the enterprise's tax burden, the
management accountants are required to have a thorough understanding of
tax legislation, their accounting practices, and tax-related planning.

In conclusion, managers need to grasp these concepts and many more in order to
make wise decisions, allocate resources efficiently, and track performance.

2.2 Different tools and techniques used in management accounting.

When supplying the management with the accurate information they need to carry
out their managerial duties, management accounting makes use of a variety of
instruments and procedures, such as

● Financial Statement Analysis: This process involves systematic examining

and interpreting data from the income statement and balance sheet in order to
collect the necessary important information and provide it to managers for use
in assessing the company's liquidity, viability, revenue, and performance
management.
● Fund flow analysis: is a thorough examination of the movement of money
(working capital) from different business operations over the course of an
accounting period. Fund Flow Analysis is a crucial tool for managerial
decision-making since working capital is thought of as the foundation of any
business concern. Effective working capital management is very effective for
the smooth operation of all operating activities of the concern.
● Cash flow analysis: is a thorough examination of the daily movement of cash
and cash equivalent from different business operations over the course of an
accounting period. Since the transfer of cash is crucial to any corporate
concern, proper cash management is crucial for the concern's liquidity
strategy. The management accounting tool of cash flow analysis is widely
used to ensure that a company's cash is managed effectively and efficiently.
● Costing methods: it entails identifying, quantifying, and examining the costs
related to a product, service, or activity. When making decisions, it offers
useful information that may be used to assess the financial viability of various
goods and services, spot areas where money can be saved, and determine
prices. Management Accounting commonly uses several types of costing
methods in the framework of cost control and decision-making.
● Budgetary control: includes setting up budgets, comparing actual results
with projected outcomes, identifying any differences between actual and
projected outcomes by computing variances, and taking the appropriate
corrective action in response to such variances. It is a crucial instrument that
is frequently utilized in management accounting for the purposes of planning,
regulating, and evaluating an organization's performance.
 ● Statistical and operational study techniques: Management Accounting
frequently uses a variety of statistical and operational study techniques as
instruments in the course of performance evaluation and decision-making.
These methods include charts, graphs, sampling, regression modeling, linear
computation, and many more.
● Responsibility Accounting: This process entails creating a budget for
different responsibility centers and giving specific tasks to the relevant
managers in order to fulfill the budget's instructions. Oftentimes, it is utilized in
cost control operations.
● Management reporting: is creating and submitting summaries to
management regarding the performance of different tasks, in order to facilitate
efficient planning, directing, performance assessment, and decision-making. It
is an important instrument in management accounting that is frequently used.

3.1 Apply management accounting techniques to solve business problems.

Comparative financial statement analysis is a type of horizontal analysis in which the

financial statements of a period of time, two or more distinct companies, or a
business and its industry are compared, analyzed, and interpreted. The two most
popular types of this analysis are: the comparative balance sheet; and the
comparative income statement.

The following comparative sheet between 2021 and 2022 is calculated using the
Balance sheet of Amazon 2022 annual report:

Changes (increase or
Absolute Figure decrease)
comparative balance sheet Absolute
2021 2022 Figure Percentage
$ $ $ %
ASSETS
Current assets:
Cash and cash equivalents 36,220 53,888 17,668 48.78
Marketable securities 59,829 16,138 -43,691 -73.03
Inventories 32,640 34,405 1,765 5.41
Accounts receivable, net and other 32,891 42,360 9,469 28.79
Total current assets 161,580 146,791 -14,789 -9.15
Property and equipment, net 160,281 186,715 26,434 16.49
Operating leases 56,082 66,123 10,041 17.90
Goodwill 15,371 20,288 4,917 31.99
Other assets 27,235 42,758 15,523 57.00
Total assets 420,549 462,675 42,126 10.02
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current liabilities:
Accounts payable 78,664 79,600 936 1.19
Accrued expenses and other 51,775 62,566 10,791 20.84
Unearned revenue 11,827 13,227 1,400 11.84
Total current liabilities 142,266 155,393 13,127 9.23
Long-term lease liabilities 67,651 72,968 5,317 7.86
Long-term debt 48,744 67,150 18,406 37.76
Other long-term liabilities 23,643 21,121 -2,522 -10.67
Stockholders’ equity:
Common stock 106 108 2 1.89
Treasury stock, at cost -1,837 -7,837 -6,000 326.62
Additional paid-in capital 55,437 75,066 19,629 35.41
Accumulated other comprehensive
income (loss) -1,376 -4,487 -3,111 226.09
Retained earnings 85,915 83,193 -2,722 -3.17
Total stockholders’ equity 138,245 146,043 7,798 5.64
Total liabilities and stockholders’
equity 420,549 462,675 42,126 10.02

3.2 Apply management accounting techniques to inform business decision

making.

Making business decisions according to financial statements requires examining the

financial data provided in thereports and applying it as a guide. To do so we need to:

● Understand the three main financial statements—the balance sheet, income

statement, and cash flow statement—and be able to explain what each one
means and how it relates to the others.
● Examine the balance sheet: An overview of the financial state of the
business at a particular time is provided by the balance sheet. Examine the
sections on assets, liabilities, and equity to determine the company's liquidity,
solvency, and general financial wellness.
● Review the income statement: It lists the company's revenues, costs, and
net profits for a specific time period, analysing the cost structure, profitability,
and revenue sources. Assess the company's capacity to produce steady
earnings by keeping an eye out for trends, changes in revenue or spending
categories.
 ● Examine the Cash Flow Statement: it outlines the company's cash inflows
and outflows from its financing, investing, and operating activities. Analyze the
financing activities, asset investments, cash flow patterns, and cash
generated by operations. Examine the business's capacity for cash
generation, working capital management, and operating funding.
● Financial ratios can be calculated to assess how well a business performed
in comparison to industry norms or competitors. Typical ratios include those
measuring cash , profitability, and debt. Ratios aid in assessing the
profitability, efficiency, and health of the company's finances.
● Determine Your Strengths and Weaknesses: Determine the company's
strengths and shortcomings via your evaluation of the financial statements
and ratios. Identify which areas need to be optimized as well as where the
organization is excelling. Look for patterns, trends, and peculiarities that can
help you make decisions.
● Check essential financial indicators: Observe crucial financial indicators like
revenue growth, gross margin, operating margin, return on investment, and
return on equity. Check to see if these measures are in line with industry
norms, represent the company's objectives, and satisfy shareholder
expectations.
● Take Wise Decisions: Make decisions based on the knowledge you have
learned from the financial accounts and analysis. Financial statements, for
instance, can assist in guiding choices regarding pricing tactics, cost-control
strategies, investment opportunities, capital allocation, and operational
upgrades. Consider the financial repercussions of many possibilities before
choosing the one that best fits the strategic plan and financial goals of the
business.

Consider other elements including industry trends, the competitive landscape, and
future estimates prior to making business decisions considering that financial
statements only provide historical data. Financial statements shouldn't be the only
factor when making decisions; rather, they should be a tool to aid in that process.

Reference:

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