BUS 630 Final Paper Instructions
Due to varying business characteristics, the managerial accounting techniques applied in each business may differ. For example, a business in the start-up phase may rely heavily upon budgeting and capital investment techniques; whereas, a business in the mature/maintaining phase may rely heavily upon cost management and quality control. Ultimately, the techniques used by management should assist the business in achieving its short-term and long-term goals through effective decision-making.
For your Final Paper, you will analyze the role of managerial accounting in two parts. Part I will provide a general overview of managerial accounting. Part II will provide examples of how managerial accounting theories and principles are applied in the business world. You may find it helpful to reflect upon your own professional experiences for examples.
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Part I – Present the following:
- Define managerial accounting
- Describe the role of managerial accounting and the management accountant in a business or organization
- Describes ethical issues/concerns for the management accountant
- Describes at least three managerial accounting techniques available and their application within a business or organization
Part II – Select at least three of the five topics identified below:
- Cost Management Techniques
- Costing Methods
- Capital Investment Decision Techniques
- Quality Control
For each topic selected, present real-world examples of the application of managerial accounting techniques within a business or organization. Examples may be gathered from your own professional experiences or from case studies obtained from credible sources (excluding textbook examples explored in previous weeks). Presentation of each example should include how a managerial accounting technique was applied in the business or organization’s decision-making model. Be sure to support your example with calculations when applicable.
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Decision Making with Managerial Accounting – BUS 630
Definition of Managerial Accounting
Managerial accounting involves the identification, measuring, analysis, interpretation and the communication of information to managers to achieve the goals of an organization. Warren, Reeve & Duchac (2013) define managerial accounting as the procedures and the processes involved in the creation of documents and reports that facilitate the decision-making process of the management to improve the functions of the company. The success of business entities rely on the decisions made by the management and the stakeholders regarding the functions of the company. Managerial accounting, therefore contributes to this success by providing useful information in the decision making process.
The Role of Managerial Accounting and Management Accountant in a Business or Organization
Managerial accounting contributes to the success of an organization through planning. According to Braggs (2011), managerial accountants predict the future of business entities by making both long term and short term plans. These plans help in formulating strategies to sustain the business and facilitate market research. The managerial accountants also provide recommendations on how the business should be conducted. They help in determining the price of product, the financing of the projects and they determine whether companies will make or buy and whether they will lease or buy.
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Additionally, managerial accounting help companies to analyze the margins in the market. They execute this role by determining the profits and cash flows generated from a specific product, customers or the region of operations (Warren, Reeve, & Duchac, 2013). In so doing, business entities establish their strengths and weaknesses regarding their products. The companies then focus on the production of specific products depending on the analysis generated by the managerial accountant.
Managerial accounting also assists in the creation of new products by determining the cost of production and comparing them with the target costs. The information obtained from target costing helps the management to plan for the cost of the product, the price points and the profit margins desired from a new product (Baharudin & Jusoh, 2015). The information obtained therefore, ensures that companies maintain profitability and minimize the losses in the production process.
Finally, managerial accountants conduct trend analysis to determine the changes in the costs incurred and reveal the variances in the patterns. The data obtained is used to determine the rise and the decline of sales in specific products, regions and among customers (Bragg, 2011). The company is therefore, able to predict the future of the product to minimize losses. The analysis of this information also helps in determining the inaccuracies in financial statements. For instance, the management can use the report submitted to determine claims of fraud in the entity. The information is therefore vital for maintaining integrity in the business.
Ethical Issues for the Management Accountant
The ethical issues regarding the conduct of managerial accountants mainly involve falsifying figures to mask losses within the company. For instance, managerial accountants work with the operational managers to record expenditures as production costs. According to Jaijairam (2017), altering the figures affects the expenses and the outputs recorded in a particular period. It also leads to overproduction and the managerial accountants are forced to use absorption costing. The false figures affect the decision making process in the management level as it makes it hard to determine the failures of the business entity. Therefore, dishonesty is an ethical issue faced by managerial accountants.
Ethical issues in managerial accounting also arise based on the allocation of costs. Managerial accountants, therefore act unethically by shifting overhead costs from income statements to contracts (Jaijairam, 2017). Such actions force the clients to pay higher prices for goods and services. Shifting costs affects the credibility of the organization and it affects the accounting statements. Eventually, the repeated actions damage the client relationships due to the high costs of prices and inaccurate billing of contracts.
A conflict of interest in the part of the managerial accountant also presents ethical issues in the business. For instance, managerial accountants may advance their personal interests more than the interests of the company. In so doing, they compromise the ethics of conduct in the work environment. The inclination towards a specific segment in the entity affects the productivity in managerial accounting (Jaijairam, 2017). The individuals are responsible for providing information to improve the functioning of the whole company not few departments in the company.
Three Managerial Accounting Techniques
Managerial accounting uses techniques such as marginal costing, budgetary control, cost accounting and reevaluation accounting to determine the profitability of the entity (Cleary, 2015). The marginal costing technique is used to determine the price of the product, the best raw materials to be used in the production process and to determine whether to make or buy decision in the organization. The technique can be applied to reduce the cost of production while improving the profits in a company.
The budgetary control aspect assess the financial needs of the company and determine the priority of each need (Lavia López, & Hiebl, 2014). It controls the financial performance of the company and determines the spending patterns of the company. The approach can be applied to determine the direction of the company and dictate the spending patterns. Additionally, the cost accounting technique presents data of the cost of the product, in the process, the department and the branch of operation (Cleary, 2015). With this data, the management is able to determine the differences in costs by comparing the information of the entities. Finally, reevaluation accounting ensures that the fixed assets are revalued to represent the capital with the value of the assets. The technique can be applied in a business entity to determine the amount of the returns gained from the capital invested.
Real-World Examples of the Application of Managerial Accounting Techniques
Cost Management Techniques
Costs can be managed in businesses by reducing the overhead costs, adapting efficient technology, encouraging time management and outsourcing projects (Juras, 2014). An automotive company worked towards improving the sale of a new model in the market while maintaining profitability. The company, therefore, set a selling price for the new model by considering factors such as the attributes of the product, the competitors and the profitability objectives. Research was then conducted to identify customer preferences. Additionally, the target profit for future product was set based on the Return on Sales (ROS), profit planning and the target profit guidelines. The target cost was then set based on the target profit and the target selling price. The profit feasibility was then assessed to determine the achievability of the target profit. Finally, the cost reduction plans were implemented to achieve the target cost.
The technique of cost reduction in management accounting was employed in this case. Based on the failure to achieve the target cost, cost maintenance activities were conducted to prevent the escalation of costs. Lean manufacturing activities were employed in the production stage, the target costs were monitored to determine the costs incurred and a comparison between the standard cost and the target cost variance at the production stage. With these strategies, the company cut the cost of production while improving profitability through the high sales of the models in the consumer market.
According to Hilton & Platt (2013), costing methods in companies help in determining the pricing of the product and to analyze the consumption of a particular product. For instance, an equipment manufacturing company produces several products depending on the customer preferences. The costing process in the company therefore involves the analysis of the raw materials used in the production process, the systems used in the production and pull production. Due to the nature of their consumers, the company produces unique products for each company. The traditional based costing applies to the analysis of the materials in the production process and the systems used for the production. For the pull production with the demand of the customer uses job order posting to calculate the costs incurred.
The product cost in this company is generated through the analysis of materials such as the assembly cost and the cost of the raw materials. The traditional costing method is, therefore, applied by establishing the overhead rate at the beginning of the year and analyzing the overhead rate in the previous year. The rates are then analyzed in the 12 months to determine the new overhead rates. In so doing, the company is able to determine the cost of the products, the sales margins and determine the market price.
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The managerial accounting technique of job costing is applied in the company by the determination of the costs of producing the product. With a focus on the production process and the systems used to manufacture the products, the company determined the profitable areas and adjusted them to improve profitability. The job-order costing technique used also focused on the production of unique items hence they determined the returns acquired from the sale of each item.
Decision making in management accounting involves choosing a course of action from many alternatives. Barry (2011), asserts that the assumption in the alternative picked depends on the least cost incurred by the company. The management accountant, therefore, finds the best alternative for the company. A milling company in a rural area faces a tough decision on whether to buy or lease the land. Based on the scale of the operations and the competitive advantage, the company is likely to exist in the area for five centuries. The management of the company is conflicted on the cheapest option between purchasing the land around it or leasing it for 50 years. The research conducted by the management accountant in the company revealed that it would be more profitable to buy the land. Despite the low return on investments in the few years after purchase, the profits acquired in a few years would be more than the cost invested in buying the land.
With the information presented by the management accountant, the company eventually bought the land. The profitability acquired in the years after the purchase proved that role of the management accounting in the decision-making process of the management. The process involves identifying the alternatives, collecting data, analyzing the consequences of each alternative, choosing the best option and the implementation of the choice. The information obtained presented the advantages and the disadvantages of buying land over leasing. With comparison of the alternatives, the best course of action is determined. Working with management accountants therefore, eliminates the risk of incurring losses associated with the decisions made without proper research.
In conclusion, management accounting contributes to the success of business entities and determines the profitability of the companies. They achieve this through research, analysis, interpretation and communication of information to the management. Despite the ethical issues in managerial accounting, the entity forms a backbone for successful business operations. Several techniques such as costing, budgetary allocation and marginal costing enable the managerial accountants to submit credible information for the operations of business entities. The information gathered, therefore, enables business to maximize profits by minimizing the risks involved.