Managerial accounting is the identification, collection, measuring, interpretation, and finally communication of accounting information. This information is used by managers of organizations to provide the bases of the organizational decision making. This is important in facilitation of the manager’s administrative and control roles. The roles of a managerial accountant in an organization are very crucial in decision making. Their roles, ethical issues that arise against them and techniques they use to do some of their duties are discussed in this paper.
The Role of Managerial Accounting and the Management Accountant in an Organization
Before making any decision, all managers need this information so that they can be in a good position to weigh the options they have so as to take the best. For example, a manager in a company that wishes to purchase a machine will require such information to make an informed decision on the best machine to purchase so as to maximize their returns.
The role of a managerial accountant in respect to decision making is to provide such information. He/she should do research on the expected returns, for the case of the above example, so as to advice the management on the machine that has the best returns, and the patterns of these returns (Albrecht, 2011).
Forecasting and Planning
Managers need information that will facilitate their decision making for the future. In other words, they need such information to forecast and plan for the future. The managerial accountants should provide information that will help these managers in making these decisions. For example, in a manufacturing company, the management needs to know what products they should focus their attention on to maximize their returns in the future. When planning, the managers need to put into account the resources that are available so as to put them in line with their objectives (Albrecht, 2011).
One of the major roles of managerial activities is to prepare budgets. These budgets are used by the managers to give guidelines on how the finances of the organization will be used in quantitative figures. In this process, both the managers and the accountants are able to allocate resources to the department that needs them most, and reducing allocation on the departments with reasonable resources or those that do not need them as much as the others.
Budgets also give an outlay of the expected revenue that would be allocated to different departments. They give the expected sources of income to the organization, which are calculated by managerial accountants and help in giving managers guidelines on how best to make decisions to get these resources (Albrecht, 2011).
Ethical Issues/Concerns for the Management Accountant
All managerial accountants have a responsibility to maintain the highest levels of professional competency by applying their skills and knowledge towards their responsibilities. However, there are some accountants who compromise these standards of professional competency. All accountants are expected to perform their duties in accordance with the laws, regulations, and the technical requirements of their respective jurisdictions. At times, there are some accountants who work in total disregard of these laws, something that is a concern to their ethics. The last competence concern of accountants is where they are unable to prepare clear reports, give any recommendations or reliable information (Jackson, Sawyers, & Jenkins, 2008).
All accountants have a responsibility not to disclose any information that they get in the course of their duties, unless they are doing it to any authorized persons, or they are obliged to do so by law. Any disclosure of such information is prohibited and amounts to confidentiality malpractice by the individuals. It would be a concern if an accountant uses any confidential information that they get during the course of their duties to exercise some unethical or unlawful activities either by themselves or through third parties (Jackson, Sawyers, & Jenkins, 2008).
Integrity issues may arise in financial management practice. Such integrity issues include cases when a person shows actual or implied conflict of interest, engages in activities that could impede his/her duties to act ethically, where an accountant receives any favors that could influence his/her actions. Additionally, other issues include situations where they engage into activities that could hinder the organization from attaining their goals or objectives, and where they engage into activities that are harmful to the credibility of accounting as a profession (Jackson, Sawyers, & Jenkins, 2008).
Some objectivity issues that could be raised among managerial accountants include cases when they communicate their information in unfair manner. Additionally objectivity issues may entail failing to disclose any information that is important and relevant to enhance the understanding of its users (Jackson, Sawyers, & Jenkins, 2008).
Managerial Accounting Techniques
Analysis of Financial Statements
This is where the management accountants use the information from available financial statements to derive some conclusions that would help in making organizational decisions.
The accountants scrutinize the financial statements and simplify them to demonstrate what these values mean about the previous accounting period, and give the way forward (Maher, Stickney, & Weil, 2012).
These are ratios that are calculated by management accountants to analyze the financial statements. These ratios are compared to those from other years and companies to gauge the performance of the organization and different organizational departments. Examples of ratios used among others are debt-equity ratios, earnings per share ratios, assets turnover ratios, and working capital ratios (Maher, Stickney, & Weil, 2012).
Funds Flow Analysis
This is the analysis of the patterns of cash flowing in and out of the organization. These include all the payments made and received by the organization. After having this data, analysis is done to determine what the quantities mean to the organization (Maher, Stickney, & Weil, 2012).
Application of Accounting Theories and Principles in the Business World
1. Job costing
This is where the cost of each job or item in an organization is calculated and determined independently. This is mostly applicable where the organization takes orders from its customers (Coombs, Hobbs, & Jenkins, 2005). For example, a company that publishes books can establish the cost of publishing an order of like 500 books.
2. Batch Costing
After job costing, the data is used to carry out batch costing. Here, the cost of producing some batches of the products is established, and from these batches the cost of producing one product is calculated (Coombs, Hobbs, & Jenkins, 2005). For example, a publishing company receives an order for 500 books. If they calculate that they will use $5,000 to publish the whole batch, they can divide this with the number of books produced and realize that the cost of producing one unit is $10.
3. Contract Costing
This is mostly applicable in companies that deal with contracts, more so construction. For the purposes of determining cost and cost control, each contract is considered a separate unit from others. This means that the cost will be of a single project, rather than calculating the cost of all the projects they have (Coombs, Hobbs, & Jenkins, 2005). For example, a company that deals with road construction should not calculate the cost of construction of all the projects they have, but should calculate the costs of each project separately.
4. Single Or Output Costing
After calculating the costs of producing each unit, the company will calculate the cost incurred in the features of production of that unit (Coombs, Hobbs, & Jenkins, 2005). For example, in the books, the cost of paper or ink used per book can be calculated.
5. Process Costing
This is the calculation of costs at each stage of work. For example, in publishing the books, the cost incurred in printing, or binding can be calculated (Coombs, Hobbs, & Jenkins, 2005). Such costing is done mostly in companies where a product is produced within the organization before it is used as a raw material, for example making paper from pulp to use it for printing books, one can calculate the cost of making paper.
6. Operating Costs
These are the costs incurred in paying for services that facilitate the production of the products. Such costs may be electricity, cost of transport, or labor. For example, in the case of book publishing, the cost incurred to pay for power and transporting the books to their clients are calculated.
7. Multiple Costing
This is where two or more methods of costing are brought together to determine the cost of the final products (Coombs, Hobbs, & Jenkins, 2005). For example, in a vehicle manufacturing company all parts are calculated separately but after the different parts are assembled, the total costs can be calculated.
Quality Control Techniques
There are different quality control techniques that an organization can use to manage the quality of their products including value stream mapping and 5s. To ensure overall organizational quality, the organization will have to control the quality of their products, monitor quality of their departments, and seek feedback from their customers. Techniques for overall organizational quality control are quality assurance, product testing, total quality control, and customer feedback.
Value Stream Mapping
This involves helping the workers to realize any loopholes in the production and how to mend the defects. It entails using ways such as reducing the amount of time used in production and the amount of waste from their inputs. For example, a tea processing company may wish to increase the time used in production, so that when tea leaves arrive at the factory, processing can be done fast enough to get tea leaves ready for the market. Similarly, the amount of tea for the best grades may be processed rather than low grade tea leaves (Wadsworth, Stephens, & Godfrey, 2001).
The 5s Method
This is a Japanese instrument that is necessary to achieve a clean working environment (Wadsworth, Stephens, & Godfrey, 2001). Each s in the 5s represents certain attribute:
This word means organization. Organization means that everything is done in an orderly manner, for example in manufacturing company the inputs are put at their right place. This ensures that one can gain quick access to whatever they are looking for hence reducing time wastage.
Seiton means neatness. All operations should be done in a simple but elegant manner. This makes operations more effective and increases the speed at which they are done. Simplicity means that every employee would be in a good position to perform most operations at ease which improves the quality and speed at which they deliver.
This means cleanliness. For the quality of products to be maintained, the whole procedure of production should be clean. That is, the industry and the raw materials should be clean. Cleanliness also reduces the chances for the accidents to occur, and improves the life of machines that are used by preventing them from wearing out.
This means standardization and it is also a very necessary quality control measure. This is where all operations have minimum standards that are set. The company should set the standards that all their products should meet so that they can keep their qualities high. For example, a research company that assigns jobs to several researchers can give a minimum confidence level of reporting for each researcher to meet.
Discipline should be maximized at all levels of the production production to ensure that quality is kept at the highest level. All the employees should observe professional discipline and the orders that they receive. If the subordinates follow orders as they are given and observe professional discipline, quality will not be compromised. For example, in an accountancy firm, all accountants should observe professional ethics so that they can give quality accounting information to their clients (Wadsworth, Stephens, & Godfrey, 2001).
This is where the organization ensures that the quality of their products is not compromised. This can be achieved by use of the techniques of products quality control. For example, a car manufacturer should make sure that the quality of their cars is up to standard (Wadsworth, Stephens, & Godfrey, 2001).
Testing the products the organization has produced can be a good way of ensuring that they meet their customers’ requirements. Testing can be done on products randomly since it could be very hard to test each product unless where they are produced in small numbers.
Total Quality Control
When a company notices some dip in either product prices or quality, they conduct an audit on their departments to determine the exact reason for the problem. Measures are then taken to ensure that this is remedied (Wadsworth, Stephens, & Godfrey, 2001).
Seeking the feedback from the customers gives the organization ideas on how best to make decisions on the products to ensure that their demands are met. For example, a car manufacture may want to know the opinion of its customers on a new model. Consequently, the customers could point out if they have malfunctioning parts and the manufacturer could recall them to remedy the malfunctions (Wadsworth, Stephens, & Godfrey, 2001).
A budget should help the organization or individuals control their spending. For each budgeting period, it ensures that they spend as much as they can afford and gives a good guideline on the sources of these funds. Budgeting techniques should help in making a good plan on how to spend. There are various budgeting techniques that an organization can use as discussed below:
Zero Based Technique
When an organization is making a budget, they should also make room for follow-up steps and make timely reviews to determine how effectively it is being implemented. When making a budget, all the managers should give reasons as to why their departments should receive the amount of money they are asking for.
After determining the objectives of the budget, the next step is to come up with decision unit which is used for cost analysis. Here, these units are analyzed and the costs determined. For example, in a manufacturing company these units can be as follows: procurement, packaging, production, and marketing. After coming up with this division, decision on the amounts of money to be given to these units is determined. This is based on the expenses of the units, and the amount of money that is available (Baker, & Powell, 2005).
This is more applicable for budgeting of funds in small quantities. The expected expenses are listed, and funds that are expected to finance them are put in envelops. Each time payment is done, the funds are removed from their respective envelops (Swoboda, & Swoboda, 2009).
They give the organization a way of paying their debts first, and at the same time allow for allocating any funds to other future expenses. First, the amount of debt owed by the organization is calculated and then, the budget is calculated for the next budgeting period. The excess amount of income after the budget is then used to pay the debt owned by the organization starting from the smallest to the largest (Swoboda, & Swoboda, 2009).
Budgeting by Percentages
This is where the organization sets percentages of the income to be spent on departments. These percentages can be set and used for several budgeting periods or can be set at each period. For example, they can decide to use 25% on production, 15% on marketing and 35% on administration.
These are programs that enable a track of spending in comparison to other related companies. This would give a clear picture on whether the organization is in line with its expectations and the industry trends.
When most of the organization’s decisions are being made, the management accountants are expected to give clear guidance on the financial implications of each decision. This would help the organization to make the decisions that will ensure maximization of income or shareholder value of the organization. Despite there being some issues that are raised against managerial accountants, their roles in the organization such as budget making and calculating cost cannot be underestimated. These two roles of management accountants ensure that the organization has clear estimates on its future spending, after observing its previous expenses.