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³Asking the question why we need accounting is like asking a farmer why we need rain.´
(MoneyInstructor.com, 2005).
Managerial Accounting has become the most intellectually challenging area in the field of
management, and the most turbulent one. All these new accounting theories and practice aim
at turning the accounting data into information highway for management decision-making
planning development and process. Moreover, Weygandt, Kimmel, & Kieso (2008) has
defined that an effective managerial accounting system should be able to assist managers in
planning, directing and controlling by providing information that would change the decision
Nowadays, managerial accountants are far from playing a passive role as information
providers, whereby they have to take proactive role in both the strategic and day-to-day
decisions that confront an enterprise. Per study conducted by Tayles, Pike, & Sofian (2007),
they have found that firms need to invest heavily in intellectual capital1 (IC) in the evolution
of its management accounting practices. This shows that management accounting practices is
important for the firm to perform. The list of management accounting practices mentioned in
this study are reporting & decisions, performance measurement, budgetary control and capital
investment.
This essay will explain on the importance of managerial accounting process in organization
to successfully carrying out the day to day as well as long term activities and goals.
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Managerial accounting is an alternative term for management accounting which defined as
the process of preparing management accounts that provide accurate and timely key financial
and statistical information required by managers to make day-to-day and short term decisions
(BusinessDictionary.com, 2010).
Siegel (2000) mentioned that adding value means helping managers run the business. It
means providing relevant information for business decisions, explaining how the information
accountants know that they are adding value because people seek their advice for a variety of
business decisions because they look at trends and do in-depth analysis so that we can say
what the implications are, make better predictions, consider all the alternatives, and
understand the consequences and the pros and cons of each alternative.
(BusinessDictionary.com, 2010).
As such, in other words, the topic on how managerial accounting add value to the
organization can refer to on how does by preparing management account which provide
accurate and valuable information can help managers run the organization mainly in helping
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There are three fundamental processes for successfully carrying out day to day as well as
long-term activities which are planning, directing, and controlling. Thus, the managerial
preparation of the budgets and decision making for their departments. This will help in
directing and controlling operational activities by providing timely feedback on the current
operations as well as impact of past decisions. Once the budget has been set, this may
motivate managers and other employees towards organization goals in which this is in
relation with the budget and goals set. The next key importance is the ability to measure
performance of the sub-units, activities, managers and other personnel with the entity for
rewards etc. Last but not least, managerial accounting will help organization to construct the
SWOT analysis2 and analysing the organization¶s competitive position to know their standing
From a management accounting point of view the primary purpose of management is to make
decisions that may be classified as marketing, production, and financial (Grooan, 2009). The
tactical decisions which must be preceded by strategic decisions provide the historical data
from which the accountant prepares financial statements. In addition to the statements
model for decision making. As an example, a historical cost has always served as a very
useful measure of performance, control, and critical managerial decisions (i.e. make or buy,
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©very item or element on the financial statements is the result of a decision. For each
decision, there exists a management accounting tool that may be used to make a good
decision. However, the management accounting tools can be used only if the management
Noted that management accounting picks up data from cost database and prepare reports for
the management to facilitate decision making. Both financial and non-financial data are used
in the reports. In the non-financial data, both numerical and non-numerical information are
used. While numerical information consist of operational statistics such as units produced,
raw materials consided and labour hours used, the non-numerical or qualitative information
organisation.
For a particular decision, different types of cost and benefits are considered. Called relevant
costs, these have a bearing on the future and differ under various decision alternatives. If any
After considering the relevant information and making a good decision (though the good
decision may not always be the best decision), managerial accounting is also important as it
will assist managers in directing and controlling operational activities. How? Of course by
that involves identifying all major operating activities, determining what resources are
consumed by each activity and the cause of the resource usage, and categorizing the activities
as either adding value to a product or service or not adding value. ABC benefits both strategic
planning and operational decision making because it provides financial and operational
performance information at the activity level that is useful for making decisions about
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business segments, such as product lines, market segments, and customer groups. It also
helps managers eliminate waste and inefficiencies and redirect resources to activities that add
This grounded theory case study of an insurance company by Norris & Innes (2002) found
that managers generally were favourably disposed towards Activity Based Costing (ABC)
method. A first proposition or hypothesis emerging from this case study was that non-process
managers had a poor understanding of the ABC information, and used it infrequently. In
contrast process managers understood the ABC information and used it frequently. As a
result, although the non-process managers were still in favour of the ABC information, they
considered that it made their job harder. In contrast the process managers considered that the
ABC information made their jobs easier whereby ABC information assisting in various ways
Another key purpose of managerial accounting is to motivate managers and other employees
to direct their efforts toward achieving the organization¶s goals. In addition to planning for
the future, managers must oversee day-to-day activities and keep the organization functioning
smoothly. This requires the ability to motivate and affectively direct people. Managers assign
tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and
make many small decisions that affect customers and employees. In effect, directing is that
part of the manager's work that deals with the routine and the here and now. Managerial
accounting data, such as daily sales reports are often used in this type of day-to-day decision
making.
This motivates managers to achieve the organization¶s goals by communicating the plans,
providing a measurement of how well the plan was achieved, and prompting an explanation
of deviations from the plan. An example of achieving goals is through budgeting. The budget
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indicates the top management¶s desire to allocate resources and emphasize certain activities.
Another way to motivate employees to assist in achieving the organization¶s goals is through
workers to take the initiative to improve operations, product quality, customer service, and
reduce costs.
One study conducted by ©ker (2009) shows that recently, the effects of MAS (Management
Accounting System) and budget participation has positive effects on managerial performance
budget decisions and targets, on the other hand, makes possible to share information about
internal and external condition of organization with subordinates for top management. So, by
process of exchanging, disseminating and discussing information between top managers and
subordinates, job relevant information of managers and quality of decision can increase. In
one sense, budget participation constructs an environment that makes possible to get broad
Thus, subordinates are able to get broad scope and timely information about whole
organization and take right position to reach organizational targets by considering their own
In addition, using broad scope and timely information together with participation to budget
setting process can enhance managerial performance of subordinates. When subordinates can
obtain broad scope and timeliness information about all organization, they get a clear
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understanding about their job and environment and this understanding decrease
Once these managers and employees clear with their goals, and motivated them to perform,
& Norton (1996), the Balanced Scorecard translates an organization's mission and strategy
into a comprehensive set of performance measures and provides the framework for strategic
performance by reviewing the financial aspects. However, financial measures alone are not a
balanced view of the critical success factors of any organizations, mainly because financial
measurements tend to measure the past. Therefore, what if an organization knows what has
rationale in today¶s organizations is not just to measure the financial outputs but what
influenced the financial inputs with which the productivity of employee can be generated
Measuring the process performance will enhance the company activities, subunits, managers
and other employees within the organization. Furthermore, one of the critical roles of
managerial accounting is to identify and eliminate (or at least try to minimize) non-value
adding activities throughout the value-chain. This can be related with the Just-In-Time (JIT)
method3. The ultimate goal is to promote value-adding activities. The mismatch between
strategies and tactics, largely unintentional, with the overall goals and objectives of the
organization trigger most of the non-value adding activities in operations. Non-value adding
activities lead to higher production costs, inefficiencies, and hence the loss of profitability.
Therefore, to remain relevant and to create value, performance measurement systems (PMS)
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must attempt to minimize this mismatch. Any misalignment at strategic levels gets amplified
Take this as an example on how important is the CFO's role in financial planning which it
cannot be overemphasized. A solid financial plan, authored by the C©O and CFO, provides
the backbone for a healthcare organization, linking the organization's strategic mission and
vision to measurable financial goals. A well-developed financial plan helps the organization
determine the critical relationship between strategy and financial capability and achieve
normally conduct a SWOT analysis. When an organization has the knowledge to perform a
task better than other organizations, it has a core competency. And it is crucial for an
organization to identify the main core competency activity and to concentrate more to this
particular activity. A core competency has many different forms. A unique work method, a
unique mode of communication, and unique physical possessions can all be considered core
1991. The Australis Corporation took on an activity-based costing project to add to a total
quality management initiative in the corporation. The project focused on overhead and non-
factory costs. The key aspect of this project was to increase knowledge of the relationship
Phase one focused on cost reconstructions, mainly in the department head level. It
reconstructed costs in terms of activities, processes, and product groups. This was done using
driver analysis. The outcome showed that a number of low-volume products were under-cost
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because setup costs were not being recognized. It also showed other problems such as
packaging costs, maintenance costs, and equipment replacements were not correctly allocated
in certain situations.
activities and performance directly in order to define new activity/cost relationships. Both
There were three main outcomes to this project. First, it provided a process orientation.
During the project, it was noticed that there were different cultures in different parts of the
corporation. The ABC portion showed how structure dominated process in the company.
Next, it provided a set of diagnostic tools for employees. Staff members were given the
knowledge to evaluate their own activities. Third, the project began the process of sharing
It was proved that management accounting is now being used as a mechanism for strategic
resource management. Together, all types of resources can be examined and a new type of
management through "knowledge" is created in which this has assessed the organizational
competitive position in ensuring the organization¶s long run competitiveness in its industry.
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In the 21st century the business environment is changing very rapidly. These changes are
systems. The activities that make an enterprise successful today may no longer be sufficient
organization stacks up against the competition, with an eye towards continuously improving.
In fact, moving away from a historical cost accounting perspective and towards a proactive
cost management is the challenge that an enterprise has to face. Assigning the costs to a
larger number of cost pools that better represent those activities that are responsible for their
birth, portrays the general idea upon which future managerial accounting will evolve.
However, study by Gupta & Gunasekaran (2005), they are not suggesting that the historical
cost-based measures are not needed. We still need these lagging indicators for other reasons.
For example, historical cost-based measures may still be needed to validate contracts (debt)
To recap, there are three fundamental processes for successfully carrying out day to day as
well as long-term activities which are planning, directing, and controlling. Thus, the
? Providing information and guidelines to managers for preparation of the budgets and
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? Motivating managers and other employees towards organization goals in which this
So, to conclude, for any business unit starting from the smallest business activity to the
concept and practices (Tripod, 2005). This accounting provides data to owners for
preparation and scheming of rating products and services for customers too. The main focus
of managerial accounting is to help the managers for making better decisions. Because of all
these reasons, businesses and organizations hire on managerial accountants and thereby, they
are becoming integral persons of decision making teams instead of just data providers.
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