Management Accounting

“Management Accounting is often seen as a crucial aid to the Decision Making Process in any organization but is often ill-understood by managers.”

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Management Accounting can be defined in various ways. In simple words it can be defined as the field of accounting that provides vital and accurate financial and statistical information to managers for decision making in terms of planning, control and organising. There can also be a more complex definition of Management Accounting. It can be defined as preparing management accounts required by managers and other internal users. These internal users can be department managers or Chief executive officers. The management accounting reports are produced on a weekly or monthly basis for these internal users. There is a slight difference between financial accounting and management accounting. Financial Accounting reports are produced for external stakeholders such as investors, creditors etc. Management accounting assists managers in making short term decisions using cash inflow and out flow, sales revenue, evaluating stocks of raw materials, work in progress and finished goods. This is also called managerial accounting.

Management accounting has also got a history. It all started in the 19th century when there were only a handful of accountants. Today the accounting professional bodies boast about quarter million qualified accountants. The growth in the number of accountants rose due the Britain’s Industrial history, during the mid 19th century, when England was the largest producer of cotton textiles, coal and iron. Due to the increase in demand of these materials, the demand for more accountants also increased by the companies who went bankrupt due to fierce competition. The British accountants started acquiring professional status towards the end of the nineteenth century. This was due to the establishment of professional organisations like “Edinburgh Society and Glasgow Institute in 1853”. Between the first and the Second World War the accountants moved from the public to the private industries in large numbers. Today accountants outnumber any professional group in the UK. “Institute of Cost Accountants” was the first institute which was later called “The institute of Cost and Works accountants”. With strict entrance criteria, almost 800 candidates passed to enter this institute.

The management functions are a theory defined by “Henry Fayol (1841-1925)”. If a business wants to be successful, then the four management functions should be practiced. The four management functions are Planning, Organising, Leading and Controlling. Planning is the first tool in any management process. It will determine a successful and an unsuccessful leader. Before any good decisions are made, there must be some guiding aims and objectives. A schedule should then be set up to achieve these goals in certain time. Managers use this to plan for the future. It is also called pre-planning. Pre-planning adds to the success of the business. A business should always think a step ahead so that there are no barriers that restrict them to achieve their goals and objectives. One way to start pre planning is by completing a SWOT analysis. SWOT stands for Strength, Weaknesses, Opportunities and Threats. This makes the management team think of what they are good at, how to make full use of the opportunities and how to avoid the threats they would face. With a plan, the stakeholders will have a clear knowledge of the scope the business and will know what to expect from the company. It is common that a lack of plan often leads to failure of business projects. The second business function is Organisation. In order to reach the objectives with planning, organisation in a business is vital. Managers often delegate tasks and projects to his team or department. Each member of the team is given a specific task, depending on their abilities. The task is then gathered by the manager and implemented. If the manager issues the plans and the strategies, but does not involve in the implementation, then there is a risk that the team may not be able to achieve the implementation. If there is no contribution or interaction from the top level of the management, the business will not achieve their target of being successful. The manager must know their team members and what they are capable of in order to organise the resources. This can be achieved by setting up training for the employees, acquiring resources etc. Another management function is Leading. It is often misunderstood that delegating and telling staff what to do. It is however more complex. Leading a team involves motivating staff, giving them incentives and praising and criticising them. It also involves togetherness of the team and setting individuals’ objectives and ensuring they are met. With leadership comes efficiency, good communication to the team and close contact with them. Without a good manager, the business will not have a good team. Similarly without a good team a business will find it hard to be successful. The fourth management function is Controlling. It is the final link of the chain in the management functions. This is the process that guarantees that plans are implemented correctly. Controls are effective if daily responsibilities are required to be completed. Sometimes discipline action can also be taken if necessary. Every manager needs to control its budgetary spend and be cost efficient in order to achieve the business objectives. The manager needs to control and implement in such a way that the budget is spent in the most profitable way. If consistent control does not take place, it will reduce the return of investment and hence the success the manager can achieve can be limited.

The above four functions can be applied to the day to day running of a team or department. It can also apply to employees. They should apply the principles of the functions with their own abilities and achieve the best they can.

Every manager makes good and bad decisions. The good decision leads to their success and also to their business. A bad decision can bring a negative effect on the company. I will analyse the good and bad decisions made by the Shah’s motor company. This motor company was established in 2005 and have a head office in London. They have two manufacturing plants in Blackpool. They manufacture mini, compact, luxury and family cars. They are currently trying to compete with Toyota, Nissan and Vauxhall. The cars Shah’s motors manufacture are targeted to the middle class people in the UK. In 2005, when they established, they manufactured one car model called “S1”. This was a mini car and competed with Toyota Yaris, Vauxhall Agila and the Nissan Micra. As the Shah’s motor company started manufacturing cars four years ago, they didn’t have good sales compared to Toyota, Vauxhall etc. Toyota Yaris was leading the market share of 32%, followed by Vauxhall Agila with 26% and the Shah’s S1had 4%. Two years later the Shah’s slowly built their image as the sales of the S1 rose and the market share shot up to 18%. People started preferring the model as it is economical, reduced carbon footprint and looked stylish. In the first two years Shah Motors made a net profit of £1.6 million from the “S1”. This shows that when the managers decided to make the “S1”, they made a good decision. Good decisions led to a high profit. Before the S1 was manufactured, the management team had carried out research about the potential market. There was great potential for the S1 as the economy was in a boom and the demand for cars was high. The managers also researched about the statistical information such as the costs for manufacturing the model. These costs included Energy, Gas, raw material, car parts, labour etc. After all these costs were calculated, a selling price was calculated for the S1 by adding a certain amount as profit to the cost of manufacturing the car. All these detail was given to the manager in the form of a report. The manager then used all their experience and time and decided that there was a good chance of success with the S1 model and therefore gave the green light in the manufacturing of the model. The increase in demand of the model proved that the decision made by management using the managerial accounting was a good one. Making big decisions like making a car model, needs to be thoroughly researched in terms of financial and statistical information. This is when managerial accounting is very vital to managers. A year after the S1 was launched; the demand for it fell slowly as the competitor’s manufactured new versions of the cars. In the same way Shah Motors designed and manufactured the new S1 and sales were up as normal.

In 2008 Shah Motors decided to make another compact model called “S2”. Like the S1 model, all the financial and statistical research was carried out and presented to the manager. The manager gave the authority to make the new model. Due to the good image built by the S1, the S2 was initially demanded. A few months later it was found that the S2 models has technical faults in them and therefore there a sudden drop in the sales of the cars. Due to the faults, the S2 models had to be recalled by the company and repaired. Due to this the company had to incur a cost of £1 million. Once these technical issues were resolved, the economy fell into a deep recession. Therefore the demand for the S2 declined tremendously. This is a major concern in management accounting. Sudden trends or changes are not shown in the reports. This has happened because the management team of Shah Motors are not proactive. They depend alot on managerial accounting and made rapid decisions. This was a type of case where the management team were overconfident on the success of the S2 model. It turned out that they were incorrect. “It is not what we don’t know that gets us into trouble, it is what we know that aint so”(Roger

Managers have to make decisions, whether it is on pricing products, allocation of resources, whether to introduce the product in the market or not, or the organisation of its product or process. These decisions are made with the use of the information they are provided with. If the source information turns out to be good, there will be a better decision. These days there is use of computer specialists who use “systems” to aid managers with the decision making by providing them with the information. On the other hand some people may argue that the way data is developed, summarised, presented determines the way a situation is viewed. Therefore it also determines the action to be taken. Accounting reports are the major source of the profitability information of the company and the performance information. Accounting reports are sometimes prepared by external groups and therefore it will not focus enough on its task of supporting managers in their full range decisions. The simplicity and uniformity in the external reporting will be compromised for accuracy and validity. This will mislead the managers further; resulting in the development of inappropriate strategies with will therefore lead to bad decisions. Activity-based costing is a recent development that solves the problem.

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