What is Management Accounting and why is it Important in Decision-Making

What is Management Accounting?

Management accounting is the process of preparing management reports and accounts that provide accurate and timely financial and statistical information to managers to make short-term and long-term decisions. It identifies, measures, analyzes, interprets, and communicates information to enable an organization to pursue its goals.

10 Reasons Why Management Accounting is Important

1. Planning & Forecasting the Future

A key focus of managerial accounting is planning for the future. Managerial accountants develop reports that are more detailed than financial accountants. They can include information about specific products, market reach and regional information. Based on the information obtained from reports such as surveys, budgets or competitor analysis, managers can set objectives and outline how they will be achieved.

2. Make-or-buy Decisions

Is it cheaper to procure materials or a product from a third party or manufacture them in-house? Cost and production availability are the deciding factors in this choice. Through management accounting, insights will be developed which will enable decision-making at both operational and strategic levels.

3. Controlling

Management accounting systems help in setting standard of performance and company standards with actual results and analyzing such variances if any. This is done through a technique known as Variance Analysis. Variances are attributed to managers responsible for them. This is achieved through responsibility accounting.

4. Activity-based Costing Techniques

Once the company has determined what products to sell, the business needs to determine to whom they should sell the products. By using activity-based costing techniques, small business management can determine the activities required to produce and service a product line. Embedded in this information is the cost of customers. Deciding which customers are more or less profitable allows the business owner to focus advertising toward the consumers who are the most profitable.

5. Relevant Cost Analysis

Managerial accounting information is used by company management to determine what should be sold and how to sell it. For example, a small business owner may be unsure where he should focus his marketing efforts. To evaluate this decision, an accounting manager could examine the costs that differ between advertising alternatives for each product, ignoring common costs. This process is known as relevant cost analysis and is a technique that is taught in basic managerial accounting courses. The same process can be used to determine whether to add product lines or discontinue operations.

6. Understand Performance Variances

Business performance discrepancies are variances between what was predicted and what is actually achieved. Management accounting uses analytical techniques to help the management build on positive variances and manage the negative ones.

7. Helps Increase Efficiency of the Business

Management accounting increases efficiency of the business concern. The targets of different departments of the enterprise are determined in advance and the achievement of these goals is taken as a tool for measuring their efficiency.

8. Maximum Profits can be Obtained

In this process every possible effort are made to control unnecessary expenses. The incapability or inefficiency is removed. New systems or techniques are found out to achieve the goal, so that there may be maximum profits out if the capital invested in the Business.

9. Better Services / Products to Customers

The cost control device is management accounting enables the reduction in prices of the product. All employees in the concern are made cost aware. The quality of the product become good because quality standards ate predetermined. The customers are supplied goods and goods quality at reasonable price.

10. Helps Analyzing & Increasing Financial Return

Business owners can also use management accounting to increase their company’s financial returns. Management accountants can prepare financial forecasts relating to consumer demand, potential sales or the effects of consumer price changes in the economic marketplace. Business owners will often use this information to ensure they can produce enough goods or services to meet consumer demand at current prices. Companies also pay close attention to the amount of competition in the economic marketplace. Competition can reduce the company’s financial returns from business operations.

References:

• https://www.invensis.net/blog/finance-and-accounting/what-is-management-accounting-and-its-importance/
• http://smallbusiness.chron.com/advantages-management-accounting-3983.html
• http://managementstudyonline.blogspot.com.ee/2014/05/need-and-importance-of-management.html
• http://www.gemanalyst.com/importance-of-management-accounting/
• https://yourbusiness.azcentral.com/advantages-managerial-accounting-21281.html
• http://smallbusiness.chron.com/management-accounting-important-decisionmaking-53947.html