The Effectiveness of Management Accountancy - Example

Management Accountancy Name Class Unit Introduction The issue on the effectiveness of management accountancy as a tool for decision making planning and control features prominently on business decision making debate. In fact management accounting is seen as an integral part of the management process (Lord, 2007). Management accounting main focus is value addition to organisations through maximum utilisation of resources. Traditionally, its roles had been limited to giving relevant information required attaining planning, control and decision making (Bonner, 2008). Researchers believe that the manner which information is provided by the accountant to decision makers helps a lot in determining the firm performance. Moreover, an economic activity can only be carried out in the correct manner if the decision, implementation and control of the execution process are based on information which is accurate and complete (Zimmerman & Yahya-Zadeh, 2011). This essay will critically discuss the effectiveness of management accountancy as a tool for decision making, planning and control. The critical essay will primarily focus on decision making accounting and financial planning concepts. This will help critically analyse the challenges faced by business when making and implementing decisions using academic and practical evidence to support. I feel that decision making accounting, financial planning, financial statement analysis and management reporting are some of the vital tools in management accounting. The tools ensure that the business is able to make decisions, plan and control in an effective manner (Bonner, 2008). To run effectively, a business must have financial planning that leads to profit maximisation. The need for sound planning requires having a competent management accounting. This helps in attaining the business objectives (Horngren et al., 2013). Thus, management accountancy is an important part of effective decision making in a business. For an organisation, decision making occupies an important part. Decision making in this case ranges from the strategic decisions which are made at the top level to operational decisions (Bonner, 2008). It is thus agreeable that decision making is all about selecting choices while at the same time compromising. Also decision making is not only about coming up with the right choice or compromising. According to Zimmerman & Yahya-Zadeh, (2011), a decision will only be considered successful if it has degenerated into work. This is where effective decision making comes in with an aim of attaining the business objectives. According to Drucker, effective decisions are based on a systematic process using distinct steps (Drucker & Cortes, 1996). In this case, it is vital to involve management accountants in the process due to their input (Bonner, 2008). But the question is does management accountant help in making effective decisions? According to Guilding, Cravens & Tayles (2000), management accounting plays an important role in effective business decision making, planning and control. This is where the management have to select an option from the alternatives to help in attaining the expected goals (Garrison, Noreen & Brewer, 2003). Management accounting information provides the information which is required when making such decisions. Most of organisations decisions are based on the information which is put into their decision making process. Decision making in management accounting is seen as selecting a course from the given alternatives. The best decision is the one which leads to the most revenue using the least cost (Horngren et al., 2002). It’s prudent that management and the management accountant works together to come up with the best alternative. Management accounting input into decision making makes it possible to ensure that all alternatives are considered when making a decision (Garrison, Noreen & Brewer, 2003). I personally believe that effective decisions in business are only attained if the management accountants are treated as business partners. This can only happen if the finance and accounting partners are working together (Horngren et al., 2013). The challenges can only be overcome if useful and timely information on management is provided in an efficient manner. The management accountants must also be ready to combine their financial knowledge with the business expertise to make them more effective (Atkinson et al., 1997). Through management reporting, it is possible for the management accounting to help the business on decisions based on profits and loss (Bonner, 2008). The management accountant in this case is supposed to give the top management a report that shows the profits and loss hence outlining the organisation position (Horngren et al., 2013). I see this as a way in which a management accountant can help in determining the strength and weakness of various areas of the business operating and financial activities. The management in this case is able to use the information to exercise their control and also make effective decisions. For any business growth based decision, there is need for financial statement analysis. This requires have appropriate balance sheet ad profit and loss account (Horngren et al., 2002). When I look at this business fact, I see the need for having financial statement analysis tool. The tool which is used by the management accountant helps in determining the business rate of growth. The management accountant has to effectively use the financial statements and ratio analysis to help in coming up with appropriate information (Bonner, 2008). Management accounting in this case helps in coming up with an information backed decision. Business depends on financial planning to attain the objective of maximising profits. This is where the management accounting comes in as a tool to make proper financial planning (Zimmerman & Yahya-Zadeh, 2011). The tool is one of the most important since it is based on the business primary goal. I feel that this is the tool that makes management accounting important in decision making. To understand the effectiveness of management accounting in decision making, let’s look at the two types of decisions; strategic and tactical, short run and long run. Strategic decisions are broad and qualitative in nature (Garrison, Noreen & Brewer, 2003). Tactical decisions come from the strategic decisions. Thus, once a strategic decision has been made, a management tool is used to help in coming up with a tactical decision. Through use of management accounting, the approach used is mainly quantitative. Management accounting addresses those decisions which require having data (Horngren et al., 2013). It thus utilises mathematical techniques to help in coming up with quantitative decisions. Short run and long run decisions are based on the horizon for making a decision. A firm may base their decision on an aim of maximising their profits in the short run or long run. Accounting tools such as C-V-P and incremental analysis are mainly used in dealing with short range decisions (Horngren et al., 2002). To address long run decisions, tools such as capital budgeting models are important. Any business decision should be backed by evidence which can also be data based. According to Baines & Langfield-Smith (2003), the effectiveness of management accounting is seen through provision of data tools. Thus, the assistance of management accounting mathematical decision making models is vital to help more on the decision (Garrison, Noreen & Brewer, 2003). This includes use of C-V-P analysis which is founded on the equation I = P (Q) - V (Q) - F. The approach requires using the financial statements as checklists to help in identifying decision making areas. It is crucial to note that for every item that is listed in the financial statement of a business, there is an appropriate approach using the management accounting. For example, an item such as sales requires use of C-V-P analysis while Inventory requires use of EOQ models (Horngren et al., 2002). To gain more insight on the effectiveness of management accounting, it is important to look at the role of management accountant when management accounting tools are being used. This is due to fact that each tool that will be used requires having special information (Garrison, Noreen & Brewer, 2003). This is the role of management accountant to provide this information. Traditionally, management accounting was mainly focused in giving financial information. This includes information on the cash flows, profits and the financial ratios (Horngren et al., 2002). This has changed and at the moment, non-financial information has gained importance in the management accounting. The nature of information wanted in this case is based on the type of organisation, level of details needed, purpose of information and complexity. I feel that the importance of management accounting can be proved by the fact that leading organisations have changed their financial and accounting in a manner that improve decision making. Management accounting has been used with an aim of providing information in a timely and accurate manner (Atkinson et al., 1997). This has been based on employing people who are financial experts. This has led to a business culture that is evidence based when making a decision. I feel that business needs to change a culture and base it on efficiency and effectiveness incorporating financial and accounting vision in the organisation (Horngren et al., 2002). In fact, a successful business that has incorporated management accounting into its practices is McDonalds. McDonalds uses standard costing technique to establish a standard in their products and control price. This can be seen in their standard ingredients cost used in their products. Atrill & McLaney (2009) proves that this helps to effectively control the cost of the product and enhance performance. Conclusion To sum up, it is clear that effectiveness of management accountancy as a tool for decision making planning and control depends on how well it’s applied in a business. Decision making becomes evidence based and more effective if management accounting is involved. Decision making accounting and financial planning are among the most vital concepts in coming up with effective business decisions. The effectiveness is based on the ability to use the accountancy information to choose between the alternatives. Thus, it becomes possible to gain maximum revenue using the least cost. Thus, the effectiveness of management accounting lies on the ability to incorporate it into business decision making. References Atkinson, A. A., Balakrishnan, R., Booth, P., & Cote, J. M. (1997). New directions in management accounting research. Journal of Management Accounting Research, 9, 79. Atrill, P., & McLaney, E. (2009). Management accounting for decision makers. New York: Pearson Education. Baines, A., & Langfield-Smith, K. (2003). Antecedents to management accounting change: a structural equation approach. Accounting, organizations and society, 28(7), 675-698. Bonner, S. E. (2008). Judgment and decision making in accounting. Upper Saddle River, NJ: Prentice Hall. Drucker, H., & Cortes, C. (1996). Boosting decision trees. In Advances in neural information processing systems, pp. 479-485. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2003). Managerial accounting. New York: McGraw-Hill/Irwin. Guilding, C., Cravens, K. S., & Tayles, M. (2000). An international comparison of strategic management accounting practices. Management Accounting Research, 11(1), 113- 135. Horngren, C. T., Bhimani, A., Srikant M.. Datar, Foster, G., & Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall. Horngren, C. T., Sundem, G. L., Schatzberg, J. O., & Burgstahler, D. (2013). Introduction to management accounting. New Delhi: Pearson Higher Ed. Lord, B. R. (2007). Strategic management accounting. Issues in Management Accounting, 3, 135-154. Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259. Appendix Fig.1, decision making model Fig.2 management accounting and decision making Read More