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Effect Of Management Accounting Practices On Financial

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Question:

Discuss about the Effect of Management Accounting Practices on Financial Performance of Manufacturing Firm.
 
 

Answer:

Introduction

The current segment explains effects of management accounting practices on essentially the financial performance of the manufacturing firm Adelaide Brighton. The current section explains the background literature, different theories of management accounting, significant management accounting practices, and important components of financial performance of firms. In particular, the review of academic literature presents details of financial performance of firm, practices in Management Accounting and financial performance of firm with special orientation to the operations of Adelaide Brighton.

Background Literature

As rightly indicated by Kaplan and Atkinson (2015), management accounting can be considered as a process of accumulation of enumeration, recognition, evaluation, preparation, analysis and communication of significant information that again aids management in meeting the objectives of the organization and business decision making. Management accounting essentially delivers opportunity for corporations to partake in the market in a bid to offer superior quality products as well as services at affordable prices to all consumers.

 

Important theories of management accounting

The current segment essentially presents two different theories of management accounting. Particularly, this include the contingency theory of essentially management accounting whilst the other theory is that is the new institutional sociology theory.

As rightly indicated by Simons (2013), the contingency theory of management accounting discusses the reason behind unalike or else dissimilar management accounting practices specifically at the time of carrying out comparison between one business firm to the other. However, this can be associated to the business firms functioning in diverse industries or else sectors. Fullerton et al.  (2014) implemented contingency theory to diverse management accounting practices and illustrated that there does not exist any generic standard management accounting practice that can be implemented to all the business concerns.  Essentially, each and every business concern might have their own management accounting exercise. Lavia López and Hiebl (2014) asserts that management accounting practices are widely utilized in diverse manufacturing firms and the favoured practices include budgeting for controlling costs along with analysis of performance of organization. Analysis of findings divulges the fact that budgeting plays a very significant role in the process of handling as well as directing procedures of business concerns. This in turn helps the managers to understand the costs that are expected in the upcoming budgeted period and provides an indication regarding seasonal alterations in the corporation and the impact it can exert on the cash flows as well as revenues of the corporation. This is why management accounting practices are preferred over other exercises. In addition to this, budgeting also helps corporations to effectually plan and at the same time formulate appropriate strategies for achievement of goals (Fullerton et al. 2013).

As rightly put forward by Soin and Collier (2013), the theory of New Institutional Sociology (NIS) was essentially developed after a series of different observations made particularly during the year 1970. The main argument of NIS is that there are certain corporations that operate in an institutionalised environment. In particular, the institutionalized business concerns have a tendency to adopt framework as well as that are essentially valued in social as well as cultural environment of the business concern. This might help the organizations in the process of achievement of legitimacy and assist in securing diverse resources that are vital for the survival of the firms. Lafond et al. (2016) argue that business concerns are very strategic in their reaction to different institutional pressures that are imposed on these firms. The firms might decisively adhere to directives or else assume explicit formal framework as well as procedures, and carry out the same in a very manipulative manner in a bid to acquire legitimacy and in that way secure different resources on which the firms rest on.

 

Management Accounting Practices

Management accounting practices also assists a corporation to thrive in the competitive, ever-transforming world as this delivers a significant competitive advantage for a corporation that guides managerial activities, motivates human behaviours, upholds as well as creates cultural values essential for achievement of strategic objectives of an organization. Management accounting is essentially apprehensive regarding internal requirements of management. The process orients around analysis of performance as well as formulation of estimation of upcoming period set against conventional financial accounting. This can stresses the need for historical data associated to legal financial matters such as ownership, investment, acquirement of credit, process of taxation, directives as well as building of foundations for consistent as well as traditional external reportage. As rightly indicated by Carlsson-Wall et al. (2015), flexibility can be regarded as an important feature of management accounting as it presupposes that cautious attention has been provided to determine the significant requirements of management, many among them cannot be accurately recognized beforehand. Alsharari et al. (2015) assets that management accounting can be defined as a procedure of recognition, enumeration, accumulation, interpretation, preparation as well as communication of particular financial information utilized by management to plan, assess and maintain control within a particular corporation. This can also help in the process of ensuring appropriate use of and accountability for resources.

Essentially, management accounting essentially consists of preparation of financial declarations for non-management classes such as shareholders of the firm, creditors, regulatory organisations as well as tax establishments. Also, management accounting also delivers information from essentially the environment to management to boost the process of business decision making. In itself, proper management accounting information has essentially three different attributes, namely, technical, behavioural and cultural. Arena et al. (2015) opines that technical attributes helps in the process of enhancement of understanding of the overall phenomenon enumerated and delivers pertinent information concerning strategic decisions. However, behavioural attributes encourages different actions that are consistent with the strategic objectives of the organization. In addition to this, the cultural attributes indicates towards the support and generates a particular set of shared cultural values, beliefs along with mind-sets in a particular corporation and community. However, the development of management accounting is essentially responsive to varied demands of necessarily the management as well as environment. Gold et al. (2016) opines that management accounting can acclimatize to different organizational transformations and three main forces that can cause corporations to evolve, namely, technological alterations, globalization and needs of the customers. Again, in a bid to remain competitive in the market, business have the need to continuously improve.  Owing to this, management needs to use different established management accounting tools as well as techniques.

 

Elements of financial performance in particularly manufacturing organization Adelaide Brighton

Examination of different determinants of particularly financial performance is important for the stakeholders of the firm Adelaide Brighton, but particularly for investors of the corporation. Adelaide Brighton also simply referred to as ABC is essentially an Australian manufacturing firm that produces cement, lime as well as different dry blended products. The corporation ABC essentially operates through different manufacturing as well as distribution facilities across different parts of South Australia, Victoria and New South Wales among many others (Adbri.com.au 2017). In itself, the overall value of specific shareholders, that is referred to as market value of the Adelaide Brighton is highly dependent on numerous facets. Essentially, the factors include present profitability of the Adelaide Brighton, diverse risks faced, and growth of the economy that is vital for earnings of the corporation. These can be considered as the major factors that can exert influence on the overall market value of manufacturing organization Adelaide Brighton. However, Simons (2013) argue that different financial indicators grounded on specific accounting information can be considered to be adequate for determination of overall value of the shareholders of the firm Adelaide Brighton. Particularly, financial performance of manufacturing corporations are essentially influenced by the specific market position of the corporation. In itself, profitability of the corporation Adelaide Brighton can essentially be decomposed in to different components such as net turnover along with net profit margin. As per Arena et al. (2015), both the components can exert influence on the overall profitability of the firm at one point of time (Adbri.com.au 2017).

As correctly put forward by Arena et al. (2015), risk as well as growth can be considered to be two very significant factors that might influence the overall financial performance of manufacturing firm. As the market value of the firms are essentially conditioned by the financial results of Adelaide Brighton, the degree as well as the level of risk exposure can lead to alterations in the overall market value. In addition to this, the economic growth can be regarded as another important element that can assist in the process of attainment of better position in different financial markets as market value takes into account anticipated profits in the upcoming period. Again, the size of the firm can also have a very positive impact on the overall financial performance as larger corporations can utilize this specific advantage to acquire certain financial gains in specific business relations. Essentially, large sized firms have get easier admittance to vital factors of production, counting human resources of the firm. Nevertheless, current studies contradict the current idea and put forward the argument that capital structure essentially plays a significant role in the process of determination of performance of a firm. In itself, the business entities that have higher rates of profits tend to remain low leveraged owing to their capability to fund their own sources. Contrarily, higher degree of leverage again enhanced the risk of liquidation or else bankruptcy of different firms. However, the total assets of a firm can positively exert influence on the overall financial performance of the corporation. In this case, large amount of sales is also not correlated with enhanced performance. Prior studies also indicates towards the fact that the association between turnover and the overall corporate performance can be considered to be inconclusive (Arena et al. 2015). For instance, companies listed under stock exchanges can be considered to have stable financial positive if they are able to distribute higher dividends.  However, there hs been a remarkable shift owing to innovations in different management accounting practices. However, this is apparent from the adoption of different innovative management accounting mechanisms such as use of activity based costing, adoption of strategic management accounting, lifecycle costing system, implementation of just in time (JIT) along with other contemporary performance evaluations mechanisms such as balance score card.

 

Financial performance of the firm Adelaide Brighton

Financial performance can be referred to as a subjective measure that shows the manner a particular corporation can utilize assets from the primary approach of business and generate revenues. Essentially, the concept of performance enumeration  concept refers towards the fact  that workforce  can augment the overall firm’s value by augmenting the overall  size of a corporation’s cash flows in the upcoming period, by quickening the cash flow receipts, or else by ensuring more certainty or else less chancy. Financial performance of a firm is essentially determined by different indicators such as profit or else value additions, revenues from sales, budget, and costs or else expends along with indicators of stock market. Proxies for particularly financial performance include different measures of performance, key financial ratio such as Return on Assets (ROA) as well as Return on Equity (ROE) (Tanc and Gokoglan 2015).

Analysis of financial statements of the company Adelaide Brighton for the years (2016, 2015 and 2014) of the firm Adelaide Brighton reveals the fact that return on assets (ROA in %) was recorded to be 10.17 in 2016, 11.39 in 2015, and 10.02 in 2014. Again, the return on equity enumerated based on the financial declarations of the firm is recorded to be 15.38% in 2016, 17.78% in 2015 and 15.75% in 2014. The two different financial ratio enumerated that is ROA and ROE can be considered to be good measure of profitability of the firm Adelaide Brighton. There are other key financial ration that can help in understanding the solvency, as well as liquidity condition of the firm. Appropriate management accounting practices can therefor help in understanding the precise financial condition of the firm by proper assessment of financial pronouncements of the firm. Therefore, these practices can help in understanding the gaps in performance and assume steps that can help in overcoming the performance gaps in order to achieve the organizational objectives of the firm Adelaide Brighton

Practices in Management Accounting and financial performance of firm

As rightly put forward by Chiwamit et al. (2014), different practices of management accounting essentially for manufacturing businesses can support infrastructure of a corporation and different management accounting procedures. Particularly, management accounting exercises comprise of analysis of performance, appropriate budgeting, sharing of information for business decision making, analysis of business strategy and many others. Brandau et al. (2013) argue that owing to development of novel mechanisms, fundamental principles of management accounting has altered to form a better one that in turn can add value to different practices. Brandau et al. (2013) opines that academic literature also points out towards certain exercises namely, absorption costing as well as marginal costing that are highly preferred by different firms. Management accounting practices essentially help in enabling management to acquire pertinent information for significant decision making. Gold et al. (2016) advocates that the perceived importance of particularly cost accounting can be properly driven by lessening profitability, escalating cost along with competition, together with world economic crisis. It can be noted in this connection that there are firm that perceive traditional management accounting instruments over the new management accounting exercises that include strategic planning as well as transfer pricing. Gold et al. (2016) asserts that the most significant management accounting practices include budgeting, cost-volume-profit (CVP) analysis, planning as well as control.

According to Chiwamit et al. (2014),, there are certain facets that influences alteration in the management accounting practices within specific business organizations. The alterations might have an influence on the process of selection of accurate management accounting exercises within a specific corporation. However, the changes might possibly originate owing to diverse settings of essentially economic as well as cultural settings of the environment. According to Chiwamit et al. (2014), management accounting practices have not transformed over the last few years. Nevertheless, Chiwamit et al. (2014), convinced that changes has occurred. Simons (2013) additionally argued that there is indication for different management accounting practices that have altered over the past few decades.

 Literature Summary

The above mentioned section helps in gaining a deep understanding regarding two significant theories of management accounting such as new institutional sociology theory and contingency theory. Thereafter, the study elucidates in detail the overall of management accounting practices that guides managerial activities, motivates human behaviours, upholds as well as creates cultural values essential for achievement of strategic objectives of an organization. Subsequently, the review of prior academic literature also includes elucidation of important components of financial performance in particularly manufacturing organization that is Adelaide Brighton. This section essentially engages in examination of different determinants of particularly financial performance is important for the stakeholders of the firm Adelaide Brighton. Subsequently, then above mentioned study also helps in understanding the Financial performance of the firm Adelaide Brighton and thereafter discusses different practices in Management Accounting and financial performance with special orientation to operations of Adelaide Brighton.

 

References

Adbri.com.au, 2017. [online] Available at: https://adbri.com.au/-/adbri/lib/pdfs/FINAL%202015%20Annual%20Report%20-%20Financial%20History.pdf [Accessed 21 Apr. 2017].

Alsharari, N.M., Dixon, R. and Youssef, M.A.E.A., 2015. Management accounting change: critical review and a new contextual framework. Journal of Accounting & Organizational Change, 11(4), pp.476-502.

Arena, M., Azzone, G. and Bengo, I., 2015. Performance measurement for social enterprises. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 26(2), pp.649-672.

Brandau, M., Endenich, C., Trapp, R. and Hoffjan, A., 2013. Institutional drivers of conformity–Evidence for management accounting from Brazil and Germany. International Business Review, 22(2), pp.466-479.

Carlsson-Wall, M., Kraus, K. and Lind, J., 2015. Strategic management accounting in close inter-organisational relationships. Accounting and Business Research, 45(1), pp.27-54.

Chiwamit, P., Modell, S. and Yang, C.L., 2014. The societal relevance of management accounting innovations: economic value added and institutional work in the fields of Chinese and Thai state-owned enterprises. Accounting and Business Research, 44(2), pp.144-180.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), pp.50-71.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), pp.414-428.

Gold, S., Moon, J. and Chapple, W., 2016. Transfer of Social and Environmental Accounting and Reporting Knowledge. In Research in Global Strategic Management. Emerald Group Publishing Limited.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Lafond, C.A., McAleer, A.C. and Wentzel, K., 2016. Enhancing the Link between Technology and Accounting in Introductory Courses: Evidence From Students. Journal of the Academy of Business Education, 17.

Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized enterprises: current knowledge and avenues for further research. Journal of Management Accounting Research, 27(1), pp.81-119.

Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed.

Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and control.

Tanc, A. and Gokoglan, K., 2015. The Impact of Environmental Accounting on Strategic Management Accounting: A Research on Manufacturing Companies. International Journal of Economics and Financial Issues, 5(2).

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