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Management Accountant In Decision Making

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Question:

Discuss about the Role of the Management Accountant in Decision Making.
 
 

Answer:

Role of the management accountant in Decision Making

According to the Chattered Institute of Management Accountant (CIMA), the management accountants are the persons who are concerned with the analysis, identification, preparation, measurement, accumulation, interpretation and communication of the business and management related information. Such effective business communication with the higher managerial level by the management accountants help in the sustainable use of the available resources. The sustainable use in turn helps the company to grab more profit via optimized revision of the expenditure chart. Garrison, Noreen and Brewer (2006) best described the term management accountant. According to them, they are the people who is concerned with providing information to the managers or the higher managing authority.

The management accountants are also involved in the preparation of the financial reports for several non-management groups like the shareholders, regulatory agencies, creditors and tax authorities.

Figure: Management Accountant in an Organization

(Source: Bamber et al. 2008)

Following the industrial revolution, there occurred an increased in the amount of the mechanized production along with size and the complexicity of the process. According to the accounting  historians, separation of the ownership in the private limited companies, led to the increase in the number of the companies followed by popularity of the concept of cost accounting or management accountant. Management accountant plays an important part of the organizational economic information system with a principal role in decision-making (Ward 2012). The three areas in which the accounting decision making of management accountant is being practiced are:

  • Strategic Management
  • Performance Management
  • Risk Management

For proper implementation of all three above mentioned management plans, the management accountant involve in setting specific goals while directing and controlling them as per the requirement of the company. By directing and controlling, it means that tactical manipulation of the plans and thus manipulating the decision or facilitating in the decision making (Langfield-Smith, Thorne and Hilton 2008).

Figure: Steps in decision making

(Source: Author)

Strategic Management

Figure 2: Strategic Management Model in Management Accountant

(Source: Isaac Mwita 2000)

Performance Management

Figure 3: Performance Management Plan in Management Accountant

(Source: Author)

Importance of Unit Costs

Unit cost, which is popularly known as single costing, is the total expenditure that has been incurred by the company to manufacture, store and to sell the product. The unit cost encompasses all the fixed cost, variable cost and the overhead cost along with other direct material/labor cost. In case of White’s Chemicals, the unit costs are dependent of the variables of machine costs, setup costs, receiving cost, material handling and engineering cost (Bebbington and Thomson 2013). In case of Mosby Design and Manufacturing, the fixed overhead expense of $160,000. $88,000 out of $160,000 will not be required if the line is drops below the estimated one. However, $72,000 will still be there as they are common fixed overheads. Thus importance of overhead in Unit costing is huge.

The importance of Unit Costing are:

It clearly discloses the total cost and cost per unit (cost per unit = total cost of production/total number of unit manufactured).

(In case of Mosby Design and Manufacturing, the cost per unit is 16 dollars approx it has a direct affect on the total cost)

  • Determined the total profitable volume of the production
  • Assist in determining the selling price of the product
  • Helps the manufacturer to keep a keen scrutiny on the overall cost of production
  • Helps in the preparation of the tender sheet
  • Helps to make a vivid comparison over the current cost with the previous cost
  • Provides necessary insight over the cost to the higher management (Drury 2013)
 

Importance of Accurate Costing

In the absence of the information related to accurate cost, the entire business will be dark. The accurate costing can be regarded as the second most important entity after unit costing that plays a huge role in decision making of the management accountant. The importance of the accurate cost lies in the fact that,

  • It helps in the setting sell price (cost plus or markup on cost): In order to set the sell price, proper and detailed information of the sell price is necessary
  • Helps in proper formulation of the legal defense (if any) against the charges of the predatory pricing practice: Numerous states have laws that prohibits business organization from selling below the cost (apart from special circumstances) and in extreme cases, a business can be charged for labeling artificially low price mostly intended to drive the prospective competitors out of the business. In order to generate the lowest possible market price, the importance of the accurate costing comes in action
  • Helps in the measurement of the gross margin and valuing assets of the organization: The profit level cannot be managed unless and until the organization have definite information about the gross margin or the gross profit (bottom line profit figure). The gross margin is obtained via subtraction of the cost of the goods with the sale revenue. If the gross margin is wrong, the bottom-line net income is wrong and accurate costing helps in the exact calculation of the gross profit of the bottom line profit
  • Promotes selection of the optimal product portfolio: Company at time, may plan to increase their product portfolio or may wish to shift their product line up altogether or may emphasize on advertising on particular product. This selection is done on the basis of the calculation of the capital investment along with yearly turn over and this can only be done via accurate citation (Li et al. 2012)

Importance of Choosing Best Method of Assigning Costs and Relevant Costs

The importance lies in the fact that it will allow the manager accounting personnel to ascertain the actual sell price of the product in the market so that the company can extrat more profit, much above the gross margin ((Langfield-Smith, Thorne and Hilton 2008; Lambert and Sponem 2012).

Conclusion

Thus from the above discussion, it clear that their lies a significant importance on of the decision making process of the management accountant. Management accounting helps in effective planning and procurement of the strategies, which in turn helps the higher management to increase their overall financial profit. The help of the management accounts comes in terms of proper analysis of the competitive market along with proper calculation of the accurate cost and unit cost of the product of interest of the organization. In case of White Chemicals, which specializes in the production of the chemicals used in the copper industry, proper information of the accurate and the unit cost is must in order to grab maximum profit. However, compound which is more difficult to manufacture (T-415), needs proper refinement of the sell price via critical application of the unit cost concept by the management accounting personnel. In case of Mosby Design and Manufacturing who is producing 40,000 units (RB11) annually, proper assistance from management accountant is mandatory in order to increase the overall manufacturing turnover or to expand the dimension of the product lineup

 

References

Bamber, L.S., Braun, K.W. and Harrison, W.T., 2008. Managerial accounting. Pearson Education.

Bebbington, J. and Thomson, I., 2013. Sustainable development, management and accounting: Boundary crossing. Management Accounting Research, 4(24), pp.277-283.

Drury, C.M., 2013. Management and cost accounting. Springer.

Garrison, R.H. and Noreen, E.W., 2006. Brewer, peter C. Managerial Accounting, 11th Edition, boston: mcgraw-hill.

Isaac Mwita, J., 2000. Performance management model: A systems-based approach to public service quality. International Journal of Public Sector Management, 13(1), pp.19-37.

Lambert, C. and Sponem, S., 2012. Roles, authority and involvement of the management accounting function: a multiple case-study perspective. European Accounting Review, 21(3), pp.565-589.

Langfield-Smith, K., Thorne, H. and Hilton, R.W., 2008. Management accounting: Information for creating and managing value. McGraw-Hill Higher Education.

Li, X., Sawhney, R., Arendt, E.J. and Ramasamy, K., 2012. A comparative analysis of management accounting systems’ impact on lean implementation. International Journal of Technology Management, 57(1/2/3), pp.33-48.

Ward, K., 2012. Strategic management accounting. Routledg

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