Importance of Management Accounting in Decision-Making

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Business owners are faced with countless decisions every business day. Managerial accounting information provides data-driven input to these decisions, which can improve decision-making over the long term. Small business managers can leverage this powerful tool to help make their business more successful by understanding how management accounting benefits common business decision contexts.

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.

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.

Make or Buy Analysis

A primary use of managerial accounting information is to provide information used in manufacturing. For example, a small business owner may be considering whether to make or buy a component needed to manufacture the company’s primary product. By completing a make or buy analysis, she can determine which choice is more profitable. While this technique is certainly useful, small business owners should only use these analyses as a factor in the decision. There could be other non-financial metrics that are important to consider that would not be part of the analysis.

Utilizing the Data

Managerial accounting information provides a data-driven look at how to grow a small business. Budgeting, financial statement projections and balanced scorecards are just a few examples of how managerial accounting information is used to provide information to help management guide the future of a company. By focusing on this data, managers can make decisions that aim for continuous improvement and are justifiable based on intelligent analysis of the company data, as opposed to gut feelings.

Management Accounting Techniques

While the fundamentals of management accounting have not changed over the past 100 years, changes in manufacturing and production processes have pushed management accounting to update its practices. Integration of technological advances into the accounting department have made it easier and less expensive for small-business owners to make data-driven decisions about their companies. Understanding how management accounting has been updated in the modern era can help you leverage technology to improve your business.

Standard Costing

Standard costing is a method of recording accounting transactions at their expected costs and then analyzing any differences between the standard costs and actual costs. While this technique is certainly not new, the speed in which this information can be analyzed has definitely changed. Using modern accounting information systems, small-business owners are able to examine variances between actual and standard costs in real-time as soon as materials are purchased and products are manufactured. In the past, these techniques would require calculations by an accountant. Now, some of this functionality is built into popular software packages. While this is certainly more convenient, small-business owners should be careful. Interpretation of standard costing variances still requires understanding of how the process works.

Balanced Scorecards

The balanced scorecard is a performance management tool that combines financial and non-financial measures to give a more holistic snapshot of firm or individual performance. In the history of management accounting, the balanced scorecard is fairly new, with the technique only being started in the 1990s. While use of the balanced scorecard technique is popular it does have limitations. Even though compensation is often tied to balanced scorecard results, this may have negative consequences. Bonus amounts are powerful motivators; if small-business owners are not absolutely positive that the metrics being used in the balance scorecard are correct, they should be cautious in using the scorecard to award compensation. Emphasizing incorrect behaviors could hinder performance instead of help improve it.

Real-time Inventory Management

The advent of radio-frequency identification (RFID) technology in the last decade has drastically changed inventory management. In the past, companies often chose between periodic and perpetual inventory systems. Periodic systems record purchases of inventory in bulk and the cost of goods sold is determined at the end of the month. Perpetual systems update the company’s cost of goods sold with every inventory transaction. By attaching RFID tags to products, businesses are able to track each individual inventory item throughout the company. Furthermore, as the company scans the RFID tags when the items are moved or sold, the accounting information system is updated on the fly.

Process Management

Modern management accounting techniques have also made great changes in process management. Management by exception, the process of only focusing management attention on processes when there is reason to believe that the process is not working correctly, can be applied much more efficiently using modern quality tracking techniques. For example, in the past a company assessing the quality of finished goods might measure every 100th unit produced to ensure that the product met specifications. Now machinery can measure any unit that falls outside of specifications and immediately remove the item from the assembly line.

Contributed by:

Milind Limaye

 

 

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One thought on “Importance of Management Accounting in Decision-Making

  1. Importance of costing has been explained by the author beautifully . Highlighting areas which is of prime focus in management accounting.Looking forward to many more such articles in future.

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