Management accounting is very important for business organizations to make strategic decisions in order to gain competitive advantage in the market. This article explains the concept of management accounting in more detail in the following sub sections.
Management accounting involves preparation of statistical and financial information that the managers require to make important decisions on behalf of the organization. Reports of management accounting are presented weekly and monthly. They are presented to the CEO and other senior managers of the organization.
Management accountants are responsible for making critical decisions and necessary predictions by analyzing the previous financial data. The reports provided by the management accountants are used to make new beneficial strategies for the company. For example, these reports are used to select the best way that can be used to expand the company either by using the product differentiation strategy or business expansions or entering into a merger or acquisition or joint venture. Likewise, to make these types of important decisions top management use the ratio analyses, forecasts, budgets, etc.
Management Accounting Tools
There are various tools that are widely used in management accounting. They are as follows:
• Ratio Analysis
When calculating ratios, one variable is being measured with regard to another. It is a widely used tool in making strategic decisions on behalf of the organization. Management accountants frequently use these ratios with other resources to measure the current performance of the company.
Some of the key ratios that are frequently used in management accounting can be illustrated as follows:
• Activity or efficiency ratios
These ratios can be used to decide the company’s ability of settling the debts.
• Gearing ratio
The company’s financial position can be decided using this ratio.
• Profitability/performance ratios
It explains about the company’s profitability and (Return On Investment) ROI within a specific time period.
Before making critical decisions on behalf of the organizations, management accountants consider the calculated figures of these ratios as the decisions have a direct impact towards the success of the organization.
Other than the above discussed ratios there are various other tools that are widely used by organizations such as cash flow statements, budgets, variance analysis, investment appraisals, etc. Cash flow statements are useful to identify the cash inflows and outflows of the organization. Budgets are the predetermined estimates for the future periods and useful to identify the estimated revenue generating sources and cost estimations of various activities.Variance analyses illustrate the differences among the actuals and the estimates. Management accountants can make certain decisions to work on positive variances and to ignore the negative variances. Investment appraisals are useful to decide whether a specific investment would be useful or not with compared to the investment made. Financial returns need to be matched with the investment cost for specific projects like building a new factory to expand the production capacity.
1. Needles et al (2011) Principles of Accounting, Nelson Education Ltd
2. Edwards et al (2014) Accounting principles; A Business Perspective, Managerial Accounting, Global Text Project 2014