Functions of management accounting cannot be fully appreciated if a working definition and explanation of what a management accounting is all about is not reasonably provided. To this end, I would like to start this article by providing a brief description of what management accounting is below.
WHAT IS MANAGEMENT ACCOUNTING?
Management accounting is the process of recognizing/ identifying, collecting, collating, measuring, analyzing, interpreting and communicating cost and non cost information that have economic value and relevant to management. This cost and non cost information are usually internal to the business so as to allow the management makes informed, economic decisions.
This is to say that an understanding of management accounting or financial accounting for that matter requires an understanding of the decision making process and being conscious of the users of accounting information and their various needs. Some scholars have attempted to distinguish between management accounting and cost accounting. I will not take that approach here as I cannot see any clear line between cost accounting and management accounting.
Users of accounting information can further be classified into internal users and external users of accounting information. Management accounting is concerned with providing information to those people within the corporation i.e. internal users to help them make better and more economically sound decisions and improve the efficiency and effectiveness of existing operations. That is why accountants are communicators in the business world.
Functions of management accounting
I want to believe that you won’t find it difficult appreciating the functions of management accounting now that an introductory knowledge of what management accounting is has been gained. The remainder of this article will now be devoted to the discussion of ‘functions of management accounting in decision making processes’.
Note that management accounting functions has been given attention in the service industry as the competition from world’s best companies become more intensive.
An efficient cost and management accounting system ought to and should generate information to meet the following requirements:
- Efficient allocation of cost between cost of goods sold and inventories for both internal and external profit reporting.
- Provisions of relevant information that will help managers make better economic decisions.
- Provision of information for planning, control, performance measurement and continuous improvements
Factors that defines the scope, dept and breath of management accounting function
Companies and businesses that existed prior to the 1980s enjoy a lot of protection and operated in an almost uncompetitive environment especially in the western countries where an average managers would look exceptional. Barriers of communication, government legislation, geographical distances, nascent nature of IT, etc restricts the ability of foreign companies to compete in domestic market. This ‘business heaven’ made it acceptable norm for companies to entertain and tolerate wastes.
Typical company and its management will always factor in the excess cost associated with inefficiency into the final cost of products / services and end users will have no choice than to buy as there are no real competitions.
The birth of globalization and e-business/e-commerce/internet commerce opened a new chapter of completion where companies have to compete against the best businesses in the world. Excellent manufacturing at a low cost coupled with high customer service become a major block in business survival.
As if this isn’t enough, product life cycle dramatically dropped reflecting the insatiable quest of customers to get better value for their money- thereby making a herculean task for management of various companies to grasp with the changing competitive environment of business.
Forward thinking businesses and world-class manufacturing companies responded to the above changes quickly by replacing their traditional production systems with new just-in-time production systems and making significant investment in advanced manufacturing technologies (ATM).
Again, the ever growing and insatiable appetite of new generation customers opened yet another challenging task to management to battle with. Nice companies responded to the yawning of customers for overall improved service at a reduced cost by developing what a call “customer satisfaction matrix”. In summary, four sets of targeted activities are designed to meet the needs of customers. They are:
FOUR ACTIONS THAT CAN MAKE YOUR CUSTOMERS HAPPY (customers satisfaction matrix)
- Identification of key business success factors, which include; is being cost efficient, producing high quality products, delivering your products and services to customers on time, and constantly innovating by making adequate investment in your R&D.
- Continuously improving on the above. It is a well known fact that a business cannot stand still just like any other thing that we do in life.
- Empowering your employees. This is no doubt one of the easiest ways of continuously improving. There are so many ways a company can go about motivating their staff. A simple delegation of certain power to employees to decide on matters that concern customers at the front desk is one way that employees empowerment can be done.
- Paying attention to value-added activities. Value added analysis helps a company to identify those activities that does not add value to customers’ satisfaction and try to reduce or eliminate them if possible.
The role of accountants in customer care services has long ago been fully established. Management accounting function will not be in the wrong track if it includes providing quality information about the delivery of customer service.
All these put together is emphasizing on the freshly created demands on management accounting functions to expand its roles by becoming involved in measuring and evaluating the quality of products and services, and constantly seeking efficient ways of managing the value added activities. The importance of accounting and its functions has taken a permanent front seat in the business and investment opportunities venhicle
This is to say that management accounting functions are therefore moving from the traditional emphasis on providing information to managers that only help monitor the activities of employees to supplying the information that will be useful in motivating employees into focusing on continuously improving value-added activities.
On a last note, I would like to sound a warning note to all management accountants that the advent of ERPS (enterprise resource planning system) has posed a serious threat that may make management accountants redundant as this software can perform all the functions of management accounting. ERPS is software that can simultaneously perform all business operations- including accounting and finance function. This excludes the human element of interpretation.
For you as a management accountant to be relevant, you had better start using your spare time to acquire some information interpretation skills which the ERP software cannot do.
As always, learning is the key to all knowledge. Learn new things today by purchasing any of the books functions of management accounting and ERPS implementation displayed below.