The role of management accounting does not normally include the function of
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The management process implies the four basic functions of: (1) Planning. (2) Organising (3) Controlling, and (4) Decision-making.
Management accounting plays a vital role in these managerial functions performed by managers.
(1) Planning:
Planning is formulating short term and long-term plans and actions to achieve a particular end. A budget is the financial planning showing how resources are to be acquired and used over a specified time interval.
Management accounting is closely interwoven in planning both because it provides information for decision-making and because the entire budgeting process is developed around accounting-related reports. Management accounting helps managers in planning by providing reports which estimate the effects of alternative actions on an enterprise’s ability to achieve desired goals. For example, if a business enterprise determines a target profit for a year, it should also determine how to reach that target.
For example, what products are to be sold at what prices? The management accountant develops data that help managers identify the more profitable products. Similarly, the effects of alternative prices and selling efforts (say, what will profit be if we cut prices by 5% and increase volume by 15%, etc.) can easily be determined by the management accountant. As part of the budgeting process, management accountants prepare budgeted (forecasted) financial statements, often called proforma statements.
(2) Organising:
Organising is a process of establishing an organizational framework and assigning responsibility to people working in an organization for achieving business goals and objectives. The type of organizational structure differs from one business enterprise to another. In the organising process, departmentalization can be done by setting up divisions, departments, sections, branches.
Organising requires clarity about each manager’s responsibility and lines of authority. The various departments and units are interrelated in a hierarchy, with a formal communication structure in which information and instructions are passed downwards to lower level management and upwards to top management level.
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Management accounting helps managers in organising by providing reports and necessary information to regulate and adjust operations and activities in the light of changing conditions. For example, the reports under management accounting can be prepared on product lines on which basis managers can decide whether to add or eliminate a product line in the current product mix. Similarly management accountant can provide sales report, production report to the respective manager for taking suitable action about the sales and production position.
(3) Controlling:
Control is the process of monitoring, measuring, evaluating and correcting actual results to ensure that a business enterprise’s goals and plans are achieved. Control is accomplished with the use of feedback. Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan. Feedback allows the managers to decide to let the operations and activity continue as they are, take remedial actions to put some actions back in harmony with the original plan and goals or do some rearranging and re-planning at midstream.
Management accounting helps in the control function by producing performance reports and control reports which highlight variances between expected and actual performances. Such reports serve as a basis for taking necessary corrective action to control operations. The use of performance and control reports follows the principle of management by exception. In case of significant differences between budgeted and actual results, a manager will usually investigate to determine what is going wrong and possibly, which subordinates or units might need help.
(4) Decision-making:
Decision-making is a process of choosing among competing alternatives. Decision-making is inherent in each of three management functions described above, namely, planning, organising and controlling. A manager cannot plan without making decisions and has to choose among competing objectives and methods to carry out the chosen objectives. Similarly in organising, managers need to decide on an organization structure and on specific actions to be taken on day-to-day operations. In control function managers have to decide whether variances are worth investigating.
Management accounting plays a vital role in these managerial functions performed by managers.
(1) Planning:
Planning is formulating short term and long-term plans and actions to achieve a particular end. A budget is the financial planning showing how resources are to be acquired and used over a specified time interval.
Management accounting is closely interwoven in planning both because it provides information for decision-making and because the entire budgeting process is developed around accounting-related reports. Management accounting helps managers in planning by providing reports which estimate the effects of alternative actions on an enterprise’s ability to achieve desired goals. For example, if a business enterprise determines a target profit for a year, it should also determine how to reach that target.
For example, what products are to be sold at what prices? The management accountant develops data that help managers identify the more profitable products. Similarly, the effects of alternative prices and selling efforts (say, what will profit be if we cut prices by 5% and increase volume by 15%, etc.) can easily be determined by the management accountant. As part of the budgeting process, management accountants prepare budgeted (forecasted) financial statements, often called proforma statements.
(2) Organising:
Organising is a process of establishing an organizational framework and assigning responsibility to people working in an organization for achieving business goals and objectives. The type of organizational structure differs from one business enterprise to another. In the organising process, departmentalization can be done by setting up divisions, departments, sections, branches.
Organising requires clarity about each manager’s responsibility and lines of authority. The various departments and units are interrelated in a hierarchy, with a formal communication structure in which information and instructions are passed downwards to lower level management and upwards to top management level.
ADVERTISEMENTS:
Management accounting helps managers in organising by providing reports and necessary information to regulate and adjust operations and activities in the light of changing conditions. For example, the reports under management accounting can be prepared on product lines on which basis managers can decide whether to add or eliminate a product line in the current product mix. Similarly management accountant can provide sales report, production report to the respective manager for taking suitable action about the sales and production position.
(3) Controlling:
Control is the process of monitoring, measuring, evaluating and correcting actual results to ensure that a business enterprise’s goals and plans are achieved. Control is accomplished with the use of feedback. Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan. Feedback allows the managers to decide to let the operations and activity continue as they are, take remedial actions to put some actions back in harmony with the original plan and goals or do some rearranging and re-planning at midstream.
Management accounting helps in the control function by producing performance reports and control reports which highlight variances between expected and actual performances. Such reports serve as a basis for taking necessary corrective action to control operations. The use of performance and control reports follows the principle of management by exception. In case of significant differences between budgeted and actual results, a manager will usually investigate to determine what is going wrong and possibly, which subordinates or units might need help.
(4) Decision-making:
Decision-making is a process of choosing among competing alternatives. Decision-making is inherent in each of three management functions described above, namely, planning, organising and controlling. A manager cannot plan without making decisions and has to choose among competing objectives and methods to carry out the chosen objectives. Similarly in organising, managers need to decide on an organization structure and on specific actions to be taken on day-to-day operations. In control function managers have to decide whether variances are worth investigating.
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