Roles of accounting and the relevance of management accounting information

Subject: Business
Type: Analytical Essay
Pages: 7
Word count: 1783
Topics: AccountingAppleFinanceManagement
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Introduction

Management accounting has become an intriguing subject of study in modern research. Many organizations rely on management accounting to make critical decisions. Particularly, organizations give attention to effective management accounting as a way of promoting organizational visibility. Managing accounting has gained popularity in the modern day as one of the important accounting functions that help an organization determine its priorities or make strategic decisions. Professionals define management accounting as a practice that focuses on providing managers with important information that they can use in decision-making. In many organizations, management accounting helps the leaders carry out successful short and long-term planning. For this reason, it is explicit that management accounting enhances an organization’s capability to achieve organizational goals. According to the Chartered Institute of Management Accountants (CIMA), management accounting seeks to apply different principles of accounting and financial management to increase value for different types of organizations. Organizations need well-established management accounting so that the organization can have access to clear data when making decisions. This paper will present a critical discussion of the roles played by management accounting and its relevance in providing information for decision-making processes.

Role of Accounting for Decision-making in Organizations

Researchers have discussed the orthodox roles of accounting. Accounting plays an important role in any organization. Particularly, accounting ensures that the organization and maintain institutional accountability and stewardship. Particularly, it would be difficult for an organization to demonstrate its level of accountability without available records. The rational allocation of resources is also an important role of accounting (Armitage, Webb, & Glynn 2016). From the statistics obtained by the accountants, the organization can decide on the most appropriate manner of allocating resources to different projects or products. Resource allocation determines how much an organization is willing to spend on a certain product or service. Specifically, the allocation of resources must have a form of justification. Accounting provides the relevant justification for allocating resources in a certain way.

An organization needs to carry out proper planning and control systems, and accounting provides the data and information required to achieve control and establish an effective plan. Without accounting, organizations would face numerous challenges in planning. There are emerging roles of accounting such as the development of organizational visibility, management of financial resources, organizational segmentation articulation, and the reinforcement of power and influence have become fundamental roles of accounting in the modern day. For the first time, accounting allows companies to have adequate knowledge of capital markets, a factor that explains why organizations can make better decisions (Golyagina & Valuckas 2016). These roles of accounting have become popular in the modern day as more organizations begin to value the importance of accurate information from the accounting department. Accountants seek to promote a higher level of responsibility and accountability for any organization. Accounting helps to reduce the level of uncertainty in an organization. It provides data and information for any uncertainty that the organization is facing.

Most importantly, accounting serves as a problem-solving and learning machine that the organization can use to enhance its decision-making processes. For the first time in history, accounting has transformed into a cohesive and influential mechanism that the organization can use for both economic and social management. Other scholars have described accounting as providing a solution for economic measurement as well as a tool for social ideology. The traditional view of accounting has changed significantly, leading to the adoption of a realistic understanding of management. Different organizations can now invest in the development of effective accounting systems that will provide information that is accurate and reliable (Young 2003). There have been critics who do not appreciate the role played by accounting in an organization. Despite such critics, the accounting sector has registered a remarkable growth from the traditional views to the modern day.

Relevance of Management Accounting Information for Decision-making in Organizations

Many scholars have emphasized the role of accounting in decision-making. Organizations rely on information from accountants to make important decisions. For example, an organization gets to understand its financial performance through the accountants working for the company. It is possible to determine selling prices, product-mix decisions, as well as outsourcing decisions based on the information provided by the accountant. An organization must have a highly competent accounting team that prepares financial reports that are comprehensive (Thukaram 2003). An organization only understands whether it is on the right track or not by analysing its accounting reports. Different principles of accounting govern how the accountants carry out their analysis. For this reason, accounting has become an integral field for many businesses. It is impossible to determine the progress that a company is making if it does not have financial data for specific quarters and years.

In the traditional setting, organizations relied on accounting systems that provided general information. It was impossible to determine the precise performance of the organization and make important decisions. The development of management accounting has introduced a new way for organizations to make informed decisions. In the modern day, organizations are complex and require management accounting systems that are highly innovative and effective. The information provided by management accountants needs to be compatible with the organizational purpose (Walker 2009). There is a need for more tools in management accounting that will enable organizations to register a higher level of accuracy when analysing information. There are more advanced techniques suitable for the determination of business performance. With new tools in management accounting, organizations can exert a measure of control on their systems. The contemporary changes in management accounting yield non-financial information and allow for the integration of information. It is possible to use the available information from management accounting to carry out forecasts of organizational performance in the future. Currently, management accounting involves the decentring of accounting knowledge. With these current improvements and innovations in management accounting, it is possible to apply the information in decision-making processes.

As highlighted above, management accounting provides important information that organizations can use in decision-making. Particularly, the information that management accounting provides helps the organization to make strategic decisions and engage in business strategy formulation. Particularly, a business needs to develop business strategies that highlight what it needs to achieve within a specified period. A strategic decision should be well informed based on the most recent information. Management accounting provides the required information to make such decisions. Organizations that rely on management accounting to develop their strategies are likely to be successful. Management accounting helps organizations to make decisions regarding the selling prices as well as product-mix decisions (Macintosh & Quattrone 2009). When developing an effective product-mix, the organization may face challenges. However, by relying on information provided by management accountants, the organization gets to understand the best decision. Some businesses may use managing accounting when determining the importance of outsourcing to the specific company. Prior to outsourcing, an organization should carry out a critical analysis of its capacity. It may be difficult to do so without sufficient data regarding the progress of the organization. Management accounting provides the relevant information and empowers the employees to make the decision regarding outsourcing.

As mentioned above, management accounting allows for the decentring of accounting knowledge. The concept of decentring denotes the diffusion of knowledge among organizational managers, enabling them to have a better understanding of financial implications associated with the decisions they make at the local level. Such diffusion empowers managers to develop a connection between localized activities and financial perspectives. The organization can rely on the information provided by the management accountants to exert the relevant control on local activities in a way to prevent complexities (Burchell et al. 1980). It is evident that the new potentials of management accounting are of critical relevance in many organizations. Management accounting provides data regarding store-keeping activities, external reporting, problem solving, and attention directing, helping the organizations to make decisions wisely. The information yielded by management accounting empowers decision-makers to be critical when making decisions. Operational managers and strategic decision-makers are likely to benefit immensely from using such information.

One example of the relevance of management accounting information is in the use of relevant costs. Relevant costs denote the costs that can register an impact on the decision-making process. A relevant cost highlights what the company is likely to incur in the future. Costs incurred in the past are not significant in decision-making (Chapman, Hopwood, & Shields 2007). However, if the costs for the future exhibit a difference, then they are likely to demonstrate the relevance expected. The future costs must register a remarkable difference with the core objective of helping the organization to determine the level of importance (Korosec & Hovert 2015). Moreover, management accounting relies on the use of break-even point to make important decisions concerning pricing and production.

How Apple used the Break-even point Analysis for iPhone 6

Precisely, the total fixed=$50, 000,000

Variable costs per unit =$250

Sale price per unit=$500

Desired profits=$200, 000

In the calculation of the break-even point:

Therefore;

According to these calculations, Apple would start making profits after selling the initial 200, 000 units.

However, it is possible to translate the break-even points into dollars by multiplying the number of units by the total sales price.

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Management accountants at Apple used the calculations to predict that the company would make a profit of $1.25 billion minus the fixed costs of $ 50 Million after the first year (Mali 2013). The calculations described above can help the organization make critical decisions. For example, management accountants at Apple used the data to determine iPhone’s profitability. For this reason, the company relied on such information to develop an effective marketing strategy to drive sales to the expected levels and hit the break-even point as soon as possible.

Conclusion

Undoubtedly, accounting has registered significant changes over the years, a factor that explains why it has new roles in the modern day. Currently, accounting represents a cohesive system that allows a company to use different approaches in applying the knowledge and information that accountants yield from their analysis. Management accounting is one of the important branches of accounting that has a positive impact on the processes of decision-making. Organizations can rely on information from management accountants to ensure that they make informed decisions. Appreciating the roles of management accounting only serves to present new opportunities for every organization. Bringing on board management accountants with the right expertise ensures that the organization can interpret data effectively.

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  1. Armitage, H, Webb, A, & Glynn, J 2016, ‘The Use of Management Accounting Techniques by Small and Medium-Sized Enterprises: A Field Study of Canadian and Australian Practice’, Accounting Perspectives, 15, 1, p. 31, Advanced Placement Source, EBSCOhost, viewed 15 November 2016.
  2. Burchell, S., Clubb, C., Hopwood, A., Hughes, J., & Nahapiet, J 1980, The roles of accounting in organizations and society, Accounting, Organizations And Society, 5, 1, p. 5-27.
  3. Chapman, C. S., Hopwood, A. G., & Shields, MD 2007, Handbook of management accounting research: [Volume 2], Amsterdam: Elsevier.
  4. Golyagina, A, & Valuckas, D 2016, ‘Representation of knowledge on some management accounting techniques in textbooks’, Accounting Education, 25, 5, pp. 479-501, Professional Development Collection, EBSCOhost, viewed 15 November 2016.
  5. Korosec, B., & Hovert, R 2015. The Role of Accounting in a Society: Only a techn(olog)ical solution for the problem of economic measurement or also a tool of social ideology?, Our Economy, 64, 4, p. 32-40.
  6. Macintosh, N. B., & Quattrone, P 2009, Management accounting and control systems: An organizational and sociological approach, Hoboken, N.J: Wiley.
  7. Mali, D 2013, Apple i phone marketing plan, viewed on 16th Nov. 2016, Thukaram, RMV 2003, Management Accounting, New Delhi: New Age.
  8. Walker, J 2009, Fundamentals of management accounting, Oxford, UK: CIMA Pub./Elsevier.
  9. Young, DW 2003, Management accounting in health care organizations, San Francisco, CA: Jossey-Bass.
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