Financial Accounting Concluded that Management Accounting is Vital

Question: Required to write a report on the role of management accounting, either as a function, or in the context of the person the management accountant. Your report must address the following: Discuss the role of management accounting in an organisation (make comparisons to financial accounting). Discuss the classification of costs by function (production, non-production); by type (direct, indirect) and by behaviour (fixed, variable, stepped fixed). Provide examples and diagrams where necessary. Provide an analysis of the Just in Time inventory control system, making references to practical applications (where applicable). Discuss the objectives of budgeting. Answer: Introduction Management accounting can be said to be a function of tracking down the cost that accrues internally to the business and helps in steering the organization, firm, or an individual in the process of decision-making. The decision-making is mainly concerned with production, investment and even the operations. Management Accounting is a process an organization can identify measure, analyze, interpret and communicate information in order to achieve its goal. It is a field of accounting that ascertains and helps an organization in planning, controlling and decision-making by providing information about cost to the internal management (Albrecht et. al, 2011). Management accounting pertains to that information of accounting that is helpful for the internal management. This part of accounting is concerned with supplying of information to managers that helps them in executing the plans accurately. It is aims known as Cost Accounting. Management Accounting vs. Financial Accounting Information Managerial accounting helps the management internally by supporting people within the organization, such as the mangers, who direct and control the operations. On the other hand, financial accounting aims at providing information to shareholders, creditors and those people who have an external link with the organization. Financial accounting shows result based on which the performance of company is judged. Since managerial accounting is manager oriented, so before understanding managerial accounting what managers do needs to be understood, the information they require the general business environment (Albrecht et. al, 2011). Therefore, it is mainly concerned with providing information to managers. On the other hand, financial accounting provides information to the shareholders, creditors, external parties that relate to the organization. Hence, financial accounting provides a scorecard from which the past performance assessed. Usefulness of the information Managerial accounting provides information that is helpful to the management and the internal environment while financial accounting stabilizes the external part. As far as managerial accounting is concerned, its main objective is to provide information to management that is used to make plans, set targets and evaluate the targets. The main objective of financial accounting is providing financial results and financial position of the business at a particular date (Needles, 2011). Despite having its own importance management accounting reports are optional that is, it is not required legally whereas financial accounting reports have to be prepared by the organization, as it is legally required and share those reports with investors. Through management, accounting an organization is able to focus on present and forecast for the future. Financial accounting helps an organization to focus on quarterly or yearly reports (Drury, 2011). Time frame In managerial accounting weekly and monthly budgets are used to find out what is to be sold how much it is to be sold and what price is to be charged so that all expenses can be covered without exceeding the budget and make a margin. Managerial accounting helps an organization in measurement of its performance. Through it organization measure results by comparing it with standard set during planning and budgeting phase. Managerial accounting in situations where quick decisions are needed is the most appropriate process (Drury, 2011). Classification of Costs Cost accounting gives detailed cost information indicating to the management that it needs to tame the operations and decide on the future course of action. Cost accounting also helps management to first measure and record production as well as fixed costs and then compares input and actual results through which it measures financial performance (Needles Power, 2013). To management cost accounting can be most effective when it comes to budgeting and setting up programs for cost control. Cost can be segregated into various ways depending upon the features. There are many types of cost classified into different categories. These classifications of cost information make it more pronounced. It is of utmost use to the management that is engaged in manufacturing concern and is the initial step towards the alignment of decision with cost. The classifications of cost are as follows: On basis of Function Production Cost - Production cost is the cost incurred by firms for manufacturing goods and services. Production cost includes raw materials and labor. To determine the cost of production per unit, number of units produced divides cost of production. Companies that know how much expenses it will incur per unit of good or service it produces will have an upper hand, as it will be able to know how much price is to be set for each item produced and what will be the total cost of production incurred by it. Non-Production Cost - Non-production cost is the cost or expense incurred by the firm that is not related to manufacturing operations. For example, salaries given to staff, expenses incurred in activity such as selling, distribution, marketing etc. On basis of Type Direct Cost- Direct Cost is type of expense that can be directly related to the production of specific goods or services. Direct cost refers to material labor and expenses related to the production of product. For example, cost of cheese in pizza can be directly related to that good. Indirect Cost - Indirect Cost is a type of cost that cannot be directly related to a particular product or service. It may be either fixed or variable. Indirect cost includes administration, personnel and security costs. For example advertising, marketing expenses etc. On basis of Behaviour Fixed Cost- Fixed Cost is that cost which will incur even if no production activity is taking place. A suitable example of fixed cost would be factory rent. No matter how much units are produced, even if no unit is produced, the rent is fixed. Variable Cost- Variable Cost is a cost that is influenced with the output produced. Variable cost enhances when the production enhances and declines when there is a decline in the production. An example would be cost of materials used to produce units. Step Cost - Step cost is a cost which remains fixed for a given level of activity but once that limit is crossed, step cost may increase or decrease. For example, a supervisor under whom six labors are working but if workers were increased to, twelve then company would need to appoint another supervisor hence increasing cost. Analysis of JIT inventory control system JIT inventory can be termed as a strategy that enhance the efficiency and leads to a reduction in waste by receipt of goods only when the need arises in the process of production, hence leading to a reduction in the cost of inventory. It is also referred to an inventory management system that contains the aim of having availability of inventory on a continuous basis that helps to cater to the demand. The concept of JIT inventory is based on the notion of lean manufacturing activities that are produced to manufacture those products that helps in meeting the demand of the customer (William, 2010). It is a system of control that helps in meeting the demand through a production facility. Under this step, production of a limited amount of inventory happens. A control mechanism helps in implementation of the following ideas: Pull concept In JIT every step in the process of production is influenced by a notification that is signaled by a downstream workstation and it can be termed as a need for a particular item. The main feature of this workstation is that it produces the amount that is authorized. If the downstream leads to no notification then the workstation will remain idle. Hence, the pull concept leads to a decline in the wok-in-process inventory. On the traditional system runs on the notion of future forecast and might, lead to more inventory that may not be feasible for the organization (Horngren, 2013). Size of the lot Lot size of small sizes is advocated by the JIT and it is of one unit. This implies that the inventory passes through the process of production in small batches. Once completed, it is immediately passed to the workstation and hence, this process leads to reduction of waste (Vanderbeck, 2013). Movement of inventory Material handling is less when the JIT mechanism is into implementation because lot sizes are small and hence easier to move them to the next level. Management usually keeps the workstation closer to reduce the time of travel. This step helps to bring down the work-in-process between the workstation (Horngren, 2013). Hence, JIT inventory can be aptly said to be a set of well-equipped mechanism that helps in squeezing a huge amount of inventory. One of the limitations that the method contains is during the time of fluctuations. If the company does not have a buffer stock then the management needs to stop the operation for the time being (Venanci, 2012). Objectives of Budgeting Budgeting is an important factor in financial success. It is very easy to imply and it is not only for those people who have limited income. Budgeting makes it very easy for people of incomes and expenses of all types to make better decisions, how much and where they would like to invest their money. It also helps people to save money that they can use after their retirement or may be during emergencies (Horngren, 2011). Properly planned budget helps people in various ways. Budgeting has many objectives and those are as follows: Provide Structure - A budget in very useful for giving guidance to a company how much and in which sector it should invest. Hence, it forms the basis of what next move of a company should be. A budget would be significantly help to a company only if they constantly keep referring to it and judge its employee performances based on standard set with within it (Robinson last, 2009). Predict Cash Flow- For a company growing rapidly a budget is extremely helpful as they have season sales or sales that have irregular pattern. These companies have a difficult time in trying to figure out how much cash they might have in near future and hence it leads to periodic cash related crisis (Horngren, 2011). Allocate Resources- Some companies use budgeting process as a method for deciding where they should allocate their funds on different sectors. A company should be combining budgeting with capacity constraints analysis to find out where they should really allocate their resources. Model Scenario- If a company has various options and finding it difficult to figure out the best option in that case, it should make a set of budgets, each based on different available situations, to find out the financial results of each available option. It is a very useful objective but if the company is excessively optimistic while making budget models then outcome might be highly unlikely (Robinson last, 2009). . Measure Performance - The most common of making a budget is that it is used as a basis for judging employees by using variances from the budget. Although this is a dangerous objective as employees may modify budget plan in order to achieve their personal goals easily. Budgeting is very useful for companies that grow rapidly and companies having limited capital. However, companies having well established business that has a conditions record may not find budgeting much of use (Horngren, 2011). Conclusion It can be concluded that management accounting is vital for the company like the financial accounting. Management accounting is related to the internal functioning and helps to align the production, operation, etc. It helps in effective preparation of budget and its implementation. Hence, the role of a management accountant has become of prime importance to the organization because the operations of the organization are directly linked to it (Shim Siegel, 2009). The organization benefits internally through management accounting and the main influence can be seen in the area of budgeting. Proper budgeting and its implementation rest entirely in the hands of the management accountant. Hence, from the discussion it can be said that the organization will perform effectively and the activities will be aligned when the management accounting is correctly stabilized (Lanen et. al, 2008). Therefore, in order to thrive in the world of cutthroat competition it is essential that management acco unting of any organization should be strong so that the risks can be combated. This will also aid in financial accounting and leads to a better functioning. References Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. Drury, C 2011,Cost and management accounting, Andover, Hampshire, UK: South-Western Cengage Learning. Horngren, C 2011, Cost accounting, Frenchs Forest, N.S.W.: Pearson Australia. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W.: Pearson Australia Group. Lanen, W. N., Anderson, S Maher, M. W 2008. Fundamentals of cost accounting, NY: Hang Loose press. Needles, B. E. Powers, Marian 2013, Principles of Financial Accounting. Financial Needles, S. C 2011, Managerial Accounting, Nason , USA: South Western Cengage Learning . Vanderbeck, E. J 2013, Principles of Cost Accounting, Oxford university press Robinson, M., Last, D 2009, Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press Shim, J.K Siegel, J.G 2009, Modern Cost Management and Analysis, Barron's Education Series Venanci, D 2012, Financial Performance Measures and Value Creation , State of art, New York: Springer. William, L 2010, Practical Financial Management, South-Western College.