How can managerial accounting help managers

These plans may include current-year plans, five-year plans, and ten-year plans. The five-year plan may be to sell the products internationally in three countries, and the ten-year plan may be to acquire their chief competitor and, thus, their customers. Each of these plans will require outlining specific steps to reach these goals and communicating those steps to the employees who will carry out or have an impact on reaching these goals and implementing these plans.

Planning can involve financial and nonfinancial processes and measures. One planning tool discussed in Budgeting is the budgeting process, which requires management to assess the resources—for example, time, money, and number and type of employees needed—to meet current-year objectives. Budgeting often includes both financial data, such as worker pay rates, and nonfinancial data, such as the number of customers an employee can serve in a given time period. A retail company can plan for the expected sales volume, a hospital can plan for the number of x-rays they expect to administer, a law firm can plan the hours expected for the various types of legal services they perform, a manufacturing firm can plan for the level of quality expected in each item produced, and a utility company can plan for the level of air pollutants that are acceptable.

Notice that in each of these examples, the aspect of the business that is being planned and evaluated is a qualitative nonfinancial factor or characteristic. In your study of managerial accounting, you will learn about many situations in which both financial and nonfinancial data or information are equally relevant.

However, the qualitative aspects are typically not quantified in dollars but evaluated using some other standards, such as customers served or students advised. While these functions are initially stated in qualitative terms, most of these items would at some point be translated into a dollar value or dollar effect. In each of these examples, the managerial accounting function would help to determine the variables that would help appropriately measure the desired goal as well as plan how to quantify these measures.

However, measures are only useful if tracked and used to determine their effectiveness. This is known as the control function of management. To measure whether plans are meeting objectives or goals, management must put in place ways to assess success or lack of success.

Controlling involves the monitoring of the planning objectives that were put into place. For example, if you have a retail store and you have a plan to minimize shoplifting, you can implement a control, such as antitheft tags that trigger an alarm when someone removes them from the store.

You could also install in the ceilings cameras that provide a different view of customers shopping and therefore may catch a thief more easily or clearly. The antitheft tags and cameras serve as your controls against shoplifting. Managerial accounting is a useful tool in the management control function. Managerial accounting helps determine the appropriate controls for measuring the success of a plan.

There are many types of controls that a company can use. Other controls can be physical controls, such as fingerprint identification or password protection. Essentially, the controlling function in management involves helping to coordinate the day-to-day activities of a business so that these activities lead to meeting corporate goals.

Without controls, it is very unlikely a plan would be successful, and it would be difficult to know if your plan was a success. How will the company implement this plan? Without this information, the company would not know if the plan is reaching the desired result of increased market share. The control function helps to determine the courses of action that are taken in the implementation of a plan by helping to define and administer the steps of the plan.

Essentially, the control function facilitates coordination of the plan within the organization. It is through the system of controls that the actual results of decisions made in implementing a plan can be identified and measured.

Managerial accounting not only helps to determine and design control measures, it also assists by providing performance reports and control reports that focus on variances between the planned objective performance and the actual performance.

Control is achieved through effective feedback, or information that is used to assess a process. Feedback allows management to evaluate the results, determine whether progress is being made, or determine whether corrective measures need to be taken.

This evaluation is in the next management function. Managers must ultimately determine whether the company has met the goals set in the planning phase. Evaluating , also called assessing or analyzing , involves comparing actual results against expected results, and it can occur at the product, department, division, and company levels.

When there are deviations from the stated objectives, managers must decide what modifications are needed. The controls that were put into place to coordinate the implementation of a particular company plan must be evaluated so that success can be measured, or corrective action can be taken.

This control measure, same-store sales, must be evaluated to determine the effect of the decision to expand the selling of products within the state.

This control measure will be evaluated by comparing sales in the current year in those stores to sales from the prior year in those same stores. The results of this evaluation will help guide management in their decision to move forward with their plan, to modify the plan, or to scrap the plan.

As discussed previously, not all evaluations will involve quantitative or financial measures. In expanding market share, the company wants to maintain or improve its reputation with customers and does not want the planned increased availability or easier access to their products to decrease customer perceptions of the products or the company.

However, there are many ways that companies can evaluate various controls. In addition to the financial gauges, organizations are now measuring efficiencies, customer development, employee retention, and sustainability. Managers spend their time in various stages of planning, controlling, and evaluating.

Generally, higher-level managers spend more time on planning, whereas lower-level managers spend more time on evaluating. At any level, managers work closely with the managerial accounting team to help in each of these stages.

Managerial accountants help determine whether plans are measurable, what controls should be implemented to carry out a plan, and what are the proper means of evaluation of those controls. This would include the type of feedback necessary for management to assess the results of their plans and actions.

Management accountants generate the reports and information needed to assess the results of the various evaluations, and they help interpret the results. To put this in context, think about how you will spend your weekend. First, you are the manager of your own time.

You must plan based on your workload and on how much time you will spend studying, exercising, sleeping, and meeting with friends. You then control how your plan is implemented by setting self-imposed or possibly group meeting—imposed deadlines, and last, you evaluate how well you carried out your plan by gathering more data—such as grades on assignments, personal fulfillment, and number of hours of sleep—to determine if you met your plans goals. Not planning, controlling, and evaluating often results in less-than-desirable outcomes, such as late assignments, too little sleep, or bad grades.

In this scenario, you did not need a separate managerial accountant to help you with these functions, because you could manage planning, controlling, and evaluating on your own. However, in the business world, most businesses will have both managers and managerial accountants. Figure illustrates some examples. The principal purpose of managerial accounting is to deliver information useful for management decision-making.

Many of the techniques used in managerial accounting are useful for decisions in your everyday life. In choosing whether to live on campus or off campus, how might you use planning, controlling, and evaluating in your decision-making process?

What types of financial and nonfinancial information might you need? Improving business performance and increasing revenue and profitability can result from applying managerial accounting capabilities across the organization. The most effective leaders working within a dedicated accounting department must take collaborative, interdepartmental approaches to achieving results. Accounting and finance cannot be a silent part of the organization.

Measuring performance for strategy execution. Managerial accounting competencies, such as performing high-level analyses on business strategy, can expose external threats to strategy execution. Once a company establishes a strategy or objective, management accountants can design systems so that actions lead towards achieving the goal of that strategy or objective, such as through performance management.

For example, if a company wanted to evaluate customer satisfaction — a metric that cannot be directly observed — it might survey customers.

Metrics should be evaluated in terms of the following characteristics, according to Towry:. Measuring performance for motivating employees. Performance measurement at an individual level, when tied to rewards e. Accounting professionals can help companies effectively incentivize employees by determining the right ways to evaluate their performance and the appropriate way to pay them for improvements given the job context.

Karen Sedatole, interim dean and professor of accounting at Goizueta, has researched the degree by which monetary incentives can improve performance and productivity , for example.

According to Sedatole, monetary incentives can deliver performance and productivity improvements, but only if the following four core principles are followed:. Key to an effective employee reward system is ensuring that metrics, rewards, and decision authority are well aligned, according to Sedatole. Employees should be held accountable for those performance outcomes over which they have control.

What you can infer from financial accounting is limited to numerical results like profit and loss, but in management accounting you can discuss the cause and effect relationships behind those results. Managerial accounting uses easy-to-understand techniques such as standard costing, marginal costing, project appraisal, and control accounting.

Using historical data as a reference, the management observes the current information to check the impacts of business decisions. Management can use this type of accounting to set objectives, format plans to meet them, and compare the performance of various departments. Managerial accounting is used for forecasting.

It concentrates on supplying information that would ease the effect of a problem rather than arriving at a final solution. In order to achieve business goals, managerial accounting uses a number of different techniques.

Marginal analysis: This assesses profits against various types of costs. It primarily deals with the benefits of increased production. Here, sales mix is the proportion of a product that a business has sold when compared to the total sales of that business. This value is used by managerial accountants to determine the price points for various products.

Constraint analysis: Managerial accounting monitors the constraints on profits and cash flow with respect to a product. It analyzes the principal bottlenecks and the problems they cause, and calculates their impact on revenue, profit, and cash flow. Capital budgeting: This is an analysis of information in order to make decisions related to capital expenditures. In this analysis, the managerial accountants calculate the net present value and internal rate of return to help managers with capital budgeting decisions like calculating payback period or calculating accounting rate of return.

Inventory valuation and product costing: This deals with determining the actual cost of goods and services. The process generally involves computing the overhead charges and assessment of direct costs associated with cost of goods sold.

Trend analysis and forecasting: This primarily deals with variations in product costs. The resulting data is helpful in identifying unusual patterns and finding efficient ways to identify and resolve the underlying issues. Managerial accounting may define the pace and process of development of an organisation yet it has its set of drawbacks. By now, we know that the information to make managerial decisions is dependent on financial statements.

Due to this, the strength or weakness of accounting decisions made depends solely on the quality of basic records. Meanwhile, different managers may interpret the same information in different ways depending on their capacity and experience in the field.