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Management Accounting Elements and Evolution

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Management Accounting Elements and Evolution

Introduction

Management accounting is one of the most important parts of any business entity. It underlines key functions of any organization. Management accounting has often been related to the function of cost accounting. This usually involves allocating costs to the various goods and services in a business. Management accounting systems report the results of operations using financial and non financial measures.

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If cost accounting is deemed poor, account management will definitely lead to the collapse of the business. It is an internal function of a business that involves analysing a company’s financial position and information. Over time, the role of management accountants and the accounting itself has evolved or changed. It has been a significant process that has helped develop vital elements of this function. This paper seeks to outline and discuss several elements of management accounting, the role of management accountants, and its evolution.

Role of management accounting and cost drivers

The main role of management accounting as we have seen is allocation of business costs to the various goods and services. These functions include materials, labour, and overhead costs in manufacturing companies. Management accounting is mainly used in manufacturing and production companies. Management accounting has now become a factor influencing decision making in most companies. More importantly, management accountants give the company owners advice and information on financial analysis and current production processes. Over the years there has been a lot of evolution in this field with most companies using management accounting as a tool in decision making other than just using it for accounting functions only.

Learning the procedures for measuring, collecting, reporting, interpreting, and presenting these data to managers is the subject matter of managerial accounting. There are formal procedures that govern the measurement process (Warren, C. et al, 2011). However, application of these procedures varies from time to time due to the different methods applicable. For instance, measuring product costs or profitability can be done in a variety of ways. On the other hand, product quality can be established in several ways with each of the alternatives being considerable and valid. Management accountants therefore need to be aware of the various measurement procedures that have been proved vital in the daily running of a company.

A cost driver is that part of an activity that influences or determines the cost of the activity. Several drivers of role activity change are associated with the continued and recent economic and technological developments. As we have learnt through the course, the opening up of world markets i.e. globalisation, development and innovation of machinery and information technology have been some of the causes of the change in cost drivers. Technology has influenced the way we do things by making production easier, faster, and cheaper hence the change in a number of drivers. Accounting specialists have fewer tasks to perform since operational staff is able to undertake the same tasks due to the availability of technology and information (Johnson & Kaplan, 1987).

Activity-based costing

Activity-based costing is a method of costing that uses multiple business overheads that are based on the various activities within the factory. These activities include; types of work, manufacturing processes etc. Under this approach, overhead costs are budgeted first for activities running within company (Jones, 2012).

Performance management using ROI and EVA

Return on investment (ROI) is a measurement used in evaluating the success or efficiency of an investment. It can be done in a variety of ways, among them is dividing the return of an investment by the total cost of the investment and expressing the result as a ratio or as a percentage. ROI helps in providing rationality for future investments and influences acquisition decisions (Zairi, 1994). Economic Value Added (EVA) on the other hand is a performance measure based on value. It emphasises its importance on value creation by the management for the owners. Its goal is profit maximization and coming up with new ways of rewarding management. EVA is highly dependent on the quality of the accounting systems for its success. Usability of EVA largely depends on the quality of accounting information systems (Kimmel, P. et al, 2011).

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Transfer pricing

Transfer pricing is relevant in three different contexts: From a managerial perspective, intra-firm transfer prices are employed to set incentives for sub-divisional managers to enhance efficient allocation of resources

The role of managerial accountants in the US, versus other nations

Historically, US accounting systems have over time been rated as being the best and of the highest quality. They are not universally accepted and they are different from other countries. However, the business world keeps becoming integrated due to globalisation. This has in turn brought about the need for standardization of the accounting methods meaning that accountants have started embracing accounting systems used in the US. There is a general feeling that there is need for a single universal high efficiency standard of management accounting systems. This would greatly overturn the world market by enhancing consistency and comparability. This would in turn reduce the world’s capital costs and encourage investment and economic growth around the globe. Currently, the US is working on its systems and weighing its options on systems.

References

Johnson, H., & Kaplan, R. (1987). Relevance Lost: The Rise and fall of Management Accounting. Boston, USA: Harvard Business School Press.

Jones, E. (2012). Principles of cost accounting.Natoupe Boulevard, Mason, OH, USA: Cengage Learning.

Kimmel, P. et al. (2011). Accounting tools for business decision making. United States of America: John Wiley & sons Inc.

Warren, C. et al. (2011) .Managerial Accounting. Mason, OH, USA: Cengage learning.

Zairi, M. (1994). Measuring performance for business results. London, UKChapman & Hall publishers.

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