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Businesses believe that accounting is for financial reporting and to met statutory needs alone. Most enterprises that have Management Accounting systems do not utilize them effectively. The popular way company directors influence performance is performing postmortem adjustment on financial reports to look healthy. This has contributed to the whining efficiency, filthiness and diminishing popularity of capitalism. Entities waste opportunities to tremendously improve their performance using Management Accounting. Effective Management Accounting will assist enterprise to create value, innovate, promote efficiency and effectiveness in resources utilization to achieve enterprise objectives.
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EFFECTIVE MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTING (MA)
This manifests, for example, when traditional approach, like
variance, is used in conjunction with modern business
environment minded innovative techniques, such as Life Cycle
Costing (LCC), Activity-Based Costing (ABC) and Resources
Consumption Accounting (RCA). Management capability to
influence manufacturing cost is high before the stage when the
product is finalized and production commences, apparently
changes to design may lead to substantial savings in the cost of
manufacturing a product, optimizing the efficiency of identified
activities, for example quality control failure and machine
breakdowns and considering costs and revenue as function of
resources and individual capacities that produce them. This as
well can be effectively used for services.
By utilizing (technical, business, people, &
leadership) skills on Management Information
System (MIS), MA generates data, reports, analysis,
insight, influence & impact for financial & non
financial information for decision making.
Value creation by forecasting and planning, variance
analysis, reviewing and monitoring costs inherent in
the business, business driver metrics, preparation of
sales management scorecard, operation research,
client profitability analysis and new product costing
to assist quality of management decision making.
Improve opportunities on overall procedural
and operational framework of finance and
propose holistic solutions taking into
account wide issues and interdependence.
MA controls by resource allocation,
evaluating, monitoring, coordination,
communication and motivation.
At the time Accountant prepares accounts, after transactions are done, management’s decisions have already been made and it is already too late to address these decisions when they have a bad impact on the company’s objectives. One of the reasons for this is Accounting is seen more as a profession that prepares and elegantly optimize financial reporting, not necessarily apply it. Such poor decisions implemented by management may have adverse effect on the company’s financial statements. Thus, accountants scramble to make efforts to reduce this undesirable effect. Effective MA reduces stress and assists achieve targets by looking at the finance/accounting implication of decisions first before implementing them. MA keeps in mind that any decision made has an accounting impact and therefore run some accounting numbers (model) before going through the transaction.
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For example: Timeliness: MA must respond dynamically to customer, competition, technology, environment. Response must come timely, not stale information, by providing information to make value adding decisions.
Risk Reporting (Continued) Risk reporting improves decision making, planning,
efficiency in operation and resources allocation, disaster
prevention, optimization, conflict reduction, business plan
and budget.
Revenue is the largest single number & critically
important in financial statements. Ditto risk adjustment
on sales in budgeting.
There are tremendous benefits from risk reporting. These
benefits are hidden so much that managed risk is
appreciated at a future time of lapse, poor risk planning for
new business like new markets or launch of new products.
To quantify the risk to achieve an estimate: management
decides level of risk, then MA quantifies the additional costs
that would be incurred to reduce risk to a low level.
Budgeting 1. Limiting factor, critical to the success of objectives of organization,
determines order of importance in budget preparation, most times sales.
Where raw material is restricted in supply, it will drive the budget.
2. Sales budget incorporates decision about selling price and expected
sales volume for each item of product/sales.
3. Stock of finished goods must be taken first, increase stock means
production for the period must exceed sales volume. Level of stock to hold
would depend on variability in demand, lead time for raw material. This
has implication on cash position.
4. Budget for marketing, selling & distribution should be made at early
stage to gauge expected volume of sales.
5. For material purchase budget, specify expected quantity and price of
each store item for raw materials stock level. Purchase requirement
(quantity) is made up of usage requirement plus increase in raw material
stock less decrease in stocks.
6. Production budget specifies quantities of each product in every
manufacturing unit. Unit should be estimated using cost unit principle
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Conclusion Businesses believe that accounting is for financial
reporting and to met statutory needs alone. Most
enterprises that have MA systems do not utilize them
effectively.
The popular way company directors influence performance
is performing postmortem adjustment on financial reports
to look healthy. This has contributed to the whining
efficiency, filthiness and diminishing popularity of
capitalism.
Entities waste opportunities to tremendously improve their
performance using MA. Effective MA will assist enterprise
to create value, innovate, promote efficiency and
effectiveness in resources utilization to achieve enterprise
objectives.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Hameed Gbolahan Soaga
+2347033561230
ng.linkedin.com/in/hameedgbolahansoaga/
© 2014 Hameed Soaga. All rights reserved.
