MANAGEMENT ACCOUNTING Essay Example

Social impact of management accounting decisions

The current business environment requires managers to involve themselves in ethical business activities. Ethical business is a useful aspect considering ethical business as a ultimate subject to market forces and largely reflects public opinion. Managers should make investments decisions that are regarded by society as socially responsible (Armstrong 1985). The social business decisions include socially responsible activities on factors like

  • The environment

  • The sustainability

  • Globalization effect

  • Corruption

  • Customer employee relationship

  • Local communities

  • Other social impact on people’s health

Management accounting as a decision making tool is very important in helping managers to make such decisions. The process of identification, measurement, accumulation, preparation, analysis, interpretation, and the communication of the financial information used by the management in evaluating, planning and controlling organization and organization and to ensure that the management is accountable for the company resources is management accounting (Anil, 2008). Armstrong (1985) pointed out that changing management control system start with sound decision-making process from the information generated by management accountant and defines how an organization relates to its environment.

Anil, (2008) states that management accounting comprises of accounts preparation and reporting for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities There has been evolution in the field of management accounting starting with the promulgation of the definition of the management accounting. Scholars like Bryer (1991) has been advocating for the shift of functions of management accounting from the transaction and compliance orientation to a more strategic business approach directed towards improving corporate performance management, planning and budgeting, since these decisions impacts on the social wellbeing of shareholders Armstrong (1985). Arnold, (1998) states that management accounting should be more focused towards corporate governance process, giving the risk management, internal control process and financial reporting at the time of great change in the field of management accounting. For example, when management is trying to reduce the cost of production and maximize profit, they should pay workers reasonable salary and provide working environment as per the law and regulation of the country.

The basic cardinal of management accountants is to influence the value chain of information that has currently changed to a more conceptual design approach by incorporating accounting information system, which is built on the current technological platform of the firm. For example accountant gives information on share prices, company profitability, if the management decides to report high profits more than the actual profit incurred by the company, more investors will be attracted and when they invest in the company they will make losses hence negatively impacting in the investors financial status. Low pay to employee gives negative impact on the management of the organization.

Accounting in general is the language for business, it is the tool used by management to record, report and evaluate the economic performance of the organization. Accounting is the process through which all the documents of the performance of the business from the cost, payroll capital expenditure to other company obligations including sales revenue to the owners’ equity (Kren, 2002). Internal users and external users that include managers and investors of the company use both the management accounting and financial accounting (Kren, 2002).

Management is the art of working especially through people to achieve specific set objectives by the company. In order to achieve these set objectives, organizational manager has to design strategies to find out the accounting information that is suitable for the organization to achieve these objectives and goals (Michael, 1997). Management accounting uses both the financial and non-financial information that is intended for the internal users who use this information to make crucial information in order to achieve these specific objectives including social benefits goals (Michael, 1997). Management accountant must set commodity prices which are relevant and marching the overhead cost. That is they should not over price or under-price the commodity, supply of and tender decisions should be open to all with no corruption hence high integrity by the management.

Crucial information used by the management accountants include sales growth, profit, return on capital employed and the share market. Some of the non-financial information used by management accountants includes level of customer satisfaction level, quality of production, performance of other competing product in the market and the customer loyalty (Anil, 2008). Both financial information and non-financial are used by the management accountant to make such decision (Anil, 2008). In the decision-making process by the management, it is a process of choosing alternative’s courses of action using cognitive processes (Michael, 1997). Whenever there is no clear course of action, management has to make decisions. Proper accounting system is capable of aiding in decision-making (Michael, 1997).

For proper management of an organization, must intact internal control system, and this is the function of the accounting. An answered question in the field of accounting and the management decision-making process is the concerns of the fit of accounting information with the requirements and needs of the organization for proper communication and control to the outsiders (Gary and James, 2005).

Most scholars and writers in the management accounting field do discuss management accounting as somewhat a loosely connected set of the decision-making tool (Gary and James, 2005). However, most books and researchers have not developed models or theories that can bring harmony in the decision-making process (Gary and James, 2005).
Brignall, and Modell (2000) explains that accounting information’s reflects social status of a company. modern management concerns emphases on the important of social corporate responsibility as this will help organization to identify itself with the society. Only a company that is able to identify itself with the society will reap the full benefits of customer loyalty.

It is a common practice formulating theories and conceptual models. In social science, economic field and even in medical field theories and models is a common phenomenon (CFO, 2005). Likewise, in management accounting there are basic models, elements and theories used in explaining the role of management accounting information in social and economic decision-making process (CFO, 2005). The view of management accounting on a business may be in two main perspectives, they include;

  • Basic features

  • Basic elements

A firm is an enterprise in which its cardinal functions are categorized into departmental line staffs. There are three basic functions of the departments, which directly affect the social well-being of the people and the organization (CFO, 2005). The three departments are production functions, marketing functions and finance functions. Individuals that are collectively referred to as management control any organizations. The staffs, the advisory functions of accounting personnel and purchasing and receiving are diverse and directly or indirectly affect both the internal users and external users of this information (Kren, 2002). Every organization has an organization reporting system called budgeting, which is a product of management accounting, and it has to coordinate the interaction of the various staff and departmental functions. The environment in which the organization operates includes investors, government, suppliers, accountants, competitors, accountants and lawyers (Kren, 2002). Through budgeting, management is able to balance the societal interest and the shareholders interest.

Giving back to society like training the local people, having clean and good working environment, sourcing for raw materials are some management decision which impacts on the lives of the common man hence management accounting needs to factor in the social cost whenever both short term and long term budgeting is made in a company.

The social wellbeing of the organization environment is very important. A company reporting system should take an interest of all stakeholders into consideration and management accounting is very important in helping this function through generating information that relates to the immediate organization environments like competitors report and creditors reports (Anil, 2008). The basic model, theory and assumption of management accounting are based on the several implied assumptions. The main objectives of these assumptions are to attempt attempts to relate the functions of management accounting and its social decision elements (Anil, 2008)

Goals, objectives and aims of the business enterprise is the first management accounting elements as stated by (Boyns, 1998). Some of the goals include profit maximization, sales maximization, and increase in return on owners’ equity and earning per share (Michael, 1997). Ethical sales practices is necessary like the company can decided to produce goods of low quality in order to meet the goal of profit maximization. This will have negative social impact; they can reduce the cost of environmental assessment cost thereby performing poor environmental assessment which does not give proper protection of the environment.

In the case of less satisfactory level of profit, maximization may trigger the management accountant to find the deviations and the causes of the deviation that in turn will help in achieving the social goal of meeting shareholders interest (Anil, 2008).

The management accounting information will help to balance both the shareholder’s interest and the societal interest in maintaining proper and ethical trading practices like social corporate responsibility. The communication tool that is budget will help in bringing out this and manager will be assisted on how to allocate the societal social interest not to conflict with the shareholders interest.

The success or failure of a business primarily depends on the management skills and abilities. The skills may vary among different managers and in most cases; the business is not fully controlled by the market forces (Gary and James, 2005). Management through its decisions is able to influence and control the major events that take place in an organization within their limits. In order for the organization to achieve its goals and objectives, it makes use of specific control and planning concepts. Some of the control and planning organization may use include proper and realistic budgeting, cost volume profit analysis, incremental analysis, segmental contribution reporting, inventory models, flexible budgeting and capital budgeting(Gary and James, 2005).

All these information is generated from management accounting departments and help the management in the decision-making process (Michael, 1997). Planning tools like capital budgeting decision-making process are very useful in ensuring that the management settles on the project that gives maximum returns with least social cost and maximum social benefits. In order to improve in the management and appropriated decision with appropriate results, they will evaluate the organization performance with flexible budgets and variance analysis in cost accounting (Michael, 1997). Weak internal control systems cause social evils like corruption in an organization. Some businesses are prone to social and political risk because of the location of their facilities, their product and customer characteristics, the nature of their employment relationships, or industry characteristics, therefore management decision plays crucial role.

Decision- making is the core function of the managers. Some of the decisions that the management has to make include;

 Marketing decisions,

 Production decisions and

 Financials decisions

Management decisions may also be classified as strategic and tactical decision or long run and short run decisions. The core reason for decision-making is to achieve optimal utilization of the business capital that is to get a high return on owners’ equity (Michael, 1997). Effective decisions process requires relevant information and special data analysis tool to aid in the decision-making process. Lack of the information hinders management effectiveness as stated by Bromwich, (1990). Though the social and political cost are extremely expensive and lack adequate information can negatively affect the firm’s reputation due to ineffective decision-making, the management have to strike a balance.

In order for meaningful analysis to take place in the accounting department, it is of great importance to differentiate variable cost and fixed cost of an organization. Not all information are needed in making decision process hence there is a need to classify these costs so that the management are able to get an easy time in selecting the right information for a particular decision within the company. Scorecardsare indicators of potential political and social risks, such as judiciary independence, corruption, and government turnover, are evaluated and assigned a numerical score. For example, a government viewed as highly corrupt could be assigned a 10 in a possible scale of 1-10, and this has negative social impact on the business reputation.

Management accounting is composed of set of tools relating to cost and revenue useful in the decision-making process (Chenhall, 2003). There are several variables in the financial statements useful in making decision having equal social prone and cones on (CFO, 2005). The management may get it hard in identifying this variable during decision-making process and relate them with the various decisions to be made. Model development is the best approach to deal with this complexity. Both descriptive and mathematical models are very useful in identifying such important variables (CFO, 2005).

Management decision has capability of influencing positive or negative relationship between the business and the surrounding environment. Social relationship like environment pollution, poor creditor’s relationship, poor investor’s relationship and corruptions destroy company images. Decisions like good social corporate responsibility and internal control system promotes good reputation.

Reference

Anil Keimer (2008), “Uses of Accounting and Limitation of Financial Accounting”, Gupta Platinum Ezine Articles

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Armstrong, P. 1994, «The Influence of Michel Foucault on Accounting Research», Critical Perspectives on Accounting, vol. 5

Arnold, P. J. 1998, «The limits of postmodernism in accounting history: The Decatur experience», Accounting, Organizations and Society, vol. 23, no.

Brignall, S. & Modell, S. 2000, «An institutional perspective on performance measurement and management in the `new public sector'», Management Accounting Research, vol. 11, no. 3,

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CFO( 2005)Research Services, in collaboration with PricewaterhouseCoopers LLP, The CFO as Chief Performance Advisor, 2005,

Chenhall, R. H. 2003, «Management control systems design within its organizational context: findings from contingency-based research and directions for the future», Accounting, Organizations and Society, vol. 28, no. 2-3.

Gary Siegel and James E. Sorensen, (2005) Counting More, Counting Less, Institute of Management Accountants, August

Kren, L. (2002), “Budgetary Participation and Management Performance: The Impact of Information and Environmental Volatility”, The Accounting Review, Vol. 67, pp. 511 — 525.

Michael Anastas,(1997) “The Changing World of Management Accounting and Financial Accounting