Research Paper on Management Accounting
This research paper looks at the various ways a firm’s strategic planning, competitive positioning and appraisal of investment decisions can depend on the processes of management accounting. Although the essay is only a general outline of the link between the aforementioned practices, some roles and tasks of management accounting are provided and a practical application of competitive positioning is described for a more clear understanding of the subject. Introduction Management accounting is the process of using accounting information by managers as a basis to understand and manage the standard and actual performance of a corporation. There are many roles that are included in managerial accounting and here we will have a closer look at a few of them, particularly the ones used for the appraisal of investment decisions.
In this paper, we will also look at examples of how the roles of management accounting relate to the development of a firm’s strategy and eventually determine its competitive positioning. Management accounting is most used internally and therefore is of great importance within a corporation. Roles of Management Accounting Management accountants must report to two sectors. Both the business team and the corporate finance team rely on accountancy information to provide relevant operational and financial information, respectively.
The business team requires accountancy information when performing duties such as developing new product costing, business driver metrics, and client profitability analysis. The corporate finance team relies on the preparation of financial reports such as quarterly reports as well as risk reporting. However, there are also many functions such as forecasting and planning as well as performing variance analysis, on which both teams rely. (Janice M Roehl- Anderson, Steven M. Bragg, 2005) Investment Appraisal A large part of investment appraisal relies on management accounting principles.
Functions such as Net Present Value, Discounted Cash Flow, Payback Period, Accounting Rate of Return, and Internal Rate of Return are all items needed in appraising an investment decision appropriately. Management accounting allows one, through historical data analysis, to forecast and evaluate the input vs. output of a domestic investment decision. For example, improper investment into labor, capital, machinery, etc…, profit margins may be inefficient due to great marginal costs and underwhelming marginal revenue.
Decisions such as investing in a new product line, entering a new market, undertaking research and development, among others, rely to a certain extent on accountancy information. Strategy Investment decisions lead to, and are a dependent of strategic planning, which also relate to management accounting. For example, an analysis of a firm’s internal environment such as marketing or H.R will lead to determining the firm’s SWOT which will give guidance to the strategic controller. Among his or her controlling tasks include the employment of strategic goals, strategy definition, strategy enforcement, and strategy implementation.
In developing the strategic goals, a management accountant will contribute to the measurability (past figures and forecasting) as well achievability. In strategy definition, critical analysis of the financial consequences of existing as well as alternative activities can only be executed with the appropriate accountancy information. In strategy enforcement, resource allocation and utilization will determine the capability of which projects can be implemented. Here, it is also important to link the strategy to value oriented management. Finally, when implementing the strategy, an accountant may provide data which will help in monitoring the success of a strategy, analysis of deviations, as well as an ongoing analysis of risks.
In determining an organization’s competitive positioning, the organization must find out where it may hold an advantage. Management accounting processes help guide one through the strengths and weaknesses of the particular organization. These are just a few examples of how accounting information will benefit a company in search of a suitable positioning statement. Variance analysis may indicate that the company’s weaknesses stem from setting unrealistically high standards in regards to sales.
As a result, the company will suffer high production volume, high inventory turnover and low profitability. Accountancy helps determine what, if anything needs to be amended in a current positioning strategy. This is done by measure of market share (it is or is not growing at a sufficient rate), sales (increasing, flat, or decreasing) and margin (shrinking or growing). Another prime example of how management accounting techniques relate to competitive positioning includes geographic vs. industry/client segment reporting, which provides necessary insights on the successes and failures of targeting a target group.
A firm’s positioning relies on its strategy, which relies on the investment decisions the firm makes. However, in either case, it can be argued that one practice relies on the other equally (the vice versa). With that said, no one would argue the fact that all these practices on management accounting. Management as a science has evolved greatly in the past hundred years. With all the advances in particulars, there is a lot of room for error and reason for doubt in one’s decisions. In this case, a firm must utilize the resources a management accountant provides to be successful.
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