Management Accounting: a Critical Aid to the Decision Making Process

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Is management accounting a critical aid to the Decision Making Process in an organization? The answer undoubtedly is in the affirmative. During the past few decades, management accounting practices were conducted across a range of industries in the world. Management accounting can be viewed as a powerful tool for management. However, a widespread misconception exits that management accounting is an aid omnipotent. Therefore, this essay will focus on investigating the role of management accounting in the Decision Making Process (how it can help managers to make better decisions). It will firstly give a definition of management accounting by comparing with financial accounting and my own evaluation of management accounting, and then will go on to describe the development and history of management accounting in the United Kingdom. After that, it will discuss the functions of a manager and how management accountants can help to support these functions with a number of numerical examples. Next, a further discussion about the importance of good decision making, the consequences of poor decisions and the critical factors in making a wise decision based on these examples will be conducted. At the final part of this essay, it will contain a conclusion.

Kaplan and Atkinson (1989) stated that ‘Management accounting is the process of collecting, classifying, processing, analysing and reporting information to managers to allow them to take efficient and effective management decisions’. Thus, management accounting could be referred as internal accounting which is concerned with the provision of information to those internal users within the organization, like managers to help them make better decisions and improve the efficiency and effectiveness of existing operations (Drury 2006, p.7). It is quite different from financial accounting which focuses on providing information to external parties outside the organization. In fact, management accounting differs from financial accounting also in other ways. According to Drury (2006, p.21), unlike financial accounting statements must be prepared to confirm with the generally accepted accounting principles, management accountants are not required to adhere to such requirement when providing managerial information for internal purpose. Furthermore, management accounting providing information based on different small parts of the business whereas financial accounting reports focus on the whole business. Management accounting is more future oriented and requires the related information to be published more frequently (often on a daily basis). However, financial accounting reports what has happened in the past in an organization and are often published annually or semi-annually. Management accounting is also different from financial accounting as it is entirely optional, it produces information only when management regards this information as useful.

Based on my own understanding, management accounting theories seem to be based on a number of specified assumptions. For example, for this assignment, we are required to use a manufacturing organization to be the example in the essay. Management accounting assumes that ‘the business which is likely to use management accounting is a manufacturing business’ (Viitakangas and Campbell, p.15), although ‘many service organization have recently turned their attention to management accounting’ (Drury 2006, p.13). The reason behind, I believe is because a service organization does not require a significant amount of raw materials to purchase. However, one of the major functions of management accounting is that ‘allocating costs between cost of goods sold and inventories for internal and external profit reporting’ (Drury 2006, p.18). Also, I notice that management accounting assumes the behaviour of variable costs within a relevant range tends to be linear, variables costs vary directly with volumes changing. For example, when we need to compute the labour...
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