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Decision making is the core aspects of any business entity. However, decision if not take efficiently and effectively may have repercussions on the business and may also handicap the smooth functioning of the business and make it a sick company with heavy debts and losses (Caplan, 2006).
Managerial accounting is a mechanism that that delivers financial and nonfinancial information as input to managers of an organization’s and other internal stakeholders that finally leads to effective and efficient decisions and promotes the business.
Alder (2013, pp.1-5) suggests that the basic objective of Financial Accounting is to prepare and release financial statements. However, this financial information is not the sole information that is considered by internal decision makers. There are many financial aspects which are not covered in Financial Accounting. Further, decision makers who manage organizations also requires non-financial information that is not supplemented by Financial Accounting. This is the reason that Management Accounting has emerged as an important and different subject which is separate from Financial Accounting.
Management accounting emerged during the early years of industrial revolution. However, Financial Accounting emerged nearby 3,500 BC.
Management Accounting can also be studied as a blend of two components: Planning and Controlling. Companies devise long-term strategic plans that range from 5 to 10 years. Then it refines and upgrades them. Control, on the other hand, involves monitoring decisions made during the planning phase . Adding further, it is an evaluation of the activities of organisation and its employees. So, feedback is finally provided to control and revise plans.
The world has witness many revolutions along with passage of time -Industrial Revolution, Information and Communication Revolution to name a few. As a result, with the passage of time, the focus of Management Accounting has also refined along with the change in Business Environment.
Goods are produced by business entity only when demanded by customer.
TQM focuses on improvement of quality in a continuous way and applies this methodology to all business activities.
As per this concept, companies must understand the ever-changing needs of customers with the passage of time and incorporate those figures in product.
Just like country can be classified on the basis of various demographics (Gender, literacy, State etc.) similarly, an organization's cost can be classified on the basis of various criteria's.
Following are the various parameters of classifying cost:
A cost can be divided on the basis of relevance i.e. it can be classified as sunk cost or an out-of-pocket cost. A sunk cost is the cost that has already been incurred. An out-of-pocket cost is that cost that has not been incurred and it requires decision making.
On the basis of Behaviour cost can be bifurcated in fixed cost and variable cost. Fixed Cost does not change along with change in production (Example Rent of Office) and Variable Cost changes along with the change in production (For Instance tyres in manufacturing of Cars).
Object, it is classified as a direct cost. For example Material cost in manufacture of Car. However, Indirect costs benefit more than one cost object. An illustration of an indirect traceable cost is a maintenance plan that benefits two ormore departments.
Cost can also be either controllable or not controllable. This is decided after considering the criteria of employee’s responsibilities.
As discussed in “Global Management Accounting Principles” (2014) Management accounting practices can aid in effective decision-making of organisations operating across the globe. These management accounting guidelines aid top management: chief executives, and other officials.
The four principles of Management Accounting are as follows:
Caplan, D. (2006). Management Accounting Concepts and Techniques. Retrieved from https://scholarsarchive.library.albany.edu/cgi/viewcontent.cgi?article=1000&context=accounting_fac_books
Alder, R. (2013). Management Accounting. Routledge
Bramwell, J. (2014, November 20). The 4 Global Management Accounting Principles Your Company can adopt. The Accounting Web. Retrieved from https://www.accountingweb.com/aa/standards/the-4-global-management-accounting-principles-your-company-can-adopt
Global Management Accounting Principles. (2014). Retrieved from https://www.cgma.org/resources/reports/globalmanagementaccountingprinciples.html
Hirsch, M.L. (2000). Advanced Management Accounting. Cengage Learning EMEA
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