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ACCT106 Managerial Accounting

Published : 28-Sep,2021  |  Views : 10

Question:

Write about Managerial Accounting Concepts and Principles.

Answer:

Background Information

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).

What is the role of Management Accounting?

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.

Why Management Accounting is required?

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.

When Management Accounting emerged as a discipline?

Management accounting emerged during the early years of industrial revolution. However, Financial Accounting emerged nearby 3,500 BC.

Areas of Management

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.

Focus of Management Accounting in the contemporary scenario

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.

1.Continuous improvement in goods.
2.Just in Time Manufacturing

Goods are produced by business entity only when demanded by customer.

3.Total-Quality Management (TQM)

TQM focuses on improvement of quality in a continuous way and applies this methodology to all business activities.

4.Customer Orientation

As per this concept, companies must understand the ever-changing needs of customers with the passage of time and incorporate those figures in product.

Criteria of Cost Classifications

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:

1.Classification by Relevance

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.

2.Classification by Behaviour

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).

3.Classification by Traceability A cost can  be traced to one of the four cost objects  : product, Process, department, or customer. When a cost is attributed  to a cost

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.

4.Classification of Cost on the basis of  Controllability

Cost can also be either controllable or not controllable. This is decided  after considering the  criteria of employee’s responsibilities.

5.Other criteria’s like function. (Bramwell, 2014).

Principles of Management Accounting

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:

  1. Information provided should be   relevant. One of the important role of management accounting is to provide decision-makers the right information at right time and frequent time intervals on a timely basis. It is necessary to understand about the needs and wants  of the decision-maker, it’s  identification followed by collection, verification , preparation, and finally storage.
  2. Impact on value is analyzed. It is pertinent for management to gain indepth knowledge  about the  business model  along with macroeconomic environment prevailing in the external environment. Reason being apt management accounting functions transform information into insight by evaluating the impact of various scenarios being considered.
  3. The other important component is communication. Communication provides an insight that is influential. Apt management accounting considers conversation  as  a core ingredient that promotes  integrated thinking.
  4. Hirsch (2000, pp. 2-6) suggests that Stewardship builds trust. This principles require that there should be active management of relationships and resources so that the financial and non-financial assets, value and reputation of the organisation are protected.

References

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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