Relevance of management accounting to an organisation

It is a tool of management that provides a detailed record of the costs relating to products, services, operations or activities. It is the process of determining and accumulating the costs of some particular products or services. This is a cost accumulation system concerned with calculation of costs for the purposes of stock valuation and profit measurement.  It also emphasises the controlling of costs so as to have high quality products at minimum cost.

Management accounting enables stock valuation and profit measurement. This is one of the cost objects of every cost accounting system. Something whose cost has been ascertained is a cost object for example lighting, rent, water, and unit of production. Whatever is produced must be valued and this can be achieved if the unit cost can be ascertained. Stock valuation is crucial for the preparation of financial reports. These reports are statements of comprehensive income, statement of financial positions and cash flow reports. This is because both sold and unsold items make part of financial statements. They influence the level of performance and financial position of the firm. What is sold is valued otherwise profit can never be measured. Therefore mangers use this accounting information to manage the different functional areas of the firm.

Management accounting can help functional areas of the organisation in cost control. Controlling cost is the crux of management and management accounting. It involves the comparison of the actual results against planned results. The major aim is to contain costs incurred in providing goods and services by being more efficient. An organisation can be more efficient by reducing factory overhead costs for example purchase up to date machinery which in turn can reduce on per unit cost and eventually the overall total cost. The firm can also control cost by employing suitable personnel for the jobs so as to minimise spoilage and damages which run up the total cost.

Setting goals

Measuring actual results

Action taken

Compare target against actual results

Management accounting helps in assessing the profitability of products and services. Every product’s viability is always evaluated before it is produced. It is important to ensure the product or service provided should increase the value of the business. The assessment can be achieved by comparing the product or service unit cost against the unit selling price in order to measure the unit contribution. For example if a kilogram of coffee was produced at 50/= per unit kg and sold at 150/= per unit kg, then the cost is compared to the selling price. In this case producing the coffee is profitable to the firm.

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Mufaddal K 4 years ago

I agree that management accounting is very important but the bigger issue is if key decision makers don't know what data is available or how to use it, the value that management accounting provides is really low. Most companies have tons of data being created internally and many non-Finance decision makers don't know that any of it exists. We see this all the time in our data analysis consulting work (I work for PanXpan - http://www.panxpan.com). We find for many of our clients they need us to integrate internal data and then offer them different types of analysis that can be run on internal data. Without this much of the data created using management account would be wasted internally.

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