Running head: DECISION MAKING IN MANAGERIAL ACCOUNTING 1

MANAGERIAL ACCOUNTING AND ITS TECHNIQUES

[Author Name(s), First M. Last, Omit Titles and Degrees]
[Institutional Affiliation(s)]
Author Note
[Include any grant/funding information and a complete correspondence address.]
DECISION MAKING IN MANAGERIAL ACCOUNTING 2
Abstract
The paper discusses the Managerial accounting in general and the role of managerial
accountants in any business or company. The paper provides an in depth analysis of management
accounting techniques and how they can help the company to manage the financial information
related to the company. The paper also provides us with applications to management accounting
techniques and their role in day-to-day decision-making. The paper gives us a detailed review of
real world applications for different accounting techniques used by the management accountants
to handle the financial security of their company or business. Apart from that, the paper also
discusses as to how management accounting can help managers while making decisions on
different projects with limited capital. The management accounting addresses all such issues and
hence it is of practical importance to us as it manages the accounting tools and techniques of any
particular business.
DECISION MAKING IN MANAGERIAL ACCOUNTING 3
MANAGERIAL ACCOUNTING AND ITS TECHNIQUES
Management Accounting is a type of accounting that helps in providing financial and
statistical information to the managers in any business. This helps them in making managerial
decisions regarding day-to-day goals and other short-term managerial goals (Investopedia, 2012).
The provision of financial information include details on availability of cash to company,
generation of sales revenue, the current state of companys account payable and accounts
receivables through cash budget, balance sheet and income statement.
Role of Managerial Accounting and Management Accountants in the business
Managerial accounting deals with the basic role of finding out the internal cost for any
particular process in the business. This type of information will help the company to make
decisions related to production, operations and investments in market that include capital
investment decisions like Net Present Value, Internal rate of return etc. All details are described
below. For this purpose, companies need managerial accounting to ensure that the budget they
utilize is being used efficiently and then make effective decisions accordingly related to
production, sales and investment. The role of management accountant in a business or
organization is to record the financial information which is then used by the company to make
wise decisions. They develop budgets like production budgets, cash budget, sales budget etc.
They also perform the management of assets and create important reports respectively. Hence the
role of management accountants in to ensure the financial security of their company by taking
responsibility of handling all the financial matters of company. Through this, they help in the
formation business strategy for the attainment of goals and other objectives of company (School,
2012).
DECISION MAKING IN MANAGERIAL ACCOUNTING 4
Ethical Issues Faced by the Management Accountant
There are several ethical issues faced by the management accountants which are as under:
1. Over Production: This can occur when managerial accountants work the
operational managers. Managerial accountants desire to increase the operating profits due to
which they record more expenses as production costs. This results in increased inventory of
finished goods or final goods. The absorption costing is abused here during over production.
They adopt absorption costing so that the fixed costs can be recorded in the accounts of final
inventory (Vitez, 2011).

2. Cost Allocation: Managerial accountants transfer overhead costs to contracts
from the income statements of the company. This results in customers paying higher prices for
goods or services. This cost allocation disrupts the financial statements and creates disturbances
in customer relationships due to excess billing.

3. Conflicting Interests: Management accountants role is to work for the interest of
the company as a whole. However, this might not work when he is particularly not following this
particular principle. A management accountant, for example, can work with an operational
manager to change or modify numbers related to financial statements or other operational
budgets which can better his personal position. Management accountants are responsible to work
for the interest of the company ensuring the feasibility of operational capacity for any particular
business. So working for one segment only can create conflicts of interest.

DECISION MAKING IN MANAGERIAL ACCOUNTING 5
4. Asset Replacements: This is the main ethical issue faced by the management
accountants. They are responsible to make decisions on the replacement of assets when required.
However, sometimes they are reluctant to make decisions for that purpose, as the return on
investment will decline. This is because the new asset has a higher cost that will definitely
reduce the ROI.

Management Accounting Techniques.
1. Cost Volume Profit Analysis: This is a method of management accounting,
which is based on computing the break-even point on cost and volume basis for goods or
services (Mateo, 2011). CVP analysis can estimate the effect on profits when changes are
observed for selling price per unit, variable costs, fixed costs and the total sales volume. The
most general equation used is :
Profit = Sales Variable costs Fixed costs

2. Activity based costing: This method identify different activities involved in the
production of the finished good. The process also explores expenses involved in such activities
for the final production of a finished good. The application in the business world for such
method deals with the expenses and other costs attached with different activities involved in the
final production of goods or services. This can help in identifying the variations in manufacturing
or production costs easily.

3. Net Present Value: This method enables the management accountants to compute
and determine the net present value of the investment. The present value of the future cash flows
DECISION MAKING IN MANAGERIAL ACCOUNTING 6
are subtracted from the initial cash outlay i.e. initial investment so that the present value of the
investment can be tracked for the final decision of investment. The best application is discussed
below with an example.

MANAGEMENT ACCOUNTING TECHNIQUES WITH EXAMPLES
Following are the management accounting techniques with examples:
1. Job order costing is a costing method to assign manufacturing costs to a
product or its batches. The example of job order costing is as under:
ABC Company plans to sell a batch of 28 special equipment (Job 590) to a retailer for
$119,000.
The steps to show the working of job order costing is as under:
I. Identify cost object i.e. Job 590.
II. Identify direct costs i.e. Direct materials = $40,000 and Direct Labor = $ 22,000
III. Identify machine hours for this particular job and complete machine hours used
by total jobs. Job 590 used 450 machines hours and 2650 machines hours were utilized by all
jobs.
IV. Identify overhead costs i.e. $62,000
V. Indirect cost rate $62,000 / 2650 = $23.4 / machine hour
VI. $23.4 / Machine hour * 450 machine hours = $10528
VII. Direct materials cost = $40,000
Direct Labor cost = $22,000
Overhead (factory) =$10528
Total =$72582
DECISION MAKING IN MANAGERIAL ACCOUNTING 7

Process Costing is a costing method used when it is impossible to separate production
units due to continuous production processes.
Taking a general example of any process where input is processed in to it. The input is
2000 units at a cost of $9,500. The normal loss is reported to be 11%. There are no beginning and
ending stocks. Therefore, we need to complete the process accounts if the output is 1700 units.
Since there is 11% normal loss, the output cost would equal = 89% * 2000 = 1780


I. We first need to determine the following:
Total input = 2200 units
Output = 1700 units
Normal loss = 220 units
Abnormal loss = 80 units
II. Now we need to compute the output cost / unit and losses
Cost incurred / Expected output = 9500 / 1780 = $5.33 per unit
III. Calculating total cost of output and losses
Output = $ 9061
Abnormal loss = $439
Since there is no share of cost for normal loss then,
Total cost of output and losses = $9500

DECISION MAKING IN MANAGERIAL ACCOUNTING 8
2. The other real world application of Managerial Accounting is several investment
decisions.
The first investment decision is made through net present value (NPV) i.e. present
value of future cash flows through the investment in a project less initial cost of investment. The
formula is as under:

Where n is no: of cash flows attained from the investment in a project and r
p
is the return
required on the investment which is the minimum annual percentage earned by investment into
any particular project.
It can also help in making decisions between two projects.
Example:
ABC manufacturer plans to purchase any one of two machines GT-C Textile Testing
Equipment and Fabric Abrasion Tester (Martindale). The required rate of return is 10% The
Cash flows for each of the projects are specified below.
GT-C Textile Testing Equipment
N=Years 0 1 2 3 4 5
CashFlow -2000
9
00
9
00
9
00
9
00
9
00

By using the formula above, the NPV for the above investment i.e. GT-C Textile Testing
Equipment is calculated as $1411.72
DECISION MAKING IN MANAGERIAL ACCOUNTING 9
The cash flows for the second Project i.e. investment in Fabric Abrasion Tester is stated
below:


Year 0 1 2 3 4 5
Cash
Flow
-
2,000
7
00
7
00
7
00
7
00
7
00

By using the formula mentioned previously for calculating NPV, the NPV for this project
is calculated as 634.2.
Therefore, from the two projects we can see that the NPV is higher for the second project
i.e. Fabric Abrasion Tester. Therefore, ABC manufacturing company should invest in this
equipment.
The second investment decision that is applicable in management accounting is stated as
Internal Rate of Return. The internal rate of return is the rate of return, which equals the net
present value of cash flows for any project to zero. The IRR solves the following equation as
below:

The ABC Company plans to invest in a project, which has the data as under:


DECISION MAKING IN MANAGERIAL ACCOUNTING 10

N=Years 0 1 2 3 4
Cash Flows 1,000 500 500 500 500

The internal rate of return is calculated as 34.9%. (Calculated by using the excel
function). Since the calculate IRR is greater than the required rate of return. Therefore the project
can be accepted for investment purposes.
The third investment decision is Payback Period. This period is computed to determine
the actual length of time to recover the initial investment or cash outflow for the project.

For example:
ABC Company in considering investing in any one of two projects. The data is given as:


Project C Project D
Year 0 Flow -2,000 -2,000
Year 1 Flow 900 900
Year 2 Flow 1100 700
Year 3 Flow 300 400
PP 2 3

DECISION MAKING IN MANAGERIAL ACCOUNTING 11
The payback period for project C is 2 years as in year 2 the initial cash outlay is
recovered whereas the initial cash outlay is recovered in year 3 for Project D. Therefore, the
project C is better than Project D.
The next investment decision in accordance with this capital budgeting techniques is the
Profitability Index. The profitability index can help us in selecting the combination of different
investments in projects where the capital is fixed. It is calculated by dividing the NPV by the
initial investment. But it should be noted that it is not the only deciding technique for an
investment as the shareholder value is not maximized. The example is given below:

ABC firm considers the investment projects as under where NPV and PI are also
calculated.The availability of capital to this company is $14,000.

Project Investment Cost NPV
Profitability
index
A 1,000 600 0.6
B 4,000 2,000 0.5
C 6,000 2,400 0.4
D 2,000 400 0.2
E 5,000 500 0.1

Here the combination of Project A, B & C should be selected for investment purpose.
Here the aggregate NPV is $5000.
DECISION MAKING IN MANAGERIAL ACCOUNTING 12
Now, we will look at another data where profitability index cannot be applicable. The
data is given below.
Project Investment Cost NPV PI
A 1,000 600 0.6
B 4,000 2,000 0.5
C 6,000 2,400 0.4
D 2,000 700 0.35
E 5,000 500 0.1

Here the combination of Project B, C & D is selected, as the aggregate of NPV is $5,100
as compared to projects A, B and C where the aggregate NPV is $5000 only. So, Profitability
index cannot be considered as the best method for investment decisions.
3. The other management accounting application is techniques for Cost
management. There are many cost management techniques. But the most important ones with
their respective examples commonly used are discussed as under.


i. Activity Based Costing
In ABC method, all the activities used to make any particular product are listed and costs
for such activities are assigned accordingly. The example for this technique is stated below.
The purchasing department has three different types of expenses with three different
activities. The activities include the reviewing of order purchases, reviewing of inventory and
DECISION MAKING IN MANAGERIAL ACCOUNTING 13
evaluation of different vendors and suppliers. The expenses to be incurred within the
organization equal $150,000. Such expenses include wages $ 100,000, Computer $ 20,000 and
Travel $30,000. Then different expenses are assigned to different activities.





Then the unit cost is calculated accordingly:
Purchase orders: $104,000/1000 = $104 per purchase order
Review inventory: 18000/50 = $360
Evaluation of vendors: $30000/10 = $3000 per vendor.

ii. Just in time
Just in time means to produce what is needed, when it is needed and producing in
accordance with the amount needed. We can take an example of Toyota Production System.
There is production plan named as Kanban system. The system ensured that the inventory was
solely based on appropriate customer orders rather than management forecasts. According to
Investopedia:
DECISION MAKING IN MANAGERIAL ACCOUNTING 14
Kanban is a J apanese term meaning signboard or graphic. Cards appear as the
container of goods or materials is emptied, allowing the production and delivery of more
before a hold-up or shortage develops. These cards may have several colors that are ordered
according to priority. Frequently a two-card system is employed where "move" cards are
employed to move goods from one area of production to another, while "production" cards
that replace materials after they are sold or used (Global, 2012)




There are several other cost management techniques but these are most commonly used.

4. The fourth management accounting technique is Quality control. The most
preferred term used for this purpose is total quality management. It is the coordination of all
functional units to gain continuous improvement in the products or service being produced. The
real application for this can be taken from the example of a company ABC operating in US. The
textile industry in highly competitive. And there is a danger of new Japanese entry in the
industry. However experts concluded that TQM should be implemented to compete against the
new entrants. Through TQM, the cost of quality was lessened by 26%. However, prevention
costs increased by 45%. External failure cost decreased by 31%. Hence, the total quality cost
recorded a decline of 26% and appraisal costs also increased by 55%. Therefore, TQM allowed
the company ABC to compete with new entrant Japanese company in the textile industry.

DECISION MAKING IN MANAGERIAL ACCOUNTING 15






References


Global, T. (2012, March 15). Toyota Global. Retrieved from http://www.toyota-
global.com/company/vision_philosophy/toyota_production_system/just-in-time.html


Investopedia. (2012, November 11). Investopedia. Retrieved from
http://www.investopedia.com/terms/m/managerialaccounting.asp


Mateo, C. o. (2011, August 10). College of San Mateo. Retrieved from
http://smccd.edu/accounts/nurre/online/chtr6.htm


School, A. B. (2012, October 15). All Business School. Retrieved from
http://www.allbusinessschools.com/business-careers/article/role-of-the-management-accountant
DECISION MAKING IN MANAGERIAL ACCOUNTING 16


Vitez, O. (2011, September 12). Chron. Retrieved from
http://smallbusiness.chron.com/ethics-managerial-accounting-3737.html







DECISION MAKING IN MANAGERIAL ACCOUNTING 17