Professional Documents
Culture Documents
2.0 Literature Review: 2.1 The Role of A Management Accountant
2.0 Literature Review: 2.1 The Role of A Management Accountant
0 Literature Review
2.1 THE ROLE OF A MANAGEMENT ACCOUNTANT
Firstly, the main role of a management accountant in an organization is to focus on the methods
of improving the performance and profitability. Initially, management accountant will be given a
role of organizational cost keeping and budgeting and as well as in the process of costing and
budgetary variance analysis (Misrha,2011). Management accountant is meant to satisfy the top
level management need and to motivate in achieving organizational goals as well and it was
stated by Devie, Tarigan and Kunto(2008). According to Kaplan and Atkinson(1998),
management accountant has become value adding members of management and no longer be as
a score holder of previous performance of the organization. The role of the management
accountant is to manage several tasks in order to ensure the company’s financial security,
handling all the financial matters effectively and help to run the business’s overall management
strategy.
The role or the responsibilities that has to be performed by the management accountant is to
make a budgeting. Management accountant has to review the historical data in order to prepare
an accurate prediction towards the future expenses of the year. Then, the management accountant
is also responsible to make planning in order to establish the future plans and as well as to
provide accounting information’s which may be used in the decision making process. The
planning process can be performed both on long term basis and short term basis. Long term
planning focused on the expectations of the future management which comprise of three to five
years or even longer. This planning that will be made by managerial accountant will give a
detailed clarification on which products should be sold and on which markets and at which price
it should be rated as well as evaluating proposals for capital spending. Management accountant
plays an important role in the process of making a short term planning as well. Their main role is
to provide a data based on past performances which can be used as a reference for future
performance. They will also collect the various plans and make it into one general plan which
will be identified as a master budget and will be brought up to the upper management for
approvals.
Other than that, management accountant help managers to monitor, measure, evaluate and
correcting the actual result in order to ensure as if the goal and plans of an organization achieved.
Management accountant will also make a comparison between the performance that has been
achieved and planned so that the relevant corrective changes can be made. This will be very
useful in term of the control process because it will identify the performance reports that
compare the actual and budgeted revenue for each responsibility center. In this way, it will help
managers to be notified on the activities that are not relevant to the plan and assist the control
function by identifying the problems and provide an immediate action.
Finally, the management accounting role is to evaluate the effectiveness of the organization
structure, policies and the procedures adapted in order to attain the objectives. In order to make
an evaluation, management accountant needs to make a consultation with the functional
managers and top executives. The management accountants should also advise the management
in order to improve the performance of operations if they find that the performance of the
management wasn’t satisfying and supervise all the appropriate statements and returns are
submitted to the government periodically within the given due date.
2.2 MANAGEMENT ACCOUNTING PRACTICES
Several accounting literature stated that management accounting practices are changed due to the
environment. Recent management accounting literature claim that changes with advanced in
information technology, highly competitive environment and economic recession appears at the
environment in which the management accounting has practiced and it has been mentioned by
Waweru, Hoque and Uliana (2005). Meanwhile,Yazdifar and tsamenyi(2005) supported by
stating that there were a lot of books and articles that focus on the developing the new advanced
management accounting techniques. The advance management accounting techniques comprises
of activity based costing, target costing, kaizen costing, balance scorecard and others. The most
remarkable innovative management accounting techniques are activity based techniques,
strategic management accounting and the balance scorecard as described by Abdel-Kader and
Luther (2006). Management accounting practices may include of budgeting, performance
evaluation and information for decision making and inventory management. The basic principles
of management accounting has been developed to a more superior one due to the development of
the new method has added the value to various practices and this statements has been debated by
Ittner & Larcker(2001). The literature has also defined that most of the manufacturing business
are no more interested in some of the practices such as absorption costing and marginal costing
and this situation happens due to the limitations occurred within the costing system since they do
not emphasize an accurate method of recording the exact costs in order to make a decision
Dugdale and Jones(2002).
2.2.1 Budgeting
Budgeting, Drury et al (1993) defines as it is the important tool that has been used in order to
forecast and control the activities within an organization and it is also has been used to allocate
the entity’s resources in order to achieve the organizational goal. Different types of budgeting
have been highlighted such as Activity based budgeting (ABB) and Activity Based Costing
(ABC) by Drury et al (1993). In order to improve the cost system, the Activity based budgeting
(ABC) can be used as the best method as per Horngren et al (2009). ABC has been explained as
the overhead allocation method that uses different overhead rates in order to identify the indirect
cost by the activities by William et al. (2010). Meanwhile Ayvaz & pehlivanli (2011) has
provided the explanation on Activity Based Budgeting (ABB) as budgeting of the sources
according to the target activities. This gives importance on the activities within the process rather
than the cost objects and therefore, the application of this budgeting system are easy.
The main purpose this system is to collect all the costs within the process that has to be included
in budget which includes the material, setup time, number of working hours and manufacturing
overhead. The budgeting process involves a number of different budgets such as the master
budget and the cash budget. The master budget is the total or more likely summarized budget
that sets their own goal that has to be achieved and includes of the activity of sales or
distributions of departments or divisions in the organization. Meanwhile, the cash budgets are
inclusive of cash receipts and payments which will provide the beginning and ending cash
position at the end of the budgeted period.
2.2.2 Performance Evaluation
Generally, Management accounting provides all the appropriate information both internally or
externally and on a long term and short term basis in order to make a decision. Cost volume
profit analysis and costumer profitability analysis are one of the examples of different tools for
making a short term decision. Cost volume profit analysis was defined by Horngren et al (2009)
as a method of measuring potential changes in the company’s revenues, cost and prices.
Manufacturing companies usually use this analysis to calculate how many units of that particular
product needed for sold in order reach the break even. In order to achieve the contribution
margin through this principle is by subtracting unit selling price with the variable cost per unit.
While, in order to achieve the required number of break even, the total fixed cost is divided by
the contribution margin. Therefore, this application will allow the managers to analyze the
behavior of the cost in order to make a final decision of a specific order. Besides, this analysis
will also help managers in considering as if that product should be made or bought.
Last-In, First-out (LIFO) is acceptable in accordance US GAAP but not by IFRS. According to
Comiskey Et Al. (2008), IFRS did not accept LIFO inventory valuation method because a lower
income has projected during increase in price by the companies that practice LIFO methods.
However, LIFO has the major tax benefit. The current purchases at higher price are matched
against the revenues that reduce the overstatement of profit which will reflect in the reduction of
income tax. Therefore, an improvement in the cash flow of the company can be seen.