a.

WHAT ARE THE USE OF MANAGEMENT ACCOUNTING TECHNIQUES AS A

TOOL FOR ORGANISATIONAL DECISION MAKING?

Management accounting is a vital tool that helps businesses to make informed decisions based on
financial data. It involves the collection, analysis, and presentation of financial information that
is used by owners/managers to plan, control, and evaluate business operations

Management accounting technique is essential for the attainment of the set objectives and
decision making in every organization or company. Decision making of the company will not be
guided as management accounting techniques provide adequate guide to management decision
making at all levels. It is a known fact that techniques change over time largely because
businesses themselves and the societies that they operate in change as well. What was considered
as a good management technique a year ago may be considered ineffective in making decision in
the future. Businesses thrive based on quality decision. Accounting system is a major source of
management accounting. Management accounting technique is there to help improve the
organization making by making routine operation decision, strategic decisions, report the
outcome of their operation to the management.

Any organization, whether private or public has set objectives. Attainment of these objectives
depends on how effectively the resources available to the organization were deplored for the
purpose for which they are meant to serve. Also deployment of these resources to appropriate
area agreed in the organization depends on the information available to the management of the
organization. The role of management accounting is to, provides valuable information
concerning segments and the entire organization, take care of long term strategic decisions, and
ensure the efficiency of any entity.

The problems organizations face in decision making arise from lack of management accounting
section in the organization, unqualified nature of the accounting personnel Most organizations
are resolved in taking strategic decision without prior analysis using the techniques in
management accounting. For proficiency and productivity in any establishment, management
accounting department is highly recommended to enable adequate administration and control of
cost to take place. Also, changing external business environment has resulted in further
developments in the tools and techniques used for management accounting.
Decision making may be simply defined as choosing a course of action from among many
alternatives. If there are no alternatives, then no decision is required. A basis assumption is that
the best decision is the one that involves the most revenue or the least amount of cost. The task
of management with the help of management accountant is to find the best alternative. From the
descriptive model of the basic features and assumptions of the management accounting
perspective of business, it is easy to recognize that decision making (strategic, tactical, short-run
or long-run) is the focal point of management accounting. There are a lot of management
accounting techniques that can enhance organizational decision making.

Cash Flows Analysis

Cash Flows Analysis (CFA) is one of the most important techniques in decision making. Many
managers focus only on the balance sheet and the income statement, but cash flows analysis
nowadays is very important. CFA is divided in three parts. Part one is the daily operation activity
which deals with the cash in from the clients and cash out to the suppliers, employees and other
expenses. Second part involves the cash from investment activities, the purchase or sell of the
some particular assets. Third part involves the cash from financing activities which deals with
the issuing of stocks or borrowing funds. It helps you to see the ability of the cash to pay back
and to collect the cash
.
Marginal Costing
Marginal Costing (MC) is a technique where only the variable costs are considered while
computing the cost of a product. The fixed costs are met against the total fund arising out of
excess of selling price over total variable cost. This fund is known as contribution in marginal
costing. Marginal costing system is however not a system of cost finding such as job, process or
operating costing, but it is a special technique concerned particularly with the effect of fixed
overheads on running the business (institute of cost and works

Opportunity costing
If an asset is used for one purpose, opportunity cost of using it for that purpose is the
return foregone from the best alternative use of. In addition to the accounting costs that are
explicit as labor, raw materials, supplies, rent, interest and utilities, some implicit costs are also
required for managerial decision making purpose. The objective in such case is to determine the
present and future costs of resources associated with various alternative courses of action. Such
an objective requires that one considers the opportunities foregone whenever a resource is used
in a given course of action. The implicit costs, however, consist of the opportunity costs of time
and capital that the owner manager has invested in producing the given quantity of output. This
technique is important in decision making because it helps managers and owners in a process
which involves two or more alternatives.

Activity Based Costing

Activity-based costing (ABS) is a method of assigning costs that calculates a more accurate
product cost by identifying all of an organization’s major operating activities. The goal of ABS is
not to allocate common costs to products, but to measure and then price out all the resources
used for activities that support the production and delivery of products and services to customers.
ABS is important when the organization has more than one product

Differential Costing
Usually the organizations compare two or more alternatives whether to buy this or that, to use
this service or the other, to keep the same product or to produce a new one. All these decisions
are made by managers. All alternatives given will have costs and benefits. The best alternative
which will maximize the profit can be obtained by determining the differential costs and
revenues. Differential cost (revenue) is the difference in total cost (revenue) between two
alternative. This technique shows clearly that, before taking the decision, managers should take
in consideration the cost of all Journal of Accounting, Finance and Auditing Studies alternatives.
Choosing the lower cost and higher profit alternative clearly states the correct decision.

Target Costing
Target costing (TC) is a costing tool for decision making. In the target costing approach,
management estimates how much the market will be willing to pay for the new product even
before the new product has been designed. Target costing continually motivates the management
to reduce or not to exceed target costs.
Just in Time (JIT)
Business enterprises are now showing an effort for creating attention to reducing stock levels to a
minimum by creating closer relationship with suppliers and arranging more frequent deliveries of
small quantities. The objective of just-in-time (JIT) purchasing is to purchase goods so that
delivery immediately precedes their use. This ensures holding of stocks as minimum as possible.
With this system of purchasing, the company and the supplier work in close cooperation. The
company generally guarantees for large quantity of purchases. The suppliers, on the other hand,
guarantee proper quality of materials at reasonable or lower prices as and when needed. With this
arrangement, there is no need to move goods received into stores because the goods are delivered
direct to the shop floor. Moreover, it is unlikely that raw material stock will consist of different
consignments of materials purchased at different prices. Thus, FIFO, LIFO and average cost
issue prices will be the same. JIT technique has many advantages, such as reduction of cost
because you do not have to keep much stock in your warehouse. By keeping stock, it is cost of
keeping, cost of not to be sold because it might come in a new substitute product in the market. It
is cost of freezing much cash etc.

The use of Management Accounting techniques in decision-making

Here are some of the ways in which management accounting supports decision-making:

1. Cost Analysis

Management accounting data is vital to identifying opportunities to reduce costs, improve

efficiency, and increase profitability. By analysing the cost of each business activity, owners and
managers can make informed decisions about how to allocate resources and improve processes.

2. Budgeting and forecasting

The data produced in a set of management accounts covers the financial performance of the
business. In turn, this is used to prepare budgets and forecasts. These tools are essential for
planning and controlling business operations. Budgets and forecasts help owners and managers
to set goals, allocate resources, and monitor performance. They also enable businesses to
anticipate future trends and adjust their strategies accordingly.

3. Product and service profitability analysis

Determining the profitability of products and services is critical for any business. A well-
prepared set of management accounts provide this essential data and help in identifying which
products and services are generating the most revenue and which ones are not profitable. By
analysing product and service profitability, owners and managers can make informed decisions
about which products and services to focus on and which ones to discontinue.

4. Investment appraisal

In addition to product or service-specific data, management accounting can also assess the
financial performance of business units. This information is essential for evaluating investment
opportunities across more complex businesses. By analysing the financial performance of
potential investments, owners and managers can make informed decisions about which
investments to pursue and which ones to reject.

5. Performance evaluation

Management accounting can also generate data that contributes towards evaluating the
effectiveness of business strategies and making adjustments as needed. As opposed to assessing
the financial performance of individual business units, management accounts can also help
owners and managers identify areas of weakness and make informed decisions about how to
improve performance.

b. NATURE AND SIGNIFICANCE OF MANAGEMENT ACCOUNTING

(i) Mainly concerned with future : Planning is the process of looking ahead by taking the
reference of the past. The process of management accounting is driven towards the future course
of action with proper planning based on the analytical financial details other past. It considers the
budgets to forecast the future revenue and expenditure and inflow and out follow of funds.
(ii) Recent origin: Management accounting has been well recognized in the modern business
houses due to increasing customer base and market complexity. Modern managerial decisions
need much quantitative organized information rather traditional form of financial statements for
making effective decisions.

(iii) Management need oriented: Management Accounting is highly personalized service and
Subjective in nature. It is basically intended for the use of internal managerial decisions. It
provides necessary information as per the need of the management in the required format and
ensures that the information’s are sufficient to make effective decisions.

(iv) Information as per Management need: There is no hard and fast rule in the preparation of
management reports and statement, it always as per the situational requirement of the
management and based on the availability of the data for analysis and interpretation.

(v) Provides data and not the decisions: Management accounting discipline is not an replacement
of management. It provides just information to the managerial decisions. It facilitates decisions
since majority of the decisions are made considering the facts and figures provided by the
management accountants. But at the same time these data itself cannot form the decisions of the
management.

(vi) Objective oriented: Management accounting present data in such a way that it enables the
management to formulate policies and programme so as to achieve the managerial or
organizational goals in most efficient and effective manner.

(vii) Financial and cost accounting information: Management accounting is all about the analysis
Management accounting SN Page 3 and interpretation of financial and cost accounting data, to
generate such reports and statements which can prove useful to management in decision making.

(viii) Increases efficiency: Management accounting is concerned with providing, the needed
information to the Management in the proper manner and assisting in the policy formulation and
managerial control. This enables the management to increase efficiency of its operation and
ensures the optimum profits with minimum operational risk

In addition, management can utilize management accounting to allocate appropriate attention to

each of the manifold potential outcomes with respect to profitability, pricing, and other pertinent
metrics. Although accounting information does influence management’s decision-making
process, it is critical to keep in mind that it is not the only determinant. Management considers
and evaluates additional variables associated with the practical implementation of the plan, apart
from the accounting information. Managers must reach a final decision by employing their
business acumen, experience, knowledge, common sense, and vision, in addition to the
information at their disposal. Here are the significance of management accounting.

Achieving Objectives

Management utilizes management accounting to help the business achieve its objectives. By
using past information to formulate plans and set objectives, they establish a foundation for
action. Moreover, monitoring real-time performance and comparing it with predetermined
objectives allows management to understand each department’s unique performance.
Consequently, it becomes feasible to rectify any discrepancies that may arise between the
designated criteria and the operational procedures of the various departments. Ultimately, this
can all be achieved through the consistent budgeting and pricing of the project.

Enhance Efficiency

Increasing the overall efficacy of a business is among the numerous primary objectives of
accounting for management. The management team compares the recently acquired data with
previously gathered information to evaluate each department and group’s current performance.
They possess the ability to discern how things operated differently in the past and rectify any
deficiencies. Future objectives that are beneficial can be formulated following an exhaustive
examination of all deviations, both favorable and unfavorable. By adopting this comprehensive
strategy, not only does it enhance overall productivity, but it also fosters a cost-aware mindset
among the team’s personnel.

Taking Important Decisions

Managerial accounting facilitates the process of making numerous critical decisions. The
management team is furnished with the data in order to enable them to formulate well-informed
assessments. The objective of analyzing historical data is to gain insights that can inform future
decision-making. Most people, when confronted with a significant choice, consider what might
have occurred had they pursued an alternative course of action.

Special Techniques & Concepts

As a subfield of accounting, management accounting seeks to increase the utility of accounting

information for executive teams through the application of accounting-specific concepts and
methodologies. This broader domain encompasses techniques including standard costing,
marginal costing, cash flow management, budget control, and financial planning and analysis. I
believe the majority of individuals would concur that these techniques are excellent for data
visualization and coordinating business activities.

Special Techniques

Based on the premise that specific processes and concepts can enhance the value of accounting
data, management accounting is an accounting discipline. Commonly implemented strategies
include budget control, control accounting, standard costing, project evaluation, and marginal
costing. We will consider present circumstances and obligations when making decisions about
the course of action.

Increase in Efficiency

The objective of financial data exploitation is to enhance the productivity of the organization.
You will achieve tasks more quickly and be more productive if you establish objectives for each
area. Through the performance evaluation, management will acquire a deeper understanding of
the organization’s strengths and areas that require enhancement. Numerous individuals attempt
to improve their performance by modifying the design and implementation of something.
Employees are expected to exercise cost consciousness due to the ongoing assessment of their
work. Everyone will make every effort to reduce expenses independently.
No Fixed Rules

Standards and guidelines have been established by the field of financial accounting with regard
to the delivery of financial statements. On the contrary, management accounting does not adhere
to these regulations. The procedures and instruments utilized are identical in both instances. It is
your capacity to utilize these abilities that will determine your fate.We trust the management
team’s ability to analyze the materials and choose the best actions. Customized strategies are
essential to address each concern. Careful deliberation need to pick the communication method.

Provides Information

It is the duty of the management accountant to furnish management with information that is
relevant to their operational activities. Those at the very top will ultimately make every decision.
Management has meticulously structured all the content to align with their requirements.
Management accountants entrust with providing advice, not making decisions. The effectiveness
and efficiency of management determine what will do with the data.

Cause & Effect Analysis

There is nothing more involved in financial accounting than generating a profit and loss
statement and determining the final result. Further aspects of accounting are relevant to
enterprises. Management accountants utilize the term “cause and effect” to describe a
relationship. Each potential factor investigate in the event of a loss. In determining whether a
return exists or not, a number of financial factors are taken into account, such as current assets,
interest payables, share capital, and a variety of expenses. Hence, an examination of the
correlation between causes and effects within the realm of management accounting is feasible.

Providing Information
In the decision-making process, accounting information is utilized by management.
Subsequently, the accounting staff’s economic dependency relies on acquiring and organizing
data. Management then utilizes the gathered information to formulate policy decisions. Under the
term “management accounting,” I refer to the process of structuring financial records to facilitate
comprehension and application by individuals in positions of authority. This financial data
enables the evaluation and selection of various policy alternatives. Ultimately, as a service
function, management accounting ensures that all levels of management have access to the
necessary data to perform their duties effectively.