Unit 5 Reading Activities Plus Questions

Read the following text and then complete the activities that follow.

Management Accounting

Most businesses are aware of the value of highly skilled accountants, as their knowledge can save the company money. However, a lot of companies forget that good accountants can actually help in increasing revenue and decreasing overheads as well.

Accountancy is much more than recording financial transactions in order to calculate profit or show the tax liability of a company. Management accountants actually help shape company policy and the direction that the company will take in the future.

Whereas financial accounting is focused on providing reports for both internal users like the board of management and external users such as the tax office, management accounting focuses on providing information for internal users so that they can choose the correct course of action in any situation and confirm that actions are taken efficiently.

Unlike financial accounting, management accounting has no set of standard reports - instead management accountants compile any reports which are likely to assist the company in making the right choice.

So how can managerial accounting help your company?

The primary function of managerial accounting is focused on increasing knowledge inside a company and as a result reducing risks connected with decision making. Accountants can draft reports on the cost of production, workforce expenditure, and the cost of various projects and schemes, among other activities. Managers may then utilise these reports to measure the difference, or "variance," between the expected and actual results, or to compare performance to other benchmarks.

Because of the need for a variety of detailed information about specific areas within a company, the reports produced by management accountants are often much more in-depth than financial accounting reports, such as balance sheet ratios and net income calculations. Managerial reports can also differ from financial reports in the frequency at which they are produced with these reports being prepared on a monthly, weekly or even daily basis. One of the characteristics of most managerial accounting reports is the summary format that they are presented in. This format makes it easier for managers to quickly identify potential problem areas and then study those areas to aid in determining the correct way to resolve these problems.

The majority of managerial accounting functions produce information which is used to make decisions about the future and to evaluate the effectiveness of past decisions. Monitoring financial results and measuring the outcome is called "controlling." The person in charge of a company's accounting department is called the "controller." This person plays a key role in planning and controlling processes throughout the company.

Management plans are formally shown as budgets, and the term "budgeting" usually talks about management planning. The controller supervises the creation of budgets. Budgets are often prepared for individual teams and departments within a company as well as for the company as one entity.

After the budgets have been established, managerial accountants collect information generated by the organization that indicates the actual company performance in contrast to the budgeted figures.

The managerial accounting findings are presented using performance reports tailored for the individual needs of the executives or departments. The performance reports compare budgets with actual results for a particular time period, which allows managers to identify problem areas.

Management accountants can also create special reports which are used to help make decisions about proposed projects or possible takeovers. Reports are created to analyse cost and benefit relationships connected to different variables. For example, if a company's competitor lowers its prices, management may ask for a report comparing possible responses, such as lowering its prices, or increasing advertising. These reports usually include the collection of outside data as well as forecasting.

Managerial accounting staff are now often expected to help in creating strategies to increase the profitability of a company and to cooperate in cross-functional teams with managers from operational departments throughout the organization. As a result of these additional duties, management accountants are now not only accountants but key members of finance teams.

Quiz: Reading Questions

1. Having benchmarks assists with budgeting.
2. Management accounting will be involved in the takeover of the entity.
3. Overheads of any given time period should not show much variance.
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