Five Concepts of Managerial Accounting and their Application

Managerial Accounting
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Table of Contents 1.0 Introduction. 3 2.0 Management Accounting Systems and Cost Categories. 3 3.0 Absorption Versus Variable Costing Systems. 5 4.0 Capital Budgeting Decisions. 6 5.0 Performance Measurement in Decentralized Organizations. 7 6.0 Corporate governance. 8 7.0 Summary. 10 8.0 Conclusion. 10 9.0 References. 12 Managerial Accounting 1.0 Introduction Managerial accounting is a new approach that is used by managers to carry out accounting functions in a modern company. The term management accounting comprises of two keywords- management and accounting. Mainly, the concept is accounting for managers. Managerial accounting reveals the steps that a manager needs to take to ensure transfer of accounting information between different management levels and provide insights on how to make informed business decisions. Managers can maintain effective management of the resources owned by their firms. Thus, managerial accounting is necessary for firms that need to control their business activities. This paper critically analyses five concepts of managerial accounting and their application in the management of organizations. These concepts include management accounting systems and cost categories, absorption versus variable costing systems, capital budgeting decisions, performance measurement in decentralized organizations, and corporate governance. 2.0 Management Accounting Systems and Cost Categories Managerial accounting systems and cost categories have a direct impact on profit margins and variability of an organization. Management accounting system is a process that allows the exchange of financial and non-financial information for managers. In essence, managerial accounting covers various levels of management from floor supervisors to senior managers. A managerial accounting system is designed to allow an organization to come up with information that reveals product costs, performance report, and budgeting (Tsai, Lin & Chou, 2010). The accounting system is invaluable to organizations as it motivates and encourages managers and other employees to consider the importance of using information technology. The use of information in an organization decides the best cost categories that should be adapted to have a positive impact on profit margins and variability. Activity-based accounting (ABC) encompasses product account systems is based purely on specific cost categories such as materials and labor, which sometimes includes an extra indirect cost that is allocated to various products. On the other-other hand, environmental cost accounting (ECA) systems is a focus on administrative or overhead accounts since it is difficult to quantify, easily separated from the products, activities or process that are responsible for their creation. When activity-based costing integrates with environmental cost accounting, they offer organizations with information that is more accurate and well-rounded to enhance effective decision-making (Tsai et al., 2010). It is imperative for managers to realize that when there are processes and products with high environmental; costs, the information can be hidden from key decision makers in the company. Activity-based accounting and environmental cost accounting are primary accounting management tools that have revolutionized the traditional accounting system. The use of the two accounting tools ensures that managers provide organizations with a detailed economic analysis of critical business activities that improve variability and profit margins. Therefore, managers should find effective ways of incorporating ECA and ABC systems to make accurate and more objective decisions (Talha, Raja & Seetharaman, 2010). Hence, there is a need for managers to ensure that they are conscious of changes in the work environment and deciding how to deal with changes. Managers have a demanding role that requires careful consideration of the information concerning their areas of activity. 3.0 Absorption versus Variable Costing Systems There is a significant difference between absorption and variable costing systems, and they tend to have varying results on the way the cost of a product is computed. The Absorption costing system is used to identify various marginal costs and external purposes to aid in the decision making the process of an organization. In contrast, the variable costing system identifies only the part of the cost in the production process, which varies with various activities in the process (Aleem, Khan & Hamad, 2016). It is important to note that each costing system has its advantages and disadvantages. The absorption costing method incorporates manufacturing overhead as part of the total production cost incurred by an organization, whether it is variable or fixed. An organization using absorption costing calculated each unit cost of labor, raw materials and both variable and fixed overhead. In variable costing, the period cost includes the fixed manufacturing cost, such as the selling and administrative costs, hence in the variable costing and cost of goods and existing inventory does not feature any fixed cost of production. Evidence indicates that most organizations tend to use both types of costing systems since each system has its advantages and disadvantages. Aleem et al. (2016), note that the variable costing approach is used along with the absorption costing method since the two approaches reveal the best ways to control costs effectively. Again, by referring to the fundamentals of the variable costing approach, an organization can detect resources that are unproductive since the manager can tell the value of the fixed cost in the variable costing. Labor and raw materials can be traced with little effort to particular products than overhead costs that are beneficial to the production of specific products and product lines. Inopportunely, overhead costs can translate into a significant percentage of the actual product cost. It is essential for managers to realize that overhead costs assigned to various products have a direct impact on the production costs and ultimately lead to changes in the production decision, pricing, and product promotion. Careful and consistent specifications should be made to ensure that costing system is logical to make appropriate decisions (Aleem et al., 2016). It is clear that different costing systems allow managers to have a unique approach when allocating overhead costs in different ways. 4.0 Capital Budgeting Decisions Capital budgeting decisions are processes that are used when making crucial planning decisions, especially when it comes to long-term investments. Budgeting is a valuable management tool that aid companies to motivate people and gauge their performance. Capital budgeting enables corporations to make planning decisions that will be used to decide any long-term investments. Evaluating capital budgets is enabled by applying techniques such as profitability index, internal rate of return (IRR) and net present value (NPV), accounting rate of return, and payback (Lunkes et al., 2015). Entrepreneurial organizations can ensure their effectiveness by utilizing the limited resources available. By applying the NPV method, cash flows that connect to a particular project are acknowledged as reinvested assets at the discount rate that is detailed with a review for an NPV calculation. Such an approach is within reason because the discount rate is supposed to reflect revenue available from substitute use of capital. Contrastingly, the IRR method can be used by corporations with the assumption that the reinvestment rate is equal to the calculated IRR (Lunkes et al., 2015). Lunkes et al. (2015), further notes that th...