The Importance of Management Accounting for Decision-Making

Role of management accounting

The management accountant is an inside person who conducts internal analyses that seeks to guide the overall strategy of the business. For this, (s)he is tasked with the preparation of internal accounts, financial reports, and records, all of which go toward aiding managerial decision-making in the pursuit of the short- and long-term goals of the business. Essentially, in a management accounting career, a candidate pulls out actionable insights from complex financial data.

Importance of management accounting

The role in decision-making is at the core of the significance of what a management accountant does. Every business day requires several types of decisions to be made, and operational information feeds the task of management accounting. From here come reports giving insights into how the business is performing — for instance, labor utilization, or profit margins — to further ensure that managerial decisions are grounded in solid data. This boosts the competitive advantage and hence profitability too.

Criticality of decision-making

Recent times have seen strategic decision-making move upward in importance for managers. This has been propelled by:

• A deluge of data: IBM research suggested that daily data generation was of the level of 2.5 quintillion bytes. This quantum necessitates the extraction of trends through predictive techniques and analytics.
• The march of globalization: Organizations now look to adopt best practices for their internal functioning. The requirements for information and transparency compel the need for professionals who can provide the requisite reports.
• Internal dynamics: The perpetual changes in the corporate landscape and their effect on internal happenings mean that risks and opportunities must be prudently balanced.
• External movements: Policy and political changes exert their effect on decision-makers, who must continue to smoothly guide the management of the organization.

How management accounting helps decision-making

The key task that a management accounting qualification enables the candidate to perform is to boost the effectiveness and efficiency of the operations of the organization. The person must look beyond just charts or numbers, aiming at strategy formulation. For this, many responsibilities must be handled:

• Identification of the significant performance metrics for all departments
• Collection of data and comparison and reporting of performance vs what was expected
• Leveraging a variety of advanced techniques and tools such as balanced scorecards, KPIs, management information systems, and scenario planning
• Analysis of why deviations occurred, and identification of possible corrective measures

Some of the techniques that a management accountant can use in this process are:

• Relevant cost analysis: The business needs to choose what to sell and how to sell it, for which the accountant could compare the costs of different alternatives, ignoring common cost elements. This could also suggest what products to add or which ones to ignore.
• Activity-based costing: Next comes knowing who to sell to. The accountant determines the activities required to produce and service a product line and the associated customer costs, pointing to the profitable customers toward whom the business should focus its efforts.
• Make or buy analysis: The skills learned from a management accounting qualification help, among many other things, to suggest whether it is better to make a particular product or component, or to source it from someone or somewhere.
• Budget definition: This is another key responsibility handled in a management accounting career. By analyzing past activities and defining investments for future actions, the accountant ensures that budget-related decisions are in line with the marketing database and sales history.
• Controlling: The accountant studies the financial performance of different departments to uncover why they generated profits or losses. Accordingly, (s)he can suggest how to manage operational costs to boost profitability.

Conclusion

Management accounting is a key part of the decisions — both short- and long-term — that must be taken toward the financial health of the organization. It improves operational decisions and efficiency, and also long-term investment decisions. It serves to ensure that the budgets and forecasts outlined at the outset are in line with actual results.

Originally Content Published here:https://www.toevolution.com/blog/view/2006383/the-importance-of-management-accounting-for-decision-making