management accounting

Management Accounting (Word Count 2119 )Introduction

The American Accounting Association defines accounting as the process of identifying , measuring and communicating economic information to permit informed judgements and decisions by users of the information Thus the basic objective of any accounting system is to provide information that would enable decision-making and informed judgement The functions of Management Accounting are to

Allocate costs between cost of goods sold and inventory to enable profit reporting

Provide information to facilitate better decisions

Provide information to help planning , control and performance measurement

To

achieve these objectives , a Management Accountant employs several tools and techniques . This discusses the important techniques employed in fulfilling the Management Accountant 's key roles enumerated above , namely to facilitate decision-making , and help in the processes of planning , control and performance measurement

Decision Making

The management accountant plays a very useful role by providing information and analyses that help the organisation make major decisions in important and strategic areas . The following are some of the more important decisions that an organisation needs to make , and the corresponding techniques used by the management accountant

Production and Profitability Decisions - Cost-Volume-Profit Analysis

Pricing , Production and Outsourcing Decisions - Activity Based Costing

Investment Decisions

Decision making under uncertainty and risk

Cost-Volume-Profit Analysis

The cost-volume-profit analysis supplies useful information that enables an organisation to take several decisions in key areas . This approach employs the marginal costing principles to arrive at the break-even point and an understanding of the price-volume combination that is required for profitable operation

The cost-volume-profit analysis reveals valuable information that can be used to understand

The minimum volumes that need to be produced at current price

The minimum price that needs to be charged at current volumes

Additional volumes that need to be sold to recover any additional fixed costs that are planned (Such as additional expenditure on advertising

The great advantage of cost-volume-profit analysis is that by summarizing cost behavior patterns into simple functional forms , many of the answers can be supplied with the same set of basic cost data through relatively simple algebraic manipulation

The cost-volume-profit analysis is very useful in making key decisions in the areas mentioned above . However , there are some limitations to this approach that also need to be understood . First of all the analysis is valid only within a certain range of output , because major changes in the output volumes are likely to affect the price as well as the fixed costs . Secondly , even within a limited range , many costs cannot be classified strictly into purely variable and purely fixed costs , as many costs in the real world are semi-variable , that is , they are fixed within a small range , and then change into another fixed value for the next range . Finally , the validity of the analysis is dependent on several assumptions that are made

However , in spite of these limitations CVP analysis provides very valuable information that can help the management in decision-making in key areas . The limitations only highlight the fact that caution and discretion need to...