Managerial accounting offers managers with quantitative and qualitative data that they need to understand operational and financial performances of their organizations. It differs from financial accounting that serves external purposes for creditors. Managerial accounting serves internal purposes for managers who wish to assess financial performances of their companies and make critical decisions. Managerial accounting system entails various processes that organizations rely on to control and plan different operations for supporting critical decisions. This essay shows that managerial accounting systems have critical roles in contributing toward organizational continual improvement through decision-making processes. It uses Southwest Airlines to highlight applications of managerial accounting techniques in a business context.
Definition of Managerial Accounting
Management accounting involves preparing management account with the sole purpose of coming up with accurate, timely financial statistical information that the accounting management agent requires. Management account differs from one firm to another according to what policies and structures dictate (Seal, Garrison, & Noreen, 2009). Managerial accounting focuses on critical aspects of many organizations. It provides information related to costs of products and services. Managers use such information on product costs to set pricing strategies that offer favorable returns. Moreover, they rely on product costs for evaluating potential incomes and inventory valuation. Managerial accounting also assists in organizational budgeting processes. It provides important insights about performances. Organizations use such reports for comparison with actual performances. Managers, therefore, can understand factors that contribute to variances in performances. Overall, managerial accounting provides information that can assist managers to make important decisions, plan and control operations. It aids in identifying, assessing, recording and analyzing financial data and data that assist in budgeting, forecasting, allocating costs and projecting potential incomes. Organizations, therefore, can understand important operations that affect internal financial positions. It is imperative to note that managerial accounting may differ from one firm to another based on the company’s business operations and processes. Managerial accounting, therefore, does not conform to the national standards of accounting practices. That means that any organization may develop its own systems of assessing financial performances.
The Role Managerial Accounting and the Management Accountant
Generally, managerial accounting offers useful financial information for decision-making purposes. The process involves gathering, managing and reporting data as requested by users. These processes are also found in financial accounting. In addition to reporting fiscal information, managerial accounting also entails some elements that relate to non-monetary information. Therefore, it is important to acknowledge that information for both managerial and financial accounting concepts can be useful for both internal and external usages.
There are critical concepts and procedures in organizations for determining costs of products and services (Wild, Shaw, & Chiappetta, 2011). In addition, budgeting, profit, cost and break-even analyses are also necessary for organizations. Specifically, managers require information about costs of products and services for decision-making purposes. Data from such sources are used in predicting future costs of products and services. Companies use the predicted costs to determine product and service pricing, potential profits and make decisions on production.
In most cases, managerial accounting roles involve collecting information about costs that relate to planning and controls in organizations. Planning involves setting objectives and formulating strategies to realize them. Organizations make long-term strategic goals that may range from five to ten years and then review them into medium-term and short-terms goals. Strategic goals provide a long-term direction for any organization. For instance, companies may decide to venture into new fields, new markets, make new products, introduce products or increase capital investment among others. Such goals and objectives may be broad in focus due to their long-term nature. On the other hand, medium-term and short-term objectives are specific and assume operational orientation. Organizations use such approaches to translate their goals into actions. Short-term objectives are highly defined since they provide concrete strategies for execution within less than a year time span. Companies change such objectives into monetary values in order to create budgets.
Control involves examining planning decisions and assessing a company’s processes and employees. In this activity, organizations measure and evaluate various processes, actions and results. Feedback generated from various control processes allows decision-makers to review their plans. Gauging of actions and activities allows decision-makers to take initiatives and correct certain undesired results. For instance, managers may compare results from time to time against the expected outcomes.
In short, the most important aspects of planning and controlling in management accounting involve monitoring and feedback that managers use to improve business and other activities in an organization.
Management accountants keep financial data for their organizations. Decision-makers rely on such information to make important decisions that affect long-term goals of a company. Management accountants are responsible for developing budgets, conducting assets and cost management and developing vital reports that are needed by the management team. Managers use such information from management accountants to create effective business strategies. Many managers use such information for decision-making within their organizations. Information from management account provides the basis for sound decision-making in companies. In other words, management accountants conduct many activities to ensure that organizations attain financial security through controlling all vital financial data and issues and therefore, assist in driving overall organizational strategic objectives that determine success and status of their organizations.
Ethical Issues for the Management Accountants
Studies have pointed that several issues in managerial accounting have ethical implications (Schneider, 2004). As a result, the Institute of
Management Accountants (IMA) has developed ethical guidance and standards for management accountants. The standards focus on managerial accounting issues that relate to “competence, confidentiality, integrity, and objectivity” (Schneider, 2004).
Most of the issues that management accountants face emanate from decision-making processes as Schneider (2004) observed. There are ethical issues that relate to investment decisions, production decision, cost allocation and estimation judgment (Schneider, 2004).
First, overproduction shows that managers’ decisions may be influenced by the need to manipulate earnings, particularly in situations that involve variable and full costs. Second, managers could subjectively influence cost allocations to allow a company to generate considerably higher returns from “product sold on a cost-plus basis” (Schneider, 2004). Third, managers may also misrepresent estimated returns that have overall effects on the reported profits. Fourth, managers may also display conflicts of interests when making critical investment decisions, particularly when evaluation processes involve assessing returns on investments (ROIs). Finally, many scholars have pointed that managers’ investment decisions are mainly self-serving and do not necessarily represent the interest of their organizations.
Managerial Accounting Techniques
Budgeting entails allocating cost estimates to a given account of a company with the aim of identifying baseline costs for a given product development. Management accountants must identify product development processes that will cost the company in terms of time and money and include them in the budget. The budget highlights expected time lines, assigns costs and time, and shows when an organization will incur such costs and allocates funds.
Accounting affects all aspects of organizational business processes. Hence, it is an imperative business activity. Quality control is also a part of all processes in an organization, and management accountants must support quality control processes through accounting and cost controls.
Cost Management Techniques
Cost management techniques involve different strategies that enhance strategic position of a company and reduce various costs of business processes concurrently.
Budgeting at Southwest Airlines
Southwest Airlines is known for several innovative and non-traditional modes of conducting business. It was among the first organizations to adopt innovative methods of budgeting and financial planning. As a result, the company implemented a new mode of forecasting and encouraged employees to seek for favorable performances.
It used forecasting and budgeting with the aim of suggesting potential profits and losses based on managerial accounting techniques. The company recognized that the business environment was highly dynamic and therefore, required a flexible mode of operation. Southwest Airlines used forecasting in order to determine quarterly performances. The company is able to understand future performances, past and future business trends and ensure that decision-makers remain proactive and innovative as they use financial information for making vital decisions. Although Southwest Airlines’ approach to budgeting involves constant updates, the process reduces costs and time on a long-term basis.
Its budgeting approach is highly flexible. It relies on a costing method that allows supplementary budgeting, distribution of funds for all business processes and other costs. The flexible budgeting technique allows Southwest Airlines to evaluate and enhance operational efficiency. The company can measure and compare the predicted results with actual performances through its flexible budget approach.
Based on the nature of the industry and fluctuating costs, the company uses fuel pricing to determine future earnings and profitability. In some instances, the company has used the cost per available seat mile (CASM) to adjust its pricing strategies. For instance, in the year 2007, the company adjusted its costs by 3.4% percent relative to the previous year (Securities and Exchange Commission, 2007). The company attributed nearly 80% of the adjustments to changes in fuel pricing. In addition, the company also relies on hedging to manage sudden rise in fuel prices and unexpected fluctuations.
Based on the flexible budgeting approach, the company was able to save over 70% of the costs associated with fuel charges. Consequently, it was able to reduce barrel pricing based on the market price at the time. The company was able to save substantial amount of money per barrel relative to other airline companies.
The company used budgeting to enhance a review of business activities, future trends and to determine fund allocations (Horngren, Sundem, & Stratton, 2002). Budgeting has allowed Southwest Airlines to determine specific expectations in pricing that serve standards against later actual performances. Budgeting has helped Southwest Airlines to correlate its different departments and overall operational goals in the entire company.
Quality control involves developing and maintaining products and services that are cost-effective and meet specific needs of users. Quality must reflect the major aims of an organization, services, processes and employees’ aspirations. Managers and other decision-makers must support quality control activities. Quality control affects the entire business of Southwest Airlines, and management accounting is a part of the process. Therefore, managers must support quality control initiatives in their business units.
Managerial accounting supports quality control at Southwest Airlines as an internal process.
The company has used quality control in purchasing processes by making decisions on all significant accounts payable. It supports these processes through cost recording to capture actual costs and compare with the projected pricing and outcomes. Such data have been useful in helping the company to make informed decisions that aim to enhance efficiency and improve airline services and customer experiences cost-effectively.
Quality services that the company strives to offer depend on effective implementation of inventory practices. The company must ensure accurate billing and credit utilization. Management decisions concerning quality issues focus on eliminating poor decision-making processes, sporadic reporting, effective review of financial information and evaluation of critical indicators within the company. In addition, Southwest Airlines uses quality control to avoid non-standardized resource allocations and erratic allocation of funds and time.
The company has noted that failure to understand the importance of quality control across the entire organization can affect its overall strategic goals. Consequently, the company’s management accountants understand various factors that influence the company’s quality control processes. Southwest Airlines has monitored its compliance with quality standards to ensure that payments are made efficiently, adjustments against earnings are made and records are kept to reflect actual positions.
Cost Management Techniques
Organizations must strive to manage their costs. In this regard, Southwest Airlines focuses on minimizing overhead costs. The company must take such initiatives and control rising operational costs in order to protect its profit margins. Consequently, it embraced technologies to reduce costs and facilitate service provisions.
Cost management measures involve tracking systems and approvals. The company relies on performance measurement to assess the extent of any changes that take place in performance relative to previous outcomes and projections. Management accountants are able to determine factors that are responsible for the variance and make decisions if such variations require corrective interventions.
In most cases, few initiatives may go as planned. However, many business processes often deviate from normal plans, and the company needs to review its plan and determine alternative approaches that could control costs.
Southwest Airlines relies on technologies to track planned costs against actual costs. This approach allows the company to predict potential changes in costs.
In addition, the company has used the right technology to enhance efficiency and reduce costs. For instance, customer relationship management has streamlined and automated many processes that involve management of customers’ communication processes.
Southwest Airlines has decentralized decision-making processes and trained employees to enhance efficiency in all daily operations. Monitoring of costs associated with important initiatives in the company has ensured that employees improve on performance and generate increased revenues for the company.
This essay has explored managerial accounting and its applications in organizations. It has shown that managerial accounting systems have critical roles in contributing toward organizational continual improvement through decision-making processes. Managers require financial information to make such critical decisions that affect companies’ performances. Management accountants must also understand ethical issues and observe standard guidelines when making such decisions. In the process, companies can apply various managerial accounting techniques, such as budgeting, cost management techniques and quality control among others to make informed decisions.
Horngren, C. T., Sundem, G. L., & Stratton, W. (2002). Introduction to Management Accounting. Upper Saddle River, NJ: Prentice Hall.
Schneider, A. (2004). Ethical Decision Making on Various Managerial Accounting Issues. JAMAR, 2(2), 29-40.
Seal, W., Garrison, R., & Noreen, W. (2009). Management Accounting. New York: McGraw-Hill.
Securities and Exchange Commission. (2007). Southwest Airlines, Co. Annual Report. Web.
Wild, J., Shaw, K., & Chiappetta, B. (2011). Fundamental Accounting Principles (20th ed.). New York: McGraw-Hill.