Management accounting information system
It is an information system that produces outputs using inputs and processes to satisfy specific management objectives.
Process are the heart of a management accounting system and are used to transform the inputs into outputs that satisfy the system’s objectives. Processes are described by activities such as :
- Reporting and managing information
Outputs include special reports, product costs, customer costs, budgets, performance reports and personal communication. The management accounting information system is not bound by any formal criteria that define the nature of the inputs, processes or output. The criteria are flexible and based on management objectives. The management accounting system has three objectives or purposes
1. To provide information for costing out services products and other objects of interest to management. Management accounting system have to determine the cost of products and processes. Thus, it emphasizes the importance of accuracy in product costing to suggest ways of improving a company’s operations. Accuracy in costing assignments have led to the development of new and more useful management accounting information.
2. To provide information for planning, control and evaluation. Managers, executives and workers need an information system to identify problem such as the possibility of cost overruns or the inability of a manager in a subunit to implement a plan. Once problems are known, the actions can be taken to implement solutions.
Tracking efficiency measures both financial and non financial information to evaluate and monitor the effects of decisions that are intended to improve operational and unit performance. Informing workers about operational and financial performance allow workers to assess the effectiveness of their efforts to improve their work. In this circumstance, workers and managers should be committed to continuously improving the activities they perform. Continuous improvement means searching for ways of increasing the overall efficiency and productivity of activities by reducing waste, increasing quality and reducing costs.
This information is needed to help identify opportunities for improvement and to evaluate the progress made in implementing actions designed to create improvement.
3. To provide information for decision making. It is interwined with the first two. Information about the costs of products, customers, processes and other objects of interest to management can be the basis for identifying problems and alternative solutions.
imilar observations can be made about information pertaining to planning, control and evaluation. By using product cost to prepare a bid for example, helping a manager to decide whether to reduce price by reducing the airfares and increasing advertising expenditures to improve profitability, it is cost – value – profit decision (by decreasing cost and increasing sales volume to get more profit) or decided to change manufacturing equipments with robotic manufacturing equipments system, it is what we call capital investment decision and ong run planning.
Management process is defined by
Management process describes the functions carried out by managers and empowered workers to participate in the management process. It means to give them a greater how the plant operates. Employee empowerment is simply authorizing operational personnal to plan, control and make decisions without explicit authorization from middle and higher level management. Employee empowerment is justified by the belief that the employees closest to the work can provide valuable input in terms of ideas, plans and problem solving. Workers are allowed to shut down production to identify and correct problems and their input in sought and used to improve production processes. For example, empowered workers by redesign in one department can avoid machine downtime and produces significant savings. Employee empowerment is a key element in achieving continuous improvement.
Planning the detail formulation of action to achieve a particular end is the management activity called planning. Setting objectives and identifying methods to achieve the objectives is required in planning. A firm may have the objective of increasing its short term and long term profit ability by improving the overall quality of its products. By improving product quality, the firm should be able to
Reduce scrap and rework
Decrease the number of customer complaints and warranty work
Reduce the resources assigned to inspection and so on
The works what have to be done to increase profit ability. To accomplish all, management must develop some specific methods and implement it to achieve the desired objective.
As a plant manager, he or she may evaluate and select suppliers that are willing and able to supply detect free parts. By empowering workers, they may be able to identify production causes of defects and create new methods for producing a product that will reduce scrap, rework and the need for inspection.
Planning is only half of the battle, once a plan is created, it must be implemented. Managers and workers must monitor its implementation to ensure that the plan is being carried out as intended.
Controlling on implementation of plans and taking corrective action as needed must be done. Control is usually achieved with the use of feedback or information that can be used to evaluate or correct the steps being taken to implement a plan. Based on the feedback, a manager or worker may decide to take corrective action to put the actions back in harmony with the original plan or do some replanning.
Feedback is a critical part of the control function and be done by management accounting. Feedback can be financial or non financial. Often financial and non financial feedback is in the form of formal reports that compare actual data with planned data. This is what we call as performance reports.
Decision making is to choose among competing alternatives. It is interwined with planning and control. A manager cannot plan without making decisions. Managers must choose among competing objectives and methods to carry out the chosen objectives.
Only one of numerous competing plans can be chosen. Similar comments can be made concerning the control function. Decisions can be improved if information about the alternatives is gathered and available to managers. One of the major role of the management accounting information system is to supply information that facilitates decision making.
The manager can requested information concerning the expected manufacturing costs of the product. This cost information, along with the manager’s knowledge of competitive conditions, should improve his or her ability to select a bid price. Imagine having to submit a bid without some idea of the manufacturing costs.
The accounting information system within an organization has two major subsystems
A management accounting information system
A financial accounting information system
The accounting information system is a subsystem of a firm’s overall management information system. The financial accounting information system is concerned with producing outputs for external users. It uses well-specified economic events as inputs and processes that meet certain rules and conventions which are defined by Securities Exchange Commission (SEC) and Financial Accounting Standard Board ((FASB). The overall objectives is the preparation of external reports / financial statements for
- Other outside users.
For investment decisions, stewardship evaluation, monitoring activity and regulatory measures.
The management accounting system produces information for internal users such as
Thus, management accounting called internal accounting and financial accounting called external accounting. Management accounting identifies, collects, measures, classifies and reports to internal users in planning, controlling and decision making.
Management accounting is not subject to the requirements of Generally Accepted Accounting Principles (GAAP), The Securities and Exchange Commission (SEC) and Financial Accounting Standard Board (FASB) that must be followed for financial reporting. Unlike financial accounting, management accounting has no official body that prescribes the format, contact and rules for selecting inputs and processes for preparing financial reports. Managers are free to choose whatever they want provided, it can be justified on a cost-benefit basis.
Type of information by financial accounting tend to objective and verifiable financial information. Management accounting information more subjective since it maybe financial or non financial.
Financial accounting has a historical orientation, it records and reports events that have already happened. Although management accounting also records and reports events that have already occurred, there is also a very strong emphasis on providing information about future events. Management not only want to know what it costs to produce a product, it may also want to know what it will cost to produce a product. Knowing what it will cost, helps in planning material purchases and making pricing decisions among other things. This future orientation to support the managerial functions of planning and decision making.
Management accounting provides measures and internal reports used to evaluate the performance of entities, product lines, departments and managers in very detailed information, while financial accounting focuses on overall firm performance.
Management accounting is much broader than financial accounting because it includes aspects of managerial economies, industrial engineering and management science.
However management accounting and financial accounting are part of the total accounting information system. The content of management accounting system is driven by the needs of the financial accounting system. A firm’s profitability is of interest to investors but managers need to know the profitability of individual products. The accounting system should be designed to provide total profits and profits for individual products, that is why accounting system should be able to supply different information for different purposes.
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