Question Tag: Qualitative Issues

MEMORANDUM
To: Managing Director, Akwaba Ltd
From: New Management Accountant
Subject: Role of Management Accounting
Date: 8th November 2016

Further to my recent appointment as Management Accountant at Akwaba Ltd, the following is a brief outline of the role and importance of management accounting to companies like Akwaba Ltd, the meaning of the question and also some brief suggestions as to how my appointment may prove beneficial to you and the company from both a financial and non-financial viewpoint.

Financial Vs Management Accounting
Despite the fact that the word “Accountant” is common to both job titles, they are in fact very different roles. The financial accountant is primarily concerned with stewardship and compliance activities whereas the management accountant is concerned with information gathering, analysis, and dissemination. The roles can be further differentiated using the following headings:

• Users: Financial Accountant aims to report the company’s affairs and transactions to external audiences such as shareholders, debt providers, government bodies, etc. Management Accountants aim to report information exclusively to internal audiences such as Directors, department managers, project managers, etc.
• Time Horizon: Financial accounts are usually based on historic data and are often reported some time (months) after the event to which they relate. Hence they are said to be backward-looking. Management accounting information can often be more forward-looking and may use historic data but will usually try to use it predictively to make decisions about the future direction of the company.
• Regulatory Compliance: Financial accounts are used for stewardship purposes and as a basis for other calculations such as taxation liabilities. Hence there are expectations of precision and accuracy to give a “true and fair view.” Therefore they must comply with detailed legislation and generally accepted accounting practice (GAAP). Management accounts and reports do not have to suffer the same restrictions of legislation and GAAP and may not have the same level of accuracy. The emphasis is on timely production of information rather than accuracy and compliance.
• Objective: The main objectives of financial accounting are to disclose the end results of the business, and the financial condition of the business on a particular date. Whereas the main objective of managerial accounting is to help management by providing information that is used to plan, set goals, and evaluate these goals.

Suggested Management Accounting Techniques:

• Planning: Management accountants will be heavily involved in producing the budgets within a company. These range from long-term strategic plans (3 to 5 years) to short-term operational level plans (quarterly or monthly). Producing plans helps ensure the company grows in a structured and organized way and can ensure that adequate resources are put in place, for example, to help prepare for expansion into new markets.
• Control: Management accountants often use variance analysis to monitor actual results and compare them to expected norms (standards) for all the different facets of business activities. This technique helps identify positive and negative trends/changes to ensure the company can adapt quickly when results are different from original expectations and thus optimize the company’s commercial performance.
• Decision Making: Management accountants use techniques such as break-even analysis, limiting factor, linear programming to help predict the activity levels required to ensure a profit or a target return on capital is achieved. This can help inform production quotas and scheduling and will help ensure optimal resource utilization.

Non-financial Considerations:
Accountants are often criticized for concentrating too much on the financial outcome of activities – profit focused. Management accountants are encouraged to look at other aspects that contribute to business success such as:

• Customer satisfaction
• Corporate governance and ethical responsibilities
• Good labor relations
• Market penetration/expansion
• Environmental protection
• Number of complaints
• Idle times
• Number of defects