Management Accounting and Decision Making

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1. How does management accounting differ from financial accounting?

Financial accounting involves reporting the summary results of a business or organization to people outside that organization. Financial accounting must provide those strangers with a financial report that summarizes the profitability of the business, and that lists the resources and obligations of the business. Without reliably communicating the financial situation of the business, a company cannot convince strangers to invest as a result of market expansion or use the capital for other resources. Financial Accounting involves two reports called the balance sheet and the income statement. Balance sheet is a list of organization assets and liabilities and income statement, which reports how much money the company is making. The external user uses this information to thinking of loaning money to the company or investing in the company; We need a report of how much money it is making. The balance sheet and the detailed of the income statement are summary reports that are provided by businesses to people outside the company so that those people outside can decide whether it worth invest ,loan or credit the company.

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We use internal information to focus on managerial accounting. Managerial accounting is a set of data as being the detailed, private information that is used internally to make daily decisions. Product costing is part of managerial accounting and break-even analysis are widely used to decide whether the company are in favour. Budgeting is also part of managerial accounting. A cash budget, for example, allows the company to see in advance, sometimes months in advance when a cash shortage will occur. If the company prepares a cash budget, that cash shortage problem can be addressed in advance. Performance evaluation is also part of managerial accounting.  The company need a system in place to gather the data to evaluate different employees, different products, and various processes in the companies. Internal decision making also involves assembling data to make long-term decisions which are called capital budgeting and is an important part of managerial accounting. Managerial accounting also consists in making particular decisions such as whether to accept a special order, to drop a product line, or to outsource production. There are all kinds of possibilities. Product cost, break-even analysis, budgets, performance evaluation measures, long-term capital budgeting, outsourcing decisions, these are the kind of internal decisions that are made using managerial accounting data. (Charles T.Horngreen GaryL, 2011)

The purpose of management and financial accounting (Professor PhD Elena HLACIUC, 2017)

2. Use an example to illustrate the notion of cognitive bias and its link to management accounting and decision.

Managerial accounting borrows heavily from economic principles of rationality. (Kahneman, 2011)

One of the great examples will be back at the classroom our lecturer discuss regarding the Sunk cost. Rational thought keens on ignoring the sunk costs, as such expenses occur without regard to the decision choice. (Arkes, 1985)linked the mental accounting bias to a predictably illogical bias to treat sunk costs as if they are relevant. A typical example is a thought that you must attend an event for which you bought a ticket ahead of time or even a flight ticket you have a plan ahead early. The rational response will be considered the ticket purchase as a sunk cost and go to the event only: if that is how time is best spent. The rational decision to go or not to go to a game shouldn't even to be considered in term of monetary value.

The other example will be how we evaluate opportunity based on the potential benefit by given up from choosing one alternative over another. In managerial accounting term, a dollar can be exchanged as a dollar in the condition of value however cognitive bias based on mental accounting suggest otherwise which mean a dollar with the right opportunity it may be worth more or less. As opportunity doesn't indicate all good and bad.The relativity bias occurs because people seldom make choices in absolute terms (Ariely, 2008)

Another example regarding the opportunity cost will be shown that people do not always use the incremental analysis method when comparing options. The opportunity to get something free tend to overshadow rational thought. One of the main strategies has been using over a decade is the freebie method, a replacement with a price change from $60 to $30 has a marginal profit of $30 whereas an alternative with a price change from $30 to a free good has a marginal gain of $30. The incremental analysis recommends the first option, but the enchanting attraction to get something free leads to the buyer a cognitive misunderstanding of taking the second option as it would be the best option available.

3. Identify and discuss three factors that have influenced changes in the management accounting profession in the last 30 years.

Globalisation has changed pretty much all the business sector of the manufacturing industry in all the country with an increase in competition and high-level manufacturing technology. According to (Kassim, M.Y Md-Mansur,, K. and Idris, S., 2003), globalisation begins in developing new technology and makes company open to greater competition. Globalisation required large companies to change to be on top of the market. Still, the influence on small and medium companies has made them not only to play among themselves with the larger international manufacturing organisation. Therefore, to sustain and keep on the competitive level, small- and medium-sized companies will need to find an alternative method to ensure that they can provide useful information for decision making and manage resources more efficiently. This definetly can be accomplished by using a new Management Accounting approach.

Operational involvement in term of technology, total quality management and just-in-time (Dean, J W (Jr), Snell, S.t A, 1996) reported that “for 30 years following World War II follow by Industrial Revolution the operational was neglect by upper management, and relegated to retract of day-to-day operations. Significant changes have happened in manufacturing. Just-in-time, total quality management and advanced manufacturing technology are the most well-known innovations in manufacturing models during the last 30 years . (Atkinson, Kaplan, 1999)contrast the new manufacturing model with offering mass production of standardised products that predominated throughout current economic trend. The changes may require management accounting systems to develop to not only support but to drive for excellence. With globalisation took place even more critical these days, many companies found that their traditional cost accounting measures were restraining the introduction of innovative processes and technologies. Measurement of profitability of each worker efficiency and machine utilisation helped the production of items in advance of when they are required. However, it contrasted with the goals of improved quality and the perspective of customers services of increased throughput and reductions in defects, waste and working capital. Measurement systems need to emerge to support efforts to increase not only productivity but the quality, move to JIT and computer-integrated production systems, and help the company gain competitive advantage.

The purpose of managerial accounting is to provide up-to-date data to support management made crucial economic decisions. We should encourage users to aim and endeavour for organisational development, failure to rely on suitable accounting information may give top management incompetent resource to manage an organisation in the result of a gradual decline in organisational performance.

4. Discuss the notion of corporate social responsibility and management accounting as a means of facilitating informed decision making.

CSR established for Company to voluntary integration of social and environmental concerns into business operations and their interaction with stakeholders (Commission, 2002) said that the definition of CSR consists of five extensions, which including the Vision, accountability, community relations, marketplace, and workplace. 

The Vision, for example, includes CSR conceptual development, codes and value within the organization. 

Accountability includes transparency in communication and financial reporting. 

Community relations include partnerships with different stakeholders, such as customers, suppliers, etc.  

Marketplace includes the relationship between CSR and core business processes such as sales, purchasing, etc. 

The workplace includes human rights and labour practices within the organization.

We understand that Corporate governance undeniably connected with social responsibility performance with good corporate governance; it commences to excellent social responsibility enforcement.

Many prior studies (Cochran, R. and Wood, R, 1984); (Griffin, J.J. and Mahon, 1997) (Cochran, R. and Wood, R, 1984) suggest specific connection between financial performance and corporate responsibility it significant indicate positive association exists between CSR and financial performance. Some CSR studies analyze the relation between CSR and other firm attributes. (Dhaliwal, D. , Radhakrishnan, S. , Tsang, A. and Yang, Y., 2012)find firms with preferred CSR execution will obtain significant favourable internal analyst coverage within the Company itself and achieve much lower errors. It also has less economical analyst forecast error. (Kassim, M.Y Md-Mansur,, K. and Idris, S., 2003) provide a statement to show a positive relation between CSR and earnings quality within the organization, suggesting that socially responsible firms usually have higher earnings quality. In summary, the above CSR studies indicate that engaging in CSR activities may bring a significant benefit in term of top management decision making either in acquire a new business model or decide on a day to day operation.

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Back in 1987 in New Zealand, there are several listed companies reported their undeniable substantial financial profit; it was back when the audit wasn't compulsory carried by certified audit personnel. However, after several years people from the private party realized these profits weren't generated as it was provided from the financial report due to the incident. Some of the listed New Zealand companies perished because they could not meet their debt as they become due and also unable to comply with the rules of ethics. One of the notable mentions will be South Canterbury Finance, although, global financial crisis accented some of these problems, but had not caused South Canterbury Finance's collapse. Back in 1987 October 20 stock market crash wasn't just affecting New Zealand. Still, it hit it harder than anywhere else in the world with such crashes may have only appeared to happen periodically throughout the world. Again, we all believe that as of social responsibility, amalgamate with accounting practices should prevent such collapses and also given the Company a piece of better information on managing any risk and opportunity. 


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