The Need for Accounting Information Management

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Table of Contents

Introduction
Explanation of the Nature of Management Accounting Information
Examples of Significance of Management Accounting Information
Advantages and Disadvantages of Management Accounting Information
Opinion
Conclusion
References

Introduction

Cost accounting is vital for driving decision-making processes of a company. It is significant in the cases of both small and internationally influential organizations because it determines whether the decisions made by an organization’s senior management will be productive and benefit the company guaranteeing its further flawless development. Moreover, it is advantageous for resolving whether a company has critical problems and finding the ways to solve them.

In addition to it, firms apply cost accounting for evaluating their performance by analyzing the data with the aim of estimating whether a company is at losses or has profits, what is the size of its external debt if any, who are the debtors of an organization and what is the period of their debt. It means that the primary field of application is determining the current condition and future prospects. Finally, the justification of the need for cost accounting is the opportunity to assess the current financial state of a company and its prospects in the future (Shanker, n.d.).

Accounting has several dimensions such as financial reporting, budgeting, costing, planning a company’s activities, and estimating its performance. Effective cost accounting is a composition of numerous methods of analysis and ratios. However, what is the most significant for guaranteeing the flawlessness of accounting and its productivity is the access to information, and that this information is relevant and timely. It is the information that is an input variable of every process of accounting and it is the analysis of information that is the primary tool of management accounting and determining a company’s performance and perspectives – short-, mid-, and long-term.

This paper aims at finding out the role of management accounting information in cost accounting. It will focus on the explanation of the nature of management accounting information determining the peculiarities of its analysis and possible modifications with regard to the industry of involvement and operation and company’s specialization. Moreover, the paper will provide examples of its use and significance, for the purpose of estimating its role and significance. In addition to it, the paper will speculate on advantages and disadvantages of using management accounting information in cost accounting with the special accent on relevance and timeliness of the analyzed information. Finally, it will present some recommendations on improving the experience of the application of this tool of cost accounting and making it more effective when applying to decision-making mechanisms as well as some ways to refining the quality of the information.

Explanation of the Nature of Management Accounting Information

Cost accounting dates back to the beginnings of civilization and state. The justification for the need of cost accounting is the opportunity to estimate and forecast the operation and welfare of not only organizations but also states. Initially, it was the state that implemented accounting as a tool for assessing the performance of its activities through managing and controlling financial systems. Later, with the rise of organizations, they borrowed this tool from the state because saw it as the foundation of successful operation and prosperous future. However, both the state and organization acknowledged the significance of relevant and timely information for the flawlessness and effectiveness of the whole accounting process. This paper will focus on the role management accounting information plays in organizations’ cost accounting processes.

To begin with, it is vital to determine the nature of management accounting information and to define whether there are any peculiarities of analyzing it with regard to the industry of operation and specialization. It is significant to understand that accounting as well as information analysis are both dynamic disciplines interacting with the changes in the environment of a company’s operation. Information is the basis of the accounting process. Generally speaking, it is all data covering the activities of a company.

In some cases, it also involves the developments in the global economic environment because they have a robust influence on company’s performance. So, the broadest types of information are internal regarding the company itself and external concerning competitors and global economy (Drury, 2008). There are also some other types of information such as accounting that covers primarily financial data, quantitative, i.e. statistical, and qualitative that characterizes, for example, skills and knowledge of organization’s employees (Clarke, 2002).

Cost accounting requires gathering and analyzing information regarding different dimensions of a company’s activities. That said, managers take into consideration such data as company’s cost information and cost structure, efficiency of labor and labor expenditure, i.e. the number of involved employees and their performance, efficiency of equipment and machines and the rate of their amortization, the level of consumption of raw materials with a special focus on the amount of wastes and stores-keeping, return on capital employed, reserve of profits and their appropriation, liquidity of resources and the quantity of liquid resources, company’s debtor and creditors, inventory and strategies of its exploitation in the process of manufacturing and operation, and, finally, methods of production and technical aspect of functioning such as methods of production and organization of workflow (Lal & Srivastava, 2009). This information is common for organizations involved in all industries, and it is the necessary minimum for the detailed and effective accounting process.

There are several requirements to information that is used as an input to accounting process. The primary requirement is that field workers control the collection of this information throughout an organization’s operation and once it is gathered, they are responsible for compiling it into a comprehensive report that is later used by accounting managers for estimating a company’s performance and drawing forecast of future activities (Lal & Srivastava, 2009). It is as well fair in the case of presenting information, i.e. a company should develop the standards for organizing the process of collecting and designing reports. What is also significant is that all employees have the same understanding of major terms and concepts that are unique for all departments of a company.

It becomes especially acute in the case of multinational corporations involving people from all over the globe. Moreover, the information should be relevant and timely and comply with the activities of a company. It means that it should represent the actual performance not distorting reality (Mitra, 2009). Finally, there should be no limitations to obtaining information, i.e. everyone involved in an organization’s business activities has equal right to the accessibility of primary information, but it should be confidential and not revealed to third parties without the consent of senior management (Romney, Steinbart, Mula, McNamara & Tonkin, 2013).

Because information is a dynamic variable, it is significant to keep in mind factors that can influence it. Among such primary developments, one can mention changes in laws and regulation, the shift towards customer-centrism, changing the length of product life cycle, the emergence of new companies or industries, the growth of complexity of business transactions and necessity to acknowledge the significance of intellectual capital, scientific breakthroughs or natural or industrial disasters that can affect the face of global business, increasing risks and uncertainty in the global economic environment, the change in competitive advantages, etc. (Bhimani, Horngren, Datar & Foster, 2008).

Examples of Significance of Management Accounting Information

This section of the paper aims at providing examples of the need for management accounting information in cost accounting. For the better apprehension, the idea is to divide it into subsections with regard to a different dimension of accounting. The proposed subsections are as following: forecasting, budgeting, controlling, motivating, communicating, and decision-making.

Forecasting

First and foremost, information is a valuable tool for forecasting company’s activities and performance. This statement rests on analyzing historical data for drawing the prospects of an organization from short- to long-term. In this case, managers study financial and operational data of their companies and plan their further development. Here, it is vital to understand that the field of application and analysis is broad because it covers not only company’s performance but also the developments in the global economy. The primary way of forecasting is using all information available for predicting the future outcomes of operation by designing sophisticated models and making various calculations, such as trend analysis, i.e. estimating historical and current statistics and extrapolating them on future (Okoli, 2012).

Budgeting

There is a link between budgeting and forecasting because budgeting lies within forecasting. In fact, when senior management decides on the company’s goals for the future development, it takes into consideration available financial resources. The focus in this case is analyzing all available data including the contribution of departments for the purpose of finding out the need for resources. Moreover, the connection between budgeting and information lies within studying the past budgets of an organization, the channels of expenditures, and looking for the ways to redesign budgeting with the aim of minimizing costs and maximizing profits (Okoli, 2012).

Controlling

Another example proving the need for management accounting information is the field of control. Broadly speaking, it is comparing the planned and achieved results of business activities. In this case, managers are free to choose the model of controlling from that on a quarterly basis to the one on yearly. The foundation of this activity is estimating organization’s performance by studying its reports for particular periods of operation that include all necessary information. The primary objective is to find out whether a company has achieved what was planned and detecting the problems that led to failure if a company has not (Bufan, 2013).

Motivating

Management accounting information is one of the ways to motivate employees as well as company’s senior management. Think, for example, of founding a new company or the times of recession. In these cases, employees need sources of motivation, and information is a perfect one. One should note that it can be both internal and external information. When people see that their company has done well in the times of economic turmoil, it inspires them to become even better. The same is true about studying the competitors’ experience and success. However, it is vital to remember that the way of presenting information is crucial because it determines whether it would motivate the employees. That said, it is better to provide comparisons of the past and present performance (Antić, 2004).

Communicating

Effective communication is one of the most vital factors of reaching company’s strategic objectives and high levels of performance. When speaking of communication, one can view management accounting information as a link between departments of a company, senior management and company’s employees, and a company with its shareholders and investors. What is special in this case if that information should be relevant and timely so that all sides mentioned above know whether a company has significant problems and what are its prospects. It is especially vital in communication with investors because they are interested in performance. The primary channel of using information for communication is issuing reports for internal as well as external use (Bufan, 2013).

Decision-Making

Decision-making is one of the most significant objectives of management accounting. However, it is impossible without information. The value of information in the decision-making process is that it helps in organizing it and making it effective. It can be viewed from two perspectives. First and foremost, information is the input of the decision-making process. It means that managers analyze internal information of their companies. i.e. data covering company’s performance. Moreover, there is an external dimension of the information that refers not only to studying the development in the global economic environment but also improving skills and as a source of new knowledge. In general, the benefit of information in decision-making is in detecting company’s problems both organizational and operational and making decisions to handle them. The only limitation is that information should be relevant, i.e. such that is timely and does not distort reality (Boyd & Cox III, 2002).

Advantages and Disadvantages of Management Accounting Information

The issue of determining advantages and disadvantages of management accounting information is complex. The justification for saying so is that there are numerous ways for assessing the pros and cons, and what on one hand is a benefit at the same time is a drawback and makes the process complicated. The proposal for organizing this subsection that aims and dissecting advantages and disadvantages is to view them from a perspective of requirements to information and the scope of collecting it when conducting accounting.

First and foremost, it is vital to highlight that management accounting has its roots at the origins of human civilization. However, as the times have passed, the process became more intricate because of the emergence of the new forms of business activities, new industries, and the invention of the newest technologies that can be used for running the process. Altogether, these changes become the source of both advantages and disadvantages of management accounting information.

To begin with, recollect the requirements to the information that managers can use as the input for accounting models and calculations. It has to be relevant, timely, and accurate (Mitra, 2009). This specification is a pro and con at the same time. As a benefit, it means that managers have the newest information always available. However, at the same time, it requires vast effort to collect and store this data not to mention the level of skills and knowledge required from managers that analyze this information.

First of all, it starts with training people to gather and organize it in a proper way. In the case of multinational corporations, this process is troublesome because they operate all over the globe. Second, there is the need for building up the system for sharing the information among employees and department that, again, becomes a burden for big firms. Finally, it is extremely complicated to organize all information and prepare it on time if a company does not have departments that process information and well-developed technological basis. That said, gathering and organizing management accounting information is time- and cost-consuming.

In addition to it, there is always a challenge of guaranteeing that information, especially that issued in the form of reports is relevant. In this case, the problem under investigation is the external audit because people who do not know how a company operates from the inside cannot make sure that the data they analyze is correct and does not distort reality. It is relatively easy to avoid the issue of information relevance in the case of internal accounting. However, companies should still have departments that control and guarantee the quality of information that managers use for assessing performance and forecasting the future development.

Moreover, Lal & Srivastava (2009) determined that there is a great volume of information that managers use in the accounting process. It again leads to the challenge of collecting and analyzing it. However, having access to such diverse information is a significant advantage because a company can easily estimate its performance and detect whether it experiences problems. Furthermore, when speaking of the access to information, it is vital to guarantee that corporate information is always in safety, i.e. there is the need for designing and implementing security systems that would be effective in avoiding and protecting against hack attacks. This challenge became especially acute and frequent in the era of the Internet and storing information using cloud services (Laise, 2007).

In addition to it, there is the danger of unfair competition and attempts to obtain secret corporate information for the sake of maximizing the profits through fostering one’s losses. It means that it is impossible to isolate company’s information and preserve it for the internal use only. The justification for this statement is the increased popularity of the Internet and the desire of the global community to have the information regarding a firm’s performance. Moreover, there are legal acts obliging companies to issue reports informing of the outcomes of their business activities. So, what is at stake here is a company’s success in the future because competitors can use the information they have to destroy peers.

Finally, when speaking of the vast volumes of information necessary for accounting, there is a challenge of duplication and unintentional distortion of facts because the same data can be either included twice but under different indicators of performance or as a part of a larger article of expenditures (Walker, 2005). For example, it is possible to mention the wages of employees as operational costs and specifically as wages or mention spending on raw materials twice as operational costs and expenditures on refining raw material basis.

Opinion

First of all, one cannot ignore the fact that we live in the era when information is everywhere around us, and it is impossible to avoid it whether we want to know it or not. The desire to have the newest information easily accessible has changed the face of global business. For this reason, companies should gather and issue the information regarding their performance in the form of reports. Moreover, they should conduct more intricate accounting to determine their current performance and draw the future prospects.

I believe that information is the most valuable resource in the modern world. However, we face the challenge of oversaturation with information. It is true for both social and business areas of human activities. Every time we try to find the necessary information, it requires either some specific skills in searching it or a lot of time whether it is some piece of news or relevant data in company’s reports. That is why only that information that complies with the requirement of quality, i.e. is accurate, timely, relevant, and complete (Rapina, 2014) is of high value. According to another approach, information is of high quality only when it is unique and concise (Nusa, 2015).

My opinion on the issue of management accounting information is that it is the point that underwent numerous changes. However, I believe that the process is not over yet and that this field of company’s business activities will witness even more drastic changes. At this point, I have some recommendations for improving the quality of information and the ways of using it in accounting processes. First of all, I believe that every company should put the most efforts in designing and establishing a strong corporate culture.

In the case if a company has the strong corporate culture, employees share the same values and day-to-day rituals to achieve company’s strategic objectives and make it prosperous and successful in the future (Wisna, 2015). From my standpoint, senior management can modify such specification of the strong corporate culture so that it involves the requirements for the quality of information. I believe that the way to achieve it is to design and adopt some kind of infiltration mechanism that would focus on collecting and publishing only the information that follows all the requirements mentioned above. This step is as well beneficial for avoiding duplications of information and unintentional distortion of facts.

Furthermore, recollect all the data that companies use as the input for determining their current performance. The list looks detailed, but, in fact, it is a source of distortions and complications. So, my recommendation is to make it even more detailed but with the aim of avoiding including the same data twice. To bring this recommendation to life, it is necessary to develop the unique system of terms and concepts within an organization or event the global economic environment. It will as well benefit the quality of information making it understandable.

Another recommendation is to assure that companies operate under strictly defined hierarchy with specific functions and responsibilities of every employee and member of a team. I believe that if everyone is responsible for one little task and, what is most important, knows that there are the mechanisms of controlling he or her activities and performance, it will entail improvement of the quality of information. The same is true about accounting managers. If they know that they have some particular functions and responsibilities and are sure that the information they use as the input is of high quality, the use of management accounting information in accounting processes become more efficient and the quality of these processes as well improves.

Finally, it is vital to guarantee a high level of knowledge and skills of everyone involved in the process of accounting with paying specific attention to training every time the global environment witnesses spectacular inventions or drastic changes. The motivation for this recommendation is that only people with high level of knowledge and aware of the latest news as well as having skills of working with the newest technologies can produce the information of high quality and effectively use it as an input in management accounting models and calculations.

Conclusion

This paper focused on finding answers to several questions such as determine the nature of management accounting information, finding out whether there are any specificities of collecting and analyzing information with regard to company’s specialization, dissecting its advantages and disadvantages. The paper is a compilation of both theoretical information on the subject under investigation and personal thoughts on the patterns to improve the quality of information and the ways to use it in management accounting.

It was found that the accounting information is all the data that managers use for estimating company’s current performance and designing ways for its future development. Moreover, the paper provided the classification of the types of information collected and analyzed by the company such as internal and external, qualitative, quantitative, and accounting. In addition to it, the paper specified that there are numerous requirements to information, but the most significant are that it should be relevant, accurate, and timely.

In addition to it, the paper highlighted the need for collecting and analyzing management accounting information in such areas of activities as forecasting, budgeting, controlling, motivating, communicating, and decision-making. The author as well determined the primary advantages and disadvantages of management accounting information paying attention to such benefits as the possibility of providing in-depth analysis of company’s performance due to accuracy and timeliness of information and cost- and time-consumption, safety issues, and the risk of duplication and unintentional distortion of reality as the drawbacks.

Finally, the paper provided author’s opinion on the issue under investigation and the recommendations on improving the experience of the application of this tool of cost accounting and making it more effective when applying to decision-making mechanisms as well as some ways to refining the quality of the information. I believe that information is the most valuable resource in the modern world. However, there is the problem of oversaturation with information, and when it comes to finding relevant information, it is always a challenge.

For the information to be of high quality, it should correspond with such requirement as being accurate, concise, unique, relevant, timely, and complete. For this reason, I think that companies should pay specific attention to guaranteeing that their information is accurate and relevant. It means that they should design and adopt some kind of infiltrating procedures that would assure that the information they publish is of high quality, understandable, and true. Moreover, they should focus on developing unified and clear systems of terms and concepts to avoid duplication and unintentional distortion of facts. In the case of companies, the solution is in designing and establishing strong corporate culture highlighting the significance of high-quality accounting information.

References

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Rapina. (2014). Factors influencing the quality of accounting information system and its implications on the quality of accounting information. Research Journal of Finance and Accounting, 5(2), 148-154.

Romney, M. B., Steinbart, P. J., Mula, J. M., McNamara, R. & Tonkin, T. (2013). Accounting information systems (12th ed.). Upper Saddle River, NJ: Prentice Hall.

Shanker, S. (n.d.). How can managers use accounting information?. Web.

Walker, J. (2005). Management accounting fundamentals. Burlington, MA: CIMA Publishing.

Wisna, N. (2015). Organizational culture and its impacts on the quality of accounting information systems. Journal of Theoretical and Applied Information Technology, 82(2), 266-272.

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