Why Is Managerial Accounting Important To An

MBA Graduate Essay, Research Paper

An MBA Graduate Defined

An MBA is a degree awarded to individuals who complete required coursework in the field of Management Science. The MBA title stands for Master of Business Administration and implies that the person holding the degree is qualified to hold a position in senior management within a firm. An MBA manager is similar to the captain of a ship. He is responsible for making decisions and plans about the firm and for controlling the firm?s employees. The goal of an MBA manager is to maximise the firm?s value through the use of the firm?s tangible and intangible assets. He maximises this value by obtaining the highest Profits possible. In the following discussion, I will examine how senior management in general and MBA graduates in particular can use the field of Managerial Accounting to make decisions/plan and control employees in order to maximise Profits. For clarity throughout this essay, senior managers and MBA graduates should be considered as one in the same.

Managerial Accounting Defined

Managerial Accounting is the process of using information systems to provide data to senior managers who then use this data for decision-making/planning and monitoring employee performance in order to maximise profits. The data that senior managers use is supplied by the Financial Accounting function. This information is used to improve the performance of the Marketing function, which generally provides the Revenue of the firm and the Operations function, which generally incurs most operating costs. Marketing and Operations are thus the functional areas which an MBA graduate is generally concerned.

Managerial Accounting is vital to a business?s success because it quantifies a firm?s performance. By quantifying certain performance variables, senior management can carry out its two most important functions: 1) Decision-Making/Planning and 2) Controlling Employee Behaviour.

The Theory of the Firm tells us that a business exists to maximise the value of equity investors have supplied. Profits result from decisions about what items to produce and sell (Marketing) and planning what inputs are necessary for this production and distribution activity (Operations). Value maximisation results from maximising Revenue and minimising Total Costs. In business, resources are always limited or finite. Therefore, they must be employed in the most economical and productive capacity in order to maximise profits. MBA graduates are often hired to obtain the highest profits possible; therefore, value maximisation is achieved or forgone as a result of their decision-making and leadership.

The field of Managerial Accounting is concerned with helping senior managers use data provided by the Financial Accounting function about the Marketing department and Operations department to achieve the highest profit levels attainable thus increasing the value of the firm as much as possible. Managerial Accounting is therefore cross-functional in the purest sense and should be employed in all areas of a business.

The Financial Accounting Role in Managerial Accounting

To make informed decisions, MBA managers must use a scientific approach rather than simply following their intuition. This scientific approach often uses historical data supplied by accountants in the Financial Accounting department to plan future activities and monitor employee performance.

This historical data includes such items as Balance Sheets, Income Statements, Statements of Cash Flows and Statements of Retained Earnings. Data from these sources can be further extrapolated into measures such as Return on Assets (ROA) and Return on Investment (ROI). The Financial Accounting documents provide senior managers with a tangible starting point for decision-making/planning and analysing employee performance. Through this perspective, we can see that Financial Accounting is backward-looking whereas Managerial Accounting is forward-looking.

It is worth noting that in establishing a Financial Accounting system, senior managers must often make a trade off between information used for decision-making/planning and information used form employee control. Different systems provide better information in one area or the other so executive management must make a choice about which function is more important.

To illustrate how Financial Accounting systems could help MBA graduates solve Marketing and Operations problems, let?s consider a maker of bottled drinks. Suppose a bottled drink firm makes 5 different drinks; 3 sugary sodas, 1 sports drink and 1 premium bottled water. Each drink is manufactured at its own separate facility but the distribution and sales force is the same for all 5 drinks. Financial Accounting documents are broken down on the basis of each individual drink. These documents which detail Revenue and Cost figures are the starting point for Managerial Accounting. It is this information which senior managers can use to make decisions and plans for the Marketing and Operations divisions.

Managerial Accounting takes these Financial Accounting numbers one step further and reacts by making decisions about resource utilisation, production planning and monitoring employees. In the bottled drinks case for example, good senior managers might make a decision to devote more resources to increased production for the sports drink that may be fuelling profit growth. Or similarly, Financial Accounting data could show an unusual spike in labour costs, which might alert senior management to a problem with employee control.

The main point to remember is that Financial Accounting provides the numbers that Managerial Accounting uses for planning/decision-making and employee control.

The Role of Managerial Accounting in Marketing

Profits are the residual income from Revenue earned producing and selling less the Costs of producing and selling. Marketing is generally responsible for the Revenue side of the equation and is therefore important in Managerial Accounting. The question for MBA managers is one of: what to products to produce, what price to charge for the products, how to promote the products and how to distribute the products in order to achieve the greatest profit. Maximizing Revenue while minimizing costs does this.

Managerial Accounting uses Financial Accounting data to make Marketing decisions and plans about future output. Financial Accounting for example, assembles data on sales into Total Revenue figures to determine where the greatest sources of Revenue have been. Managerial Accounting is also concerned with controlling the behavior of Marketing employees to maximize profits.

To illustrate how Financial Accounting data can be used for Managerial Accounting problems concerning planning/decision-making in Marketing, let?s once again consider the bottled drinks case. In order to decide which area to devote more resources to, an MBA graduate could examine the past three yearly Income Statements to see which drink provided the most Revenue and/or the highest profit margin. Similarly, he could look at the Return on Assets of a particular drink and compare it to the others to see which was providing the highest return on assets used in their production and distribution. These are all important measures because they give senior managers insight into how each item is affecting the bottom line?profit.

Suppose for example the sports drink has shown higher Total Revenue growth figures than the other 4 drinks for the past 3 years and the Net Profit Margin has grown at an even faster pace. This growth could be attributable to many causes such as an increase in the playing of sports or the changing preferences of consumers away from sugar-filled sodas. Although the possible cause is important, what is vital to the MBA manager is the Financial Accounting numbers that reveal the trend. Here, senior management may decide to increase the promotional spending on the sports drink to spur further growth.

To further illustrate, suppose senior management needs to decide whether to continue making one of the 3 sugary soft drinks it currently offers. Financial Accounting data has shown that the orange flavored drink offered has produced declining Revenues. Management must decide if the trend will continue or could be reversed. If the trend won?t reverse, the drink will be discontinued; however, if there are good prospects of a recovery in sales, the product will be revamped and reintroduced. Here we can see that the Marketing function has provided data on Revenue to the Financial Accounting function. Managerial Accounting is concerned with helping the MBA manager look at this financial information in the context of the Marketing function and make a decision on whether to use resources to produce and sell a particular item.

The second goal of Managerial Accounting, controlling employee behavior, can also be achieved within the Marketing function. As was stated earlier, the Marketing function generally provides Revenue to the firm. In order to maximize Revenue, employee efforts have to be guided by MBA managers towards the best interests of the firm. Suppose a field salesman for the bottled drinks company is very keen on selling orange soda; the reasons for this are unclear, but this particular individual has directed his efforts towards orange soda at the expense of the other 4 offerings. We are able to glean this information from Financial Accounting figures, which show him selling more orange soda than any other employee, but his overall sales numbers are near the bottom of the list. Orange soda, however, is not a very profitable item and thus his efforts in this area are not adding much to the firm?s profits. Here, an MBA manager could step in and attempt to redirect this man?s efforts toward the other more profitable products. This is a classic example of a senior manager controlling employee behavior to maximize profits.

To summarize, MBA managers can use Financial Accounting data for planning/decision-making and employee control within the Marketing function. This is the essence of Managerial Accounting and shows why it is an important field for the MBA graduate.

The Role of Managerial Accounting in Operations

The second component in the profit equation is Total Costs. A firm?s Operations division is usually responsible for most of a firm?s costs because of inputs such as materials and labor used in the production process. These Costs are defined as being fixed or variable according to the level of output. An MBA Operations manager should be concerned with minimizing the costs of these items in both categories but especially Variable Costs.

As was stated earlier, an MBA manager must not only plan and make decisions, he must also control employee behavior. Employees and lower level managers will often act in their own self-interest rather than in the interest of the firm. Managers and employees have personal biases and preferences that sometimes result in less than maximum Revenue and more than minimum Costs. Financial Accounting systems collect data that can be use to evaluate employee performance and alert senior MBA management to such problems.

To illustrate an Operations function employee control problem an MBA graduate might face, let?s once again consider the bottled drink example. Suppose the Income Statement for the premium bottled water division has shown an increase in Variable Costs for the adhesive labels used on the bottles. Since Profits are a simple function of Revenue and Costs, the increase in the price of labels has resulted in a decrease in Net Income, which is antithesis to the concept of value maximization. Senior management has decided to examine why the per unit cost of the labels has jumped so much. When they go to the factory where the bottled water is produced, they discover that the plant manager is a golfing buddy of the label supplier and has forged a deal to pay a higher price for labels than is necessary as a favor to his friend.

Here we can see that the plant manager is working in his self-interest to preserve and enhance his friendship. He is not working in the interest of the firm by paying a higher price than is necessary. As a result of the discovery, senior management replaces the plant manager with someone more forthright and hence label costs are reduced. Here, Financial Accounting information (the cost of labels on the Income Statement) from the Operations function has provided data to use in Managerial Accounting (controlling employee behavior).

Now let?s consider a planning/decision-making problem within the Operations function that can be addressed by MBA graduates through Managerial Accounting. As was stated earlier, much of a firm?s Total Costs are attributable to the Operations function. These costs are revealed in Financial Accounting documents outlining costs such as the Income Statement. Suppose senior management has noticed a decrease in profits for the lemon-lime soda the firm produces. By examining the Financial Accounting data they have found an unexpected increase in the cost of lime flavoring that is used because a supplier of the product has gone out of business. Here, an MBA manager must make a decision about alternative sources available for the flavoring input and as always look to buy it at a lower price. Once again, Financial Accounting data (cost information from the Income Statement) has been used by senior managers to solve a planning/decision-making problem within the Operations function.

Summary

In conclusion, Managerial Accounting is process MBA graduate managers can use to gain insight into planning/decision-making and employee control. The process involves examining Financial Accounting data and then applying that information to maximize Profits through the Marketing and Operations functions. Specifically, maximizing Revenue in Marketing and minimizing Costs Operationally. Managerial Accounting is scientific in its approach rather than intuitive and should be used by MBA graduates interested in maximizing the value of their firm.