The Significance of Management Accounting to Manufacturing Firms

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Management accounting is an internal business function that reports financial data for decision-making. It does not follow any external regulations; therefore, companies can create management accounting reports specific to their operations and upcoming decisions. Manufacturing firms are often heavy users of management accounting. The principles found in this function allow for the accurate costing of produced goods and financial management.

Cost Allocation

Allocating production costs is a central activity of management accounting. Manufacturers and producers must be able to determine how much of each material — raw materials, direct labor and manufacturing overhead — a product consumes during production. The cost for each material requires accurate allocation to ensure companies earn maximum profits. Managerial accountants track these costs based on specific projects, production processes or manufacturing activities to calculate and allocate costs.

Planning

Planning is one of three significant factors of management accounting. Manufacturers rarely engage in a production process without making plans. Owners and manager will plan by looking ahead and setting production objectives. Factors that can affect planning are either internal or external. Internal factors include level of employee skills, production output and the ability to refine operations. External factors may be government regulation, entrance of competitors or changes to consumer demand and income.

Directing

Directing takes a company’s plans and puts them into action. Owner and managers will begin pushing their plan into the company’s operational departments. Coordinating all activities is a must during this stage. Coordination can involve hiring new workers, acquiring more materials, preparing equipment for new products and creating the supply chain to move goods into retail outlets. The directing phase is typically an ongoing process as the manufacturing firm will carefully implement plans into successful operations.

Controlling

Controlling involves keeping the company’s manufacturing process on track. Allowing internal or external factors to interrupt operations can be costly for a manufacturer. Owners and managers will often engage themselves in this phase. The management team will often review operations to ensure they operate at maximum efficiency. Making small adjustments can help operations run smoother and produce a better quality good. Goals not met also require review to determine how to remove constraints and accomplish planned tasks.

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References

  • "Managerial Accounting: Tools for Business Decision Making"; Jerry Weygandt, et al.; 2010
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