Differences Between Management Accounting and Financial Accounting
Activity-based management or ABM has brought significant as well as radical changes in the cost management systems. ABM tries to support the excellence of business by providing relevant information that helps in facilitating long-term strategic decisions regarding aspects of product mix as well as sourcing (Berg & Madsen 2020). ABM at the same time also tries to support continuous improvement within business organizations by allowing management to gain new insights and focusing on the demand for activities that helps the management to create behavioural incentives that assist in improving one or more aspects of the business (Berg & Madsen 2020). Hence the primary aim of the paper is to discuss and distinguish between management accounting and financial accounting. The paper will also discuss the role of accountant management in business organizations and also highlight the benefits and limitations of ABM.
It is essential to note that management and financial accounting are different from one another. Financial accounting is considered to be an accounting system that focuses on preparing a financial statement of an organization that helps in providing financial information to concerned parties (Garbowski et al., 2019). Management accounting is considered to be a system of accounting that provides relevant information to managers that helps in making policies, strategies as well as plans that helps businesses to run effectively (Rikhardsson & Yigitbasioglu 2018).
Financial accounting helps business organizations to effectively prepare the financial statements of business organization like balance sheet, statement of cash flow as well as income statement. It helps in summarizing the outcomes of the operations of a business for the concerned period of accounting (Garbowski et al., 2019). On the other hand, management accounting analyses both quantitative as well as qualitative information, which might go on to include tables, charts, graphs for effective presentation (Rikhardsson & Yigitbasioglu 2018).
Financial accounting makes use of monetary records of past activities, whereas management accounting is considered to be future-oriented since it helps in offering both present and future information in form of budgets and forecasts that are presented with details that help in forming the foundations of decision-making of the management (Jansen, 2018).
Financial accounting reports events that are described as monetary, where non-monetary aspects which tend to have both positive as well as negative impacts on the company and, might also lead to its failure or success are not considered (Schroeder et al., 2019). Management accounting, on the contrary, reports both financial as well as non-financial information and reports that lead to better decision-making. Some of the aspects that are reported and considered during management accounting are the number of employees, labour hours, machine hours as well as production units which are essential during decision-making processes (Jansen, 2018).
Financial accounting tends to keep track of the financial performance of the entire firm and not only an individual department and tends to be public in nature (Schroeder et al., 2019). On the contrary, management accounting reports tend to be private and confidential since it defines the performance of single entities and departments.
Role of Management Accountants in Business Organizations
Management accountants play a significant role in business organizations. Some of their primary duties include recording as well as crunching numbers, risk management, and deciding budget, which helps business companies to select and manage investments (Dahal, 2019). They also play an essential role in strategizing, planning, and participating in decision-making.
Management accountant also plays a significant role in raising funds and deciding on how to maintain a proper blend between debt as well as equity. Their role is therefore to maintain an optimum capital structure and decide possibilities of trading on equity (Dahal, 2019).
Apart from this, management accountants also tend to add value within their organizations by helping the top management to effectively direct and also control operational activities by providing information about operation activities (Lepistö et al., 2018). They also play a significant role in motivating employees to reach the objectives as well as goals of the organization. Often goals of the organization and employees do not align with one another, in these situations management accountants motivate managers and employees to put their efforts towards accomplishing organizational goals (Lepistö et al., 2018).
They also play a vital role in fraud prevention and internal control systems in their organizations. Therefore, it should be noted that management accountants today have more roles to play than before due to decentralization and delegation of duties (Hadid & Al-Sayed 2021).
Activity-based management is considered to be a process of analysing as well as evaluating company business activities with the help of activity-based costing along with value-chain analysis (MAKING, 2020). Operational ABM also includes examining the cost of every activity and thereby tend to increase the operational efficiency by increasing the value-generating activities which thereby helps in eliminating costs that are unnecessary and activities the does not generate value (MAKING, 2020).
The statement that “activity-based management treats all products and all customers the same” is to some extent correct. For instance, ABM is used by business organizations to analyse the profitability of a new product that a company wants to introduce in the market by looking at both marketing as well as the cost of production (Zamrud & Abu 2020). Apart from this, ABM also analyses the products’ sales, warranty, claims along with the cost of repair time which might be required for products that are either returned or exchanged (Zamrud & Abu 2020).
Similarly, if a company tends to be reliant on research as well as development department, ABM can help in analysing the costs which are spent in operating specific departments, the cost involved in the testing of new products, and whether the selected products will bring profit to the organization or not (Jiménez et al., 2020). Hence, it can be said that ABM makes use of the same approach to analyse all the products that are intended to be launched in the market which makes the statement true and thereby is considered to be one of the weaknesses of the approach (Jiménez et al., 2020).
Thus, it should be noted that when products are viewed in a similar manner, then customers viewing the products are also viewed in the manner. However, to make a business sustainable and successful in the external market, it is essential to view every product and its target customers differently since every product plays a different role, has different features, and might offer different benefits for different customers (Ali & Muhammad 2018). Therefore, when different products and their customers will be treated differently then it will lead to better satisfaction and contentment of customers.
Activity-Based Management (ABM)
However, the role of ABM is changing, and it no longer looks at customers and products in the same way. Nowadays, ABM makes use of strategies where it practices activity-based costing which helps in analysing the profitability of an activity that now helps in unrolling new products and acquiring new customers (Ali & Muhammad 2018). ABM now, helps business organizations to make a strategic picture pertaining to which products as well as customers need to be developed that will help in boosting sales and profitability (Méndez et al., 2022).
Nowadays, strategic ABM is effectively used in strategic decision-making, especially during advertising pertaining to channel, targeting specific customers, or launching a product,. Thus, the issue of activity-based management treating all products and all customers the same are now being mitigated and evolved with time (Méndez et al., 2022).
It should be noted that activity-based management offers several advantages to business organizations as it helps in improving economic efficiency and business operations and at the same time, also helps businesses to make strategic decision-making pertaining to products, customers, and risks (Hoendervanger et al., 2018).
Similarly, ABM, by permitting managers to effectively enhance the activities that generate value and also help in increasing the potential to enhance customer experiences which thereby helps in increasing the profitability of the organization for the future (Hoendervanger et al., 2018). In addition to this, the costing information that is generated from activity-based costing can further be used in forecasting as well as determining essential financial information that will help business organizations to decide for coming fiscal years that will help the company to come up with an accurate budget (Akhmetshin et al., 2018).
Though ABM has some significant and long-term advantages and benefits, it cannot be denied that it also has its limitations. For instance, one of the common risk that is associated with the system of ABM is that it completely overlooks the intrinsic value pertaining to different activities and focuses only on the quantifiable as well as financial aspects of every activity (Akhmetshin et al., 2018).
For instance, if a manager arranges meeting with primary suppliers of the company to maintain healthy relationships, then it is bound to add some extra expenses for the company due to transportation costs (Condino et al., 2020). Thus, ABM might look at the activity as something which does not generate value and add to high costs by completely negating the strong relationship that will be built between the company and the supplier.
Another limitation of ABM is that its success depends on the implementation of activity-based costing (Condino et al., 2020).
Conclusion
To conclude it should be noted that there is a huge difference between managerial and financial accounting systems and that management accountant play a crucial role in carrying out both the above functions for the development and growth of the organization. Though initially, ABM’s role and function were quite limited, however, with time the system has evolved with different approaches being used for both customers and products. Limitations and benefits of ABM have also been effectively highlighted.
References
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