Accounting Relevance To Management

The importance of accounting relatively to decision making

The importance of accounting in society plays a major role in making decisions as the

information provided from accounting department allows managers to conduct a higher quality

in making decisions. Accounting information helps managers to understand company’s

positioning at one point in time. Especially with the current financial crisis as managers needs to

have an extensive information to be able to plan and develop strategies that can adapt the

economic situation which we live in for its survival. Accountants have the ability to influence

management decision with their information provided to the organization by using qualitative

and quantitive techniques. Accounting is beyond scorekeeping and financial reports as the

information provided has to have a context of quality by evaluating and analyzing organization

data and performance. Accountant role after implementing the scorekeeping function is also to

embrace the opportunities and problems that senior managers need to pay attention, and clarify

the best decision available that helps the organization to reach their primary goal.

Historically, business owners were mostly interested in measuring the price of outputs relatively

to the cost of inputs. However, in recent years, accounting has been a controversy for academic

who are seeking to develop an efficient management system. The controversy was on whether

accounting management is relevant to the decision-making, and is accounting management

practices realistic enough to be reliable? Especially in time with new innovations and technology.

Gary M. Entwistle and Fred phillips (2003, PP 81) argue that one of the flaws facing

accounting is the framework of collecting information which is free from error and bias, got

accounting into be less reliable as accounting has not yet been able to measure intangible assets.

Such as brands, patents, and investment in human capital are extremely difficult to evaluate

because measuring these unphysical assets can be bias. Apple, a technological manufacturing

company ranked as the most valuable brand in the world, is valued roughly $241.2B in 2019

( Forbes, 2020). Apple’s brand value is growing dramatically because of the consistency of their

development and the uniqueness of their product. As a result, Apple has gained investors and

costumers trust and loyalty that considered to be an intangible asset. In addition, Apple intend to

invest over $16 billion on research and development in 2019( CNBC, 2019). As this investment

considered to be an expense to the company in accounting perspective. However, some critics

believe that R&D is a future economic benefit that should be included to the balance sheet as I

quote from Robert S. Kaplan and Johnson (1987, PP 22) explains that “The financial system

treats many cash outlays as expense of the period in which they are made even though these

outlays will benefit future period.” These critics appeared because the quick dramatic changes in

behavior from the old traditional manufacturing to the new modern manufacturing economy

resulted a gap between real world valuation and accounting quantitive practice which has raised

the debate between whether accounting is practical or not.

Furthermore, Critics refer to accounting management information as basic, broad, and takes time

until managers can be able to act based on the information. Kaplan and Johnson (1987, p. 22)

states that “management accounting is produced too late, too aggregated, and too distorted to be

relevant for managers’ planning and control decision.” Traditionally, Accountant uses simple

cost system that is not helpful for management to evaluate each product line performance.

Traditional costing system sums up all the actives instead of allocating the actual expense which

makes managers job much harder to improve each product line and eliminate any extra expenses

by reason of its simplicity. Therefore, Accounting needed a new method of allocating costs that

can clear managers vision on the actual expense for each line which was the Activity based

costing developed by Cooper and Kaplan. ABC system revolutionized accounting management

into be more effective tool for decision-making. ABC system provide management with the

extensive data that guid management to pay attention on the resources consumed by each product

line. It is more accurate and reliable than simple costing system. The benefits of using ABC

system draws managers attention to any neglected aspects in the organization as it enhance

managers quality of making-decision.

A second method improves decision making is cost of quality. Cost of quality helps to

assure better quality performance in every activity. It helps to improve productivity as well as

reduction in waste. organizations use COQ to increase their competitive advantage. COQ

provides managers an analyzed data which is relevant to the decision-making of developing

process.

On the other hand , the information provided from the accounting department is incomplete

as the information context is required to have a full picture before making decision. The

importance of knowing and understanding the challenges faces an organization is crucial to have

an effective decisions making, as simple relevant cost system is incomplete and inconsistent with

the organization’s strategic goals ( Blocher, 2009). A real world example is the firm that I work

for, have a temporary limited production due to some maintenance as the company faces a high

demand over firm’s capacity of production. The firm has two product line activity bag Cement

and bulk cement as bag cement has 15% over cost than bulk cement because of the packing

process, electricity and material cost ( paper bag ). Because of the high demand, the company

needs to reduce one of the product sales. Obviously, bulk cement is much profitable using

accounting quantitive perspective. In contrast, the sales department states that the market share

of bag cement is stable and growth steadily, as decreasing company’s sales for bag cement might

result a bad reputation for the company which will result difficulty in rebuilding business

reputation and regaining our market share. Although, bulk sales is much profitable and generate

less cost, bulk sales fluctuate from week to another which also depends on credit sales. Our bulk

costumers can understand our temporary issue as we have been their suppliers ages ago. The

accounting department and sales department are still discussing on the temporary issue as well as

the financial department who is concerned in the cash flow matter. This issue shows the

importance of qualitative and quantitive perspective to have a complete ground in making better

management decision.

conclusion