Managerial Accounting is a discipline that deals with financial information that is vital for an organization to make efficient decisions. Primarily, managerial accounting handles aspects such as budgetary development and asset and cost management. In addition to that, Managerial accounting deals with the preparation of an organization’s financial report to aid the top management to make coherent decisions pertaining strategies that are essential in the running of the Corporation. Notably, the information that managerial accountants make plays a crucial role in helping managers make sound decisions.
The core purpose of managerial accounting is to provide information that is vital in enhancing decision-making. It is the duty of managerial accountants to make decisions based on making choices between two alternative products. For example, a managerial accountant of a given company that specializes in the manufacture of goods must make decisions on which product, if produced, will create profit for the organization. Additionally, the manager must make a decision on the price to charge customers so that it can reflect value for their money. However, the decision on the price of a product will mainly depend on the cost of production. In addition to that, managerial accounting employs cost analysis technique that embraces variable and fixed costs to acquire information. As such, the final decision on a given product usually reflects the information received by the managerial accountants (Warfield, et al, 2012).
Secondly, managerial accounting is responsible for forecasting and planning. Typically, the information facilitated by managerial accountants is employed for purposes of gauging and planning for the future. For instance, the information may be used by managers of an organization to determine the best product for the firm to manufacture. Moreover, managerial accounting enables a firm to know where it should place more emphasis in future. Notably, managerial accounting information is used to set goals and objectives that an organization desires to achieve in future. Usually, planning is done in a way that it incorporates an organization’s objectives and the available resources (Warfield, et al, 2012).
On top of that, managerial accounting is responsible for making budgets in organizations. Typically, a budget is a structure that utilizes quantitative figures to plan a company’s plan of action. The development of a budget usually depends on the needs and wants of an organization. However, managerial accounting dictates that more resources are allocated to needy areas that do not effectively utilize resources. In most cases, the type of budgets made by different organizations includes master, sales, production, labor, and cash (Baiman, 2010).
A real-life example of how managerial accounting helps managers improve operational and financial performances.
Coca-Cola is a company that specializes in the manufacture, retail, and sale of different drinks and beverages. In the year 2000, the company desired to increase not only its sale volumes but also profits. The managerial accountant of the firm was called upon by the board of management to come up with ways in which the company could enhance its production and keep its place as a leader in the foods and beverages industry. After doing a cost and market analysis, the managerial accountant of the corporation came up with a plan to make the company produce a range of drinks that meet the wants and needs of different people. For instance, the managerial accountant advised the company to come up with a drink that can be embraced by health conscious individuals like persons who have diabetes. As a result, the company came up with a drink known as Diet Coke that is sugar and calorie-free. During that period, the company also came up with Powerade beverages containing energy that targeted sportspersons like athletes and football players. To market the new products, the company used revenues from the already known Coca-Cola brands. Also, the company used its strong brand name to facilitate the sales of its new line of products into the market (Baiman, 2010).
Role of federal taxes in short-term business decisions
Regardless of the type of business, federal taxes must be paid by all companies. However, there are several aspects of federal taxes that affect short-term decision-making process of various enterprises. First, a business may face different tax consequences depending on location in which the business is going to be set up. For instance, setting up a business in an urban area may attract high federal taxes as opposed to starting it in a rural setting. Another aspect of federal taxes that has a bearing on short-term decision-making is debt. In most cases, businesses raise money through the selling of equities or borrowing of securities. One advantage of debt money is that it has a tax advantage since the interest of the borrowed cash is deductible business expenses. However, the federal tax may only be beneficial to small enterprises that require less money. On the contrary, large organizations that require lump sum amounts of debts are not likely to benefit from federal taxes due to the enormous risks associated with massive debts. As such, a business should borrow a small amount of money in short-term for it to benefit from federal taxes (Nordhaus, 2010).
Role of “the state of the economy” in short-term business decisions
State if the economy refers to factors such as interest rates and inflations that have a bearing on the general performance of the economy. For instance, it is fundamental that a business predicts the shift in interest rates of loans before it borrows money for short-term use from financial institutions. If the interest rates are likely to be high, then the business should look for other sources of finances with low-interest rates. On the other hand, a business entity should give much weight to inflation before making a final short-term decision. If the rate of inflation is likely to fall in future, then the company should consider looking for other sources of its production materials. However, if the rate if inflation is likely to increase further, then a business should purchase its raw materials earlier at a relatively low price. Therefore, it is vital for a firm to make all aspects of the economy for it to grow and prosper (Nordhaus, 2010).
Role of financial market outlook in short-term business decisions
The financial market is one of the most fundamental aspects of that a company should give due weight before making short-term decisions. Primarily, the rate of interests that are charged by financial institutions is the primary factor that has a bearing in decision-making processes in business. As such, a company should carry out an analysis of the current and future trends in financial markets before borrowing money from financial institutions. For instance, a company should ensure that the interest rate on the money that it borrows does not negatively impact on the current and future operations of the business. Therefore, it is fundamental that a company predicts the financial market outlook and only take loans that it can be able to pay within the agreed period. If the business fails to meet its financial obligations, then it is likely to face additional financial expenses such as charges on default payments or an additional loan to repay the earlier one, an aspect that may be strenuous to the financial capability of the organization (Nordhaus, 2010).
Overall, managerial accounting plays a pivotal role in helping corporations make better financial decisions. Most importantly, the discipline helps a firm in forecasting, planning, budgeting and in making coherent decisions about its operations. Federal taxes affect factors such as the location of business and interest rates. On the other hand, inflation rates negatively impact an organization due to the rise in prices of raw materials. Interest rates are also other financial market aspects that have bearing short-term business decisions.
- Baiman, S. (2010). Agency research in managerial accounting: A second look. Accounting, Organizations and Society, 15(4), 341-371.
- Nordhaus, W. D. (2010). The political business cycle. The review of economic studies, 42(2), 169-190.
- Warfield, T. D., Wild, J. J., & Wild, K. L. (2012). Managerial ownership, accounting choices, and informativeness of earnings. Journal of accounting and economics, 20(1), 61-91.