Management Accounting as a Strategic Tool for Bravo Plc

This paper examines the role of management accounting for Bravo plc and discusses its use as an effective management tool. Management accounting, also called managerial accounting, is concerned with providing information to managers inside Bravo — those who direct and control its operations.

For management accounting to have strategic value, it must accomplish three strategic objectives: quality, cost, and time. Management accounting achieves these objectives by providing information that links the daily actions of managers to Bravo's strategic objectives; by enabling Bravo managers to effectively involve the entire extended enterprise of customers and suppliers in achieving those objectives; and by taking a long-term view of Bravo's organizational strategies and actions. Once Bravo managers understand the benefits that management accounting provides, they can use the information generated to make better decisions and improve the company's performance (Bell, Ansari, Klammer, and Lawrence, 2010).

The Institute of Management Accountants (IMA) defines management accounting as the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information, which is used by management to plan, evaluate, and control operations within an organization. Management accounting ensures the appropriate use of, and accounting for, an organization's resources. With respect to Bravo's deteriorating performance, the management accountant plays a role in identifying and helping to correct areas of underperformance (Siegel & Shim, 2006).

One area where management accounting can help is the unhealthy rivalry and tensions between divisional managers. All managers should expect their performance to be measured, evaluated, and compensated, so it helps to achieve their buy-in if the reporting system can be shown to be fair, reasonable, and accurate. The accounting manager is responsible for promoting the use of accounting tools and techniques that accomplish these goals.

Unlike financial accounting, which is concerned with providing information to stockholders, creditors, and others external to Bravo, management accounting focuses on providing information for managers inside the organization. Because of this difference in orientation, there are different activities involved in managerial accounting, even though both disciplines rely on the same underlying data. Planning is an important part of Bravo managers' jobs, and therefore managerial accounting has a strong future orientation.

Another key difference between financial and managerial accounting is the emphasis on precision required by the former. Managerial accounting must be appropriate for the problem at hand — for example, identifying the issues affecting Bravo's performance. Timely estimates that are useful for making decisions are often more important than precise figures. Because of this requirement for relevance, management accounting often focuses on non-financial elements, such as customer satisfaction measurement. Management accounting also focuses more on segments of a company, such as product lines, sales territories, departments, or any other categorization that Bravo managers might find useful.

Generally accepted accounting principles (GAAP) play a less significant role in managerial accounting, again because the audience is not external users. The common ground rules that GAAP set forth enhance comparability and help reduce fraud and misrepresentation, but they add little to the types of reports most useful in internal decision-making. Additionally, management accounting information is proprietary; public companies are not required to disclose management accounting data or much detail about the systems that generate it.

A final distinction between financial and managerial accounting has to do with the optional status of the latter. Unlike financial accounting, which is required by the SEC and tax authorities, managerial accounting is not mandatory — it is required only insofar as it produces useful information. There are no regulatory bodies or outside agencies specifying what must be done. Bravo management alone determines what is useful for planning, control, and decision-making purposes.

It should be noted that one of the limitations of management accounting is that it is only as good as its design and implementation. For some companies, internal control and record-keeping may be burdensome. Bravo may wish to take advantage of available software to streamline business processes or customize reports. Another limitation is that, just as with financial accounting or any other accounting activity, there is the potential for fraud or human error that can result in misleading information.

In Bravo's case, managers need to be persuaded of the benefits of making better decisions and of their ability to perform better when guided by superior information. If, for example, Bravo aspires to be the leading producer of widgets in its market, then each manager can use management accounting information to understand how his or her specific responsibilities and performance contribute to or detract from Bravo's ability to meet its goals. Alternatively, if Bravo aspires to be the leading servicer of widgets in its market, managers may find it helpful to review customer satisfaction metrics.

Like all companies, Bravo must make decisions about how to allocate scarce resources, and it is the management accountant's job to facilitate this process. The scope of management accounting includes measuring and reporting information about economic activity within Bravo for use by its managers in planning, performance evaluation, and operational control. The planning function can be used to decide what products to make, as well as where and when to make them, and to determine the materials, labor, and other resources required. Management accounting is also used to evaluate the profitability of individual products and product lines, and to determine the relative contributions of different managers and different parts of Bravo's organization. Information that management accounting produces is useful for operational control as well — knowing how much work-in-process is on the Bravo factory floor, and at what stages of completion, assists line managers in identifying bottlenecks and maintaining a smooth flow of production (Caplan, 2009).

Managerial accounting practices have evolved considerably over time. In recent decades, new managerial accounting practices such as activity-based costing and the balanced scorecard were developed. Unlike traditional managerial accounting, activity-based costing deemphasizes direct labor or raw materials as cost drivers and concentrates instead on activities — such as the number of production runs per month — that actually drive costs (Geense, 2005). Activity-based costing can give Bravo's managers a clearer picture of their cost drivers and their opportunities to reduce costs.

A balanced scorecard is a set of financial measures and operational measures covering customer satisfaction, internal processes, and the organization's innovation and improvement activities. Bravo managers can use the balanced scorecard to identify the value drivers of their organizational strategy and align them to the company's overall strategy (Geense, 2005).

There are various ways in which management accounting tools can help Bravo make meaningful and timely management decisions. Analyzing financial accounts allows managers to compare Bravo's performance to previous reporting periods or to its competitors. Ratios provide a tool for making comparisons and can be used for both financial and non-financial data (Financial and Management Accounts, 2010).

Analyzing activity ratios for Bravo can help evaluate the utilization of assets in the business. In general, the greater the utilization of assets, the greater the rate of return earned. There are various ratios to measure the activity of receivables, inventory, and assets.

Accounts receivable ratios include both the accounts receivable turnover and the average collection period. The accounts receivable turnover ratio reveals the number of times Bravo collects accounts receivable during the period under consideration. It equals net sales divided by average accounts receivable. Average accounts receivable for the period is the beginning accounts receivable balance plus the ending accounts receivable balance, divided by two. If Bravo's sales vary greatly during the year, this ratio needs to be properly averaged to avoid distortion. This ratio tells Bravo managers whether they are collecting receivables quickly enough; conversely, an excessively high ratio may indicate a credit policy that is too restrictive. Also, given that Bravo divisions trade with each other, management accounting may need to focus on reporting these inter-divisional transfers of assets to ensure they are appropriately accounted for (Siegel and Shim, 2006).