To Build a Management Accounting Foundation - Part 2
Introduction
In an article titled "Why Not a Degree in Management Accounting?” I proposed a management accounting degree program in management accounting. The reasoning behind this proposal as well as the organization of the program is in the article. What I would like to describe in this article is the second of two parts associated with the two introductory courses in the program. Like traditional accounting programs, the second course, which will be described in this article, is managerial accounting. This article, unlike my previous article “How to Get the Most from Managerial Accounting”, will focus on the course’s role in a management accounting degree program.
Foundation
Continuation
I would like to continue elements from part 1, financial accounting, notably
1. The emphasis on transactions
2. Connecting to other fields of study
3. The bridge to analytics
4. The importance of perspective
Accounting, whether it is financial accounting or managerial accounting, is the study of transactions. In managerial accounting, transactions must be seen from different lenses. Transactions must be seen by their effects on production, selling, and administration, i.e., manufacturing versus non-manufacturing costs. Transactions must be seen by the effects on the balance sheet and income statement, i.e., product versus period costs. The topic of costs will be discussed in greater detail later.
Interrelationships exists between accounting and other fields of study. Accounting affects economics, accounting affects finance and vice versa, accounting affects management and vice versa, accounting affects marketing and vice versa. The interrelationships are necessary to help the aspiring management accountant prepare for life on the job.
The bridge to analytics is as strong as one can find through managerial accounting. When the opportunity arises, I find opportunities to build the bridge. Here are some examples of bridge building:
1. Cost of goods manufactured schedules to descriptive analytics
2. Variance analysis to diagnostic analytics
3. Budgeting to predictive analytics
4. Differential analysis to prescriptive analytics
Perspective is critical! Managerial accounting must provide the aspiring management accountant with a point of view from inside the company. This point of view provides the aspiring management accountant with insight into helping management make the most appropriate decisions. A former colleague said that managerial accounting is all about decision-making, perhaps a statement too strong because of the many elements I address, but I do not diminish the importance of decision-making in the course. The course is about preparing the aspiring management accountant for opportunities on the job and if the course does not prepare the aspiring management accountant to help management make the most appropriate decisions, the doors for opportunities will be closed.
Preparation
Preparation should begin with technical elements such as
1. Cost Accounting
2. Cost-Volume-Profit
3. FP&A
Managerial accounting courses typically cover job-order costing and standard costing. For some reason, I have seen some accounting programs cover process costing and activity-based costing (ABC) while other accounting programs do not. It is important to include process costing and ABC in this course!
The preparation for each costing system begins with the basic elements. For job-order costing, preparation should emphasize how each manufacturing cost – direct materials, direct labor, and manufacturing overhead – affects the reliability and relevance of product costs. For standard costing, preparation should emphasize how standards are determined and their comparison to actual costs. For process costing, preparation should emphasize the purpose of production cost reports and how they are prepared. For ABC, preparation should emphasize the calculation within the system and the reasons behind the calculations.
The preparation under cost-volume-profit should emphasize calculation and application. Contribution margin, break-even, margin of safety, target net income, and degree of operating leverages should be thoroughly studied through calculations to develop an understanding of their purpose. The application of contribution margin, break-even, margin of safety, target net income, and degree of operating leverage should be focused on how management accountants can connect these items to finance, management, and marketing.
The preparation of FP&A should begin with a thorough study of budgetary planning to create an understanding of purpose, strengths, and weaknesses within the master budgeting system. The preparation should continue with an equally thorough study of budgetary control to create an understanding of variance analysis through calculation, interpretation, and application. The preparation of FP&A should conclude with a study of responsibility accounting that emphasizes an understanding of how costs, revenues, and assets are connected to a company’s overall financial health.
Preparation should conclude with insights into areas of expertise within management accounting. For this, two organizations should serve as resources. The first organization is the Institute of Management Accountants (IMA), and the second organization is the Profitability Analytics Center of Excellence (PACE).
The IMA provides a competency framework for professors to present material connected to skills deemed necessary for development and demand. The framework is broad, which benefits students because, with an assistance from professors, students can improve their ability to meet the demands facing management accounting and what may face management accounting tomorrow. The broadness of the framework is demonstrated by areas within the framework including but not limited to business acumen and operations, data analytics, emerging technologies, leadership, performance, planning, and strategy.
PACE, like the IMA, provides a framework for professors to presented material connected to the necessities for supporting decision making affecting people inside the company as well as customers. The framework provides professors to take a holistic approach to revenues, costs, and investments. I emphasize holistic approach because for a management accounting foundation to be strong, the foundation must allow for interaction with other fields of study and with other functions in a company.
Destination
The destination within the final part of building a management accounting foundation is tomorrow, i.e., how can aspiring management accountants have a promising tomorrow?
One answer, perhaps the answer, is a quote from Peter Drucker that I used in the first part of this series: “The best way to predict the future is create it.”
Creating a better tomorrow will be the truest test of strength in the management accounting foundation. If the foundation is strong, students will be able to achieve fulfilling and rewarding careers in management accounting from the opportunities presented in the foundational courses. If the foundation is weak, students will not be able to achieve fulfilling and rewarding careers in management accounting, a setback that may never be corrected.
Those of us who are advocates of management accounting must not let such a setback happen!
Conclusion
As I mentioned in the conclusion of the first part in this series, history has taught us that companies like Ford, Walmart, and Apple have had a tremendous influence on our lives. The influence that these and other companies is not an anomaly, it is a reality. Companies improve the well-being of others in many ways. For accounting majors, improving the well-being of others can happen through employment as a management accountant. To make this happen, it is necessary for accounting majors to begin this journey with a basic element, a foundation in management accounting.