Question

The role of managerial accounting in decision making

Answer 1

THE ROLE OF MANAGERIAL ACCOUNTING IN DECISION MAKING

1. All business owners need to evaluate and analyse how their business performs and how to improve them. For this managerial accounting is a powerful and efficient tool.

2. Managerial accounting gives a good insight on business performance such as profit margin, cost optimization etc.

3. Business can use the managerial accounting tools to improve their decision making for taking a good competitive advantage.

4. If the company management wishes to go for alternative means of product line this tool will help them to evaluate the same and guide them whether to choose or opt out.

5. Similarly if a company is carrying out many activities, the management may use this tool to find out which is the most and least profitable activity thereby diverting the resources on the most profitable one and discontinue the loss or least profit making activity.

6. This also helps the company in make or buy decision or upgrading the existing machinery.

7. Capital Budgeting uses budgeting metrics like NPV, IRR etc to help the company to go ahead with the expensive projects or not.

8. Marginal Analysis is another tool which analyses the incremental benefit for increased production and help in finding out breakeven point at which the total revenue is equal to the total cost and production over and above the breakeven point would yield the profit.

9. It also helps to understand and analyse the limitations of the sales process and its impact on the profit.

10. Managerial accounting plays a very important role in performance report. For example underperforming areas or department as per the report may be kept under observation and paid attention to improve the performance.

11. Managerial accounting helps in ascertaining the accurate cost of the product and in turn in deciding the price of the product.

12. Overall managerial accounting helps the business to set goals, monitor the progress of the goal, implement best practice made out of the reports, and ultimately achieving the desired goals.