Why Is Managerial Accounting Important To An MBA Graduate

An MBA Graduate Defined

An MBA is a degree awarded to individuals who complete required coursework in the field of Management Science. The MBA title stands for Master of Business Administration and implies that the person holding the degree is qualified to hold a position in senior management within a firm. An MBA manager is similar to the captain of a ship. He is responsible for making decisions and plans about the firm and for controlling the firm’s employees. The goal of an MBA manager is to maximise the firm’s value through the use of the firm’s tangible and intangible assets. He maximises this value by obtaining the highest Profits possible. In the following discussion, I will examine how senior management in general and MBA graduates in particular can use the field of Managerial Accounting to make decisions/plan and control employees in order to maximise Profits. For clarity throughout this essay, senior managers and MBA graduates should be considered as one in the same.

Managerial Accounting Defined

Managerial Accounting is the process of using information systems to provide data to senior managers who then use this data for decision-making/planning and monitoring employee performance in order to maximise profits. The data that senior managers use is supplied by the Financial Accounting function. This information is used to improve the performance of the Marketing function, which generally provides the Revenue of the firm and the Operations function, which generally incurs most operating costs. Marketing and Operations are thus the functional areas which an MBA graduate is generally concerned.

Managerial Accounting is vital to a business’s success because it quantifies a firm’s performance. By quantifying certain performance variables, senior management can carry out its two most important functions: 1) Decision-Making/Planning and 2) Controlling Employee Behaviour.

The Theory of the Firm tells us that a business exists to maximise the value of equity investors have supplied. Profits result from decisions about what items to produce and sell (Marketing) and planning what inputs are necessary for this production and distribution activity (Operations). Value maximisation results from maximising Revenue and minimising Total Costs. In business, resources are always limited or finite. Therefore, they must be employed in the most economical and productive capacity in order to maximise profits. MBA graduates are often hired to obtain the highest profits possible; therefore, value maximisation is achieved or forgone as a result of their decision-making and leadership.

The field of Managerial Accounting is concerned with helping senior managers use data provided by the Financial Accounting function about the Marketing department and Operations department to achieve the highest profit levels attainable thus increasing the value of the firm as much as possible. Managerial Accounting is therefore cross-functional in the purest sense and should be employed in all areas of a business.

The Financial Accounting Role in Managerial Accounting

To make informed decisions, MBA managers must use a scientific approach rather than simply following their intuition. This scientific approach often uses historical data supplied by accountants in the Financial Accounting department to plan future activities and monitor employee performance.

This historical data includes such items as Balance Sheets, Income Statements, Statements of Cash Flows and Statements of Retained Earnings. Data from these sources can be further extrapolated into measures such as Return on Assets (ROA) and Return on Investment (ROI). The Financial Accounting documents provide senior managers with a tangible starting point for decision-making/planning and analysing employee performance. Through this perspective, we can see that Financial Accounting is backward-looking whereas Managerial Accounting is forward-looking.

It is worth noting that in establishing a Financial Accounting system, senior managers must often make a trade off between information used for decision-making/planning and information used form employee control. Different systems provide better information in one area or the other so executive management must make a choice about which function is more important.

To illustrate how Financial Accounting systems could help MBA graduates solve Marketing and Operations problems, let’s consider a maker of bottled drinks. Suppose a bottled drink firm makes 5 different drinks; 3 sugary sodas, 1 sports drink and 1 premium bottled water. Each drink is manufactured at its own separate facility but the distribution and sales force is the same for all 5 drinks. Financial Accounting documents are broken down on the basis