Management Accounting
Management Accounting Checklist
The role of management accounting in strategic management
Make or buy decisions and lease or buy decisions
Whether to make a product internally or buy it externally is a common decision that organisations have to make. Another is whether to lease or buy. These options will invariably have different cash flow timings and taxation considerations. Then there are the questions of capacity and opportunity costs. Management accounting can extract and obtain the relevant information and prepare the calculations (using discounted cash flow and other techniques) to enable a correct decision to be made. It is important to include other factors than financial returns for decision making, for example lower costs for items bought from overseas in large quantities requiring long lead times may be a high risk compared to more expensive items bought or made locally with much shorter lead times.
Gearing and the cost of capital
How a practice is to be financed is a strategic decision. Should it have high gearing or low gearing? This decision requires an understanding of the cost of capital - the return that a practice has to pay to gain and retain funds from investors. Investors will assess risk. The management accountant should be able to calculate the weighted average cost of capital (WACC), the marginal cost of capital, the cost of ordinary share capital and use the dividend growth model and capital-asset pricing model (CAPM). A detailed explanation of these concepts is not possible within this short check list but managers should be aware of their use and how they are required in both strategic financial decisions and used within discounted cash flow calculations to provide a discount rate.
Future Practice Owner.
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