Operation managers need to know how the business is performing so they need to see the financial accounts to see how much profit or loss is made and the reasons thereon. They also need management accounts to know usage such as hours,labour, and cost recoveries per products or services. These information will impact their strategic thinking and lead them to make wise decisions on how much to pay for wages, how much technicians are required, best prices for the input raw materials etc

Yes, that's very true.Most operations are now integrated with production linked to sales, purchases, inventory holdings, and the financials and each transaction updates the entire system. I believe that is the MRP\ERP that most operation personnel use. An increase in sales reduces finished goods which in turn reduces work in progress and which triggers raw material purchases and so on.Khan can take a course on Finance for non financial managers and he will understand basic trading accounts, costing,gross profits and the basic financial statements.

Thanks a lot Erick Outa and Juehui Shi for your valuable comments. 

Financial accounting is of limited importance.  It is obviously the lag result of decisions one made in the past.  Information that may not be as objective, but more timely, as financial accounting is more likely to influence decisions about operations and optimizing the use of limited resources.  Just because some information is denominated in currency does not automatically make it important.

Stephen,

Ikram wanted to know how Financial accounting impact operations and we have given him the explanation.What you say about financial accounting is a little true. It is historical and that is its nature but with modern IT systems it can be current. You will however, respect the response from Juehui who brought in ERP and MRP which are instant management information systems giving live information as and when they occur. Like i have said, a sale transaction in MRP will update sales revenue and debtors as well as stocks and give a report up to gross profit and it is instant. Most MRP users are trained to work and clear all their work daily to avoid report lags. Most lag problems are addressed with MRP.

Best

Erick

I am strongly agree with the answers/discussions of Prof.Erick Outa & Prof. Stephen Arthur Butler.

Financial accounting is useful to standardize the presentation of financial data across firms using Generally Accepted Accounting Principles (GAAP0.  It is of little value and most times provides the wrong answers in making operations decisions.  Goldratt's Theory of Constraints provides a simple but effective accounting system (throughput or constraint accounting) useful for operations management decisions.  See Goldratt's Haystack Syndrome: Sifting Information out of the Data Ocean provides a couple chapters on throughput accounting.  Traditional managerial accounting provides incorrect decisions based on the allocation of fixed costs to products.  Products do not make profit; organizations make profit.  Product cost and product profit are mirages.  Go back to basic economics which makes decisions based on price and variable cost (this is throughput in TOC terms).  All products taken together must cover the organization's fixed costs.  If total throughput exceeds total fixed costs then the organization makes money.  There are a number of books on throughput accounting. You might also check out the TOCICO (theory of constraints international certification organization) videos under success stories which provides videos on TOC accounting and decision making.  On the TOCICO website there is also a listing of TOC books by topic. 

Hope this is helpful.

Jim Cox

Jim.

Your contribution is quite interesting and flows from economics which is the mother of performance measurement and a lot of these have been incorporated in many ERPs and other managerial software. However, most of what you say are a critique of finance and managerial accounting. Remember , a critique of something, does not take way its value because for each negative point, there is always a positive one Imagine a world without managerial and financial accounting!!! -both investors and managers will be completely lost. Nevertheless, I agree with you and I want to  suggest that users of all these reports should be made aware of these weaknesses and how the weaknesses are being addressed to get  closer to ideal situation.

Best,

Erick Outa

A new generation of ERP systems based on smart metrics is discussed in Orlicky's Material Requirements Planning, (2011) Third Edition by Carol Ptak and Chad Smith published by McGraw-Hill Publisher. This ERP structure is based on a pull-system linking sales to production.  It includes Theory of Constraints and lean concepts.  A second book, Demand Driven Performance (2013) by Debra Smith and Chad Smith published also by McGraw-Hill Publishers.  This book expands on measures considerably.  Financial and managerial accounting were developed almost a century ago.  Companies did not have computers to do the collection and manipulation of data sorting fixed and variable costs.  Early in the automotive industry workers were paid on a piece rate system. Variable costs amounted to about 90% of the cost of a product so the impact of allocating fixed costs to product was minor. Today many overhead rates are 800 or 1000% of direct labor with automation.  Decision making using allocation of fixed costs is far from what basic economic price theory would provide.  Accounting systems seem to use average costs instead of marginal costs as prescribed by basic economic theory. Many have recognized this and proposed activity based costing and management systems.  When this failed they moved to balanced scorecards, when this failed they moved to strategic balanced scorecards.  The search goes on and on for a good set of measures of a firm's performance.

Financial accounting allocates cost to products and handles the products as if they are sold in the income statement.  One can show significant profit by just building and not selling inventory!!!!   There are many flaws in financial accounting and in managerial accounting (See Johnson and Kaplan/s Relevance Lost: the Rise and Fall of Managerial Accounting for example). 

Financial and managerial accounting served a significant role in the development of large corporations in the early to mid-1900's. Donaldson Brown's invention of many accounting concepts at DuPont and General Motors is credited with allowing GM to catch up with Ford.  It is time to find adequate replacements for financial, managerial and cost accounting and organization performance measures that link research to production to sales and marketing instead of treating each function as a separate silo. TOC seems to take more of a systems approach and is a step on a long journey to developing a comprehensive measurement system for the short- and long-term decision making needed today. It is not just the operations manager that needs an understanding of financial and managerial accounting; it is our job (the researchers) to devise a better financial and performance measurement system that links from day-to-day activities and decisions in all functions at all levels to the overall performance of the organization and eventually the supply chain.   

Best regards,

Jim

Very dynamic thinking and people who resist change may not make money. But why are Universities , training institutions , accounting bodies and companies slow to adopt to fast thinking?. Most textbooks and classes still teach double entry and IASB is spending billions researching on how to prepare financial statements through IFRS and FASB is doing the same through GAAP. At which point are these issues linked? We must move fast and create value through proper accounting. So we need  body like IASB or FASB to consolidate new and value creating accounting systems and professionals and firms should follow suit.

And to all of you best wishes and a prosperous new year

Erick

Off course when operation manager wants to offer new product or services or increase the capability of firm or apply forecast analysis, they need a financial support from finance department.

Both complete each other.

I am thankful to all of you for your guidance and comments ..

Financial accounting helps managers create budgets, understand public perception, track efficiency, analyze product performance, and develop short- and long-term strategies, among several other decisions aided by accounting figures.