Management accounting is a form of accounting specific to managers within organizations, to assist management making decisions and managerial control functions. This site will explain management accounting in depth and trace its evolution.
Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to assist management making decisions and managerial control functions. Unlike financial accountancy information (which, for the most part, is public information), management accounting information is used within an organization and is usually confidential. Contemporary managerial accounting systems are focusing more on the activities that occur at all levels of the organization.
In the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment. Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.
The distinction between ‘traditional’ and ‘innovative’ management accounting practices can be illustrated by reference to cost control techniques. Traditionally, management accountants’ principal technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind. Lifecycle costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i.e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product. Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of ‘activities’ (e.g., the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Activity-based accounting is also known as Cause and Effect accounting. Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, such as the provision of a service or the production of a product component.
In budgeting or (management accounting in general) variance analysis is a tool of budgetary control by evaluation of performance by means of variances between budgeted, planned or standard amount and the actual amount incurred/sold. Variance analysis can be carried for both costs and revenues.
A life cycle cost analysis calculates the cost of a system or product over its entire life span.
The analysis of a typical system could include costs for:
planning,design,development,production,operation,maintenance,disposal or salvage.
This cost analysis depends on values calculated from other reliability analyses like failure rate, cost of spares, repair times, and component costs.
Activity-based costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. It was developed as an approach to address problems associated with traditional cost management systems that tend to have the inability to accurately determine actual production and service costs, or provide useful information for operating decisions. With these deficiencies, managers can be exposed to making decisions based on inaccurate data. The higher exposure is for companies with multiple products or services. ABC allows managers to attribute costs to activities and products more accurately than traditional cost accounting methods. The activities responsible for the costs can be identified and passed on to users only when the product or service uses the activity. Some of the advantages ABC offers are an improved means of identifying high overhead costs per unit and finding ways to reduce the costs.
An alternative view of management accounting is that it is not a neutral or benign influence in organizations, but is instead a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory.
Project accounting is the practice of creating financial reports specifically designed to track the financial progress of projects, which can then be used by managers to aid project management.
Standard accounting is primarily aimed at monitoring financial progress of organizational elements (geographical or functional departments, divisions and the enterprise as a whole) over defined time periods (typically weeks, months, quarters and years).
Projects differ in that they frequently cross organizational boundaries, may last for anything from a few days or weeks to a number of years, during which time budgets may also be revised many times. They may also be one of a number of projects that make up a larger overall project or program.
Management Accounting Tips