Management Accounting

Definition of Management Accounting

Management Accounting (aka Managerial Accounting) is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that assists executives in fulfilling organizational objectives.

Management accounting provides financial information for the organization's internal management, its employees, managers and executives, in order to inform decision-making and improve performance. In other words, management accountants are strategic partners. They work to ensure future success by identifying ways to create value for their organization and its products or services. They do so by using numbers, data and research to help leadership make informed decisions to minimize risk and maximize profit in behalf of the business. Management accountants analyze and explain the "why" behind reporting the numbers.^[1]

Management accounting helps managers within a company make decisions. Also known as cost accounting, management accounting is the process of identifying, analyzing, interpreting and communicating information to managers to help achieve business goals. The data collected encompasses all fields of accounting that informs the management of business operations relating to the costs of products or services purchased by the company. Management accountants use budgets to quantify the business’ plan of operations. Performance reports are used to note the deviation of actual results compared what was budgeted.^[2]

Characteristics and Nature of Management Accounting^[3]

The nature and characteristics of management accounting may be summarized as:

Management accounting is a technique of selective nature. It does not use the whole data provided by financial records. It selects and picks up only that information form different financial records (such as profit and loss account or balance sheet), which are relevant and useful to the management to arrive at important decisions on different aspects of the business.
Management accounting is concerned with the future. It collects and analyses data to plan the future. The primary function of management is to decide bout the future course of action. Management accounting, with the help of different techniques, formats the future course of action.
Management Accounting makes available useful information which helps the management in planning and decision-making. It can only provide information but cannot proscribe. It is up to management to what extent it. It can make use of the information depending upon its efficiency and wisdom.
Management accounting studies the relation between causes and effects. Financial accounting does and analyses the causes responsible for profits or losses. *Management accounting attempts to study the cause-and-effect relationship by analyzing the different variables affecting the profits and profitability of the business.
Management accounting is not bound by the rules of financial accounting. Financial accounting procedures are designed based on GAAPs.

Techniques in Managerial Accounting^[4]

In order to achieve its goals, managerial accounting relies on a variety of different techniques, including the following:

Margin analysis: Margin analysis is primarily concerned with the incremental benefits of optimizing production. Margin analysis is one of the most fundamental and essential techniques in managerial accounting. It includes the calculation of the breakeven point that determines the optimal sales mix for the company’s products.
Constraint analysis: The analysis of the production lines of a business identifies principal bottlenecks, the inefficiencies created by these bottlenecks, and their impact on the company’s ability to generate revenues and profits.
Capital budgeting: Capital budgeting is concerned with the analysis of information required to make the necessary decisions related to capital expenditures. In capital budgeting analysis, managerial accountants calculate the net present value (NPV) and the internal rate of return (IRR) to help managers to decide on new capital budgeting decisions.
Inventory valuation and product costing: Inventory valuation involves the identification and analysis of the actual costs associated with the company’s products and inventory. The process generally implies the calculation and allocation of overhead charges, as well as the assessment of the direct costs related to the cost of goods sold (COGS).
Trend analysis and forecasting: Trend analysis and forecasting are primarily concerned with the identification of patterns and trends of product costs, as well as with recognition of unusual variances from the forecasted values and the reasons for such variances.