What’s is: Management accounting is a branch of accounting providing information for internal users and corporate decision making.
Like financial accounting, the management accounting process also includes identifying, measuring, collecting, analyzing, preparing, interpreting, and communicating financial and non-financial information. It’s just that management accounting information is to assist management in making decisions, not for external parties such as in financial accounting. Thus, management accountants do not have to comply with applicable accounting standards to perform their jobs.
Management accounting is essential because it provides a basis for making valid and timely decisions. It provides company performance and financial data, which is useful for formulating further plans. For management, such information provides in-depth insight into the details of the company’s operations, finances, and resource flows.
Another term of management accounting is managerial accounting.
The difference between management accounting and financial accounting
The following are some of the differences between management accounting and financial accounting:
- Is for internal users
- Do not have to comply with accounting procedures and standards
- Involves various disciplines such as accounting, management, industrial engineering, and managerial economics.
- Focus on the company’s operational aspects, hence providing not only financial information but also non-financial information.
- The output varies depending on management needs.
- Examines various problems and how to fix them
- Reports more frequently and from time to time, depending on management needs.
- Often requires estimates or projections, which may not prove correct.
- Is for external stakeholders such as investors
- Must comply with accounting procedures and standards
- Only accounting and finance disciplines
- Focus on financial information
- The output is a financial statement.
- Only focus on end results, such as profitability and business efficiency.
- Report according to the accounting period
- Rely on valid financial records to produce accurate reports
The scope of management accounting
Management accountants provide information to management related to business operation measures, both financial and non-financial information. It is useful for making short and long-term decisions.
They need accounting knowledge and other studies such as management, industrial engineering, strategic management, and managerial economics in work and reporting.
The scope of management accounting is to help:
- effective performance measurement,
- cost control,
- budget planning,
- pricing, and
- decision making by management.
Management accountants use historical data and estimates to provide information. It is useful in carrying out day-to-day operations, planning future operations, and developing an overall business strategy.
Managerial accountant duties
The scope of the management accountant’s duties varies depending on the needs of management. Here, I will discuss five of them:
- Capital budgeting
- Product costing
- Margin analysis
- Constraint analysis
- Trend analysis
Managerial accounting uses several standard capital budgeting measures for decision making. The internal rate of return (IRR) and the net present value (NPV) methods are two examples.
Such methods help make decisions about long-term investments such as purchasing a new machine, replacing old machines, new factories, or company acquisitions. Typically, the managerial accountant will examine proposals, decide whether it is the best investment option, and find an appropriate way to finance purchases. They also outline the returns and the timeframe so that management can anticipate future economic benefits.
To determine the source of investment funding, they must make details about each source (debt, equity, or retained earning). Also, management targets for the capital structure are an important consideration to determine appropriate funding.
Managerial accountants determine the actual cost of a product or service. They categorize costs into several groups, such as variable costs, fixed costs, direct costs, and indirect costs.
They then calculate and allocate these costs into products using several methods such as full costing and variable costing.
Product costing is essential for planning various business strategies. Management uses this information to make decisions regarding product pricing and promotional budgeting.
Margin analysis involves analyzing the additional profit by increasing production. In this case, the management accountant determines the optimal point between production, sales, revenue, and profit.
They may use breakeven analysis to calculate the contribution margin in the sales mix. Its purpose is to determine the volume of units where revenue equals costs. This information is useful for determining prices for products and services.
Management accountants analyze possible constraints in company operations, from the production process to sales. They then determine the source of the problem and calculate the impact on the company’s revenue, profit, and cash flow.
Because involving various fields, they need some technical knowledge.
This involves reviewing trends in operating costs and investigating unusual variants or deviations. Accountants use prior period information to calculate and project future financial and operating information, including information about:
- Selling price
- Sales volume
- Advertising budget
- Capital investment
- Cash flow