Management Accounting – How Much Detail Do You Need?
Management accounting is “the information used to make
business decisions including product costing, quality analysis, employee
motivation, performance evaluation and feedback, product pricing, production
technology, component sources, customer profitability, investment decisions,
capacity utilization, and the like.”
But what is exactly involved in management accounting, and how does it
differ from financial accounting and bookkeeping? Here are some examples of
what is involved in management accounting, and how it differs from financial
accounting:
When is management accounting used?
Management accounting can be used in a variety of
situations to make different decisions. The three most common areas of use are
in planning, performance evaluation, and operational control.
Management accounting for planning
It is used, for example, to decide what products to
produce and where and when to make them. It can also help to determine the
materials and labour needed
to achieve the correct output.
Management accounting for performance evaluation
Management accounting can be used to evaluate the
profitability of products and product lines, as well as determining the
performance of various teams or individual employees.
Management accounting for operational control
Here management accounting can be used to determine
production levels, so that you can identify potential problems and solve them
so that production runs smoothly.
Also, the management accounting system usually is
linked with the financial accounting system. For example, the product costing
system can be used to help determine inventory balance sheet amounts.
Management accounting systems are predominantly money centred, but information in a non-monetary format can also be
reported.
Who uses management accounting?
Virtually all business sectors use some form of
management accounting. Even individuals use management accounting in their
everyday lives to determine whether or not to buy or invest in something. The
complexity of management accounting depends upon the size and scope of the
organization, and what sort of decisions need to be made.
How is management accounting different to financial
accounting?
Financial accounting and management accounting differ
in a number of ways. Financial accounting is about communicating accounting
information to external parties. Management accounting is concerned with
generating accounting information for managers and other employees to help them
do their jobs more effectively.
Here are some of the ways that financial and
management accounting differ:
Rules and requirements
Whilst financial accounting and bookkeeping is mandatory,
management accounting is generally an optional discipline for businesses,
although many find it invaluable. Also, whilst financial accounting is governed
by rules and regulations, there are no standard practices within management
accounting, and many systems are company-specific.
Scope and detail
Financial accounting is generally backward-looking,
and focuses on past performance, whereas management accounting focuses on
predicting future events. Also, management accounting is much more detailed
than financial accounting, and includes lots of subjective elements as well as
non-financial measures such as number of units produced and sold.
How much
detail do you need?
The
question of how much detail you need for management accounting really does
depend on the company that you run, and what type of company it is. Obviously
management accounting is far more detailed than simple bookkeeping. Generally
speaking, you want to use management accounting in the areas of your company
that are most important to you. You might even be using management accounting
at the moment, but you just have not given it a name until now. Examine the
areas of your business that you think could benefit from management accounting,
If you start by going through the three common areas that management accounting
is used for, then you can see how and where to implement a system that will
benefit your company.