Management accounting
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 (typically for decision-making) and is usually confidential. Contemporary managerial accounting systems are focusing more on the activities that occur at all levels of the organization.
Definition
According to CIMA, The Chartered Institute of Management Accountants, Management Accounting defines as "The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non management groups such as shareholders, creditors, regulatory agencies and tax authorities"(CIMA Official Terminology)
Traditional vs. innovative management accounting practices
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 finalised 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 acitivities that drive costs, such as the provision of a service or the production of a product component.
Development of throughput accounting
The most significant recent direction in managerial accounting is throughput accounting, which recognizes the interdependencies of modern production processes and provide managers with a tool that will allow them to measure the contribution per unit of constrained resource for any given product, customer or supplier. (For a detailed description of Throughput Accounting, see cost accounting).
An Alternative view of Management Accounting
A seldom expressed alternative view of management accounting is that it is neither a neutral or benign influence in organizations, rather a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory.
Related Qualifications
- There are several related professional qualifications in the field of accountancy including:
- Management Accountancy Qualifications
- Other Professional Accountancy Qualifications