The Uses of Management Accounting

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Management accounting is the use of accounting data to assist the management team with information useful in the decision-making process. This makes decision making more of a scientific process and less of a guess. This is important when a company has a low margin of error. Management accounting is inward-focused and does not focus on the reporting issues or compliance requirements.

Business Decisions

  • Management accounting provides the executive team with the information necessary to make rational financial and managerial decisions. The information comes from a wide range of techniques and processes meant to uncover the numbers within the numbers. These techniques include variance analysis, which is used to compare the budgeted financial limits to the actual expenses. Variance analysis is important in keeping a company on the right track. Overshooting a budget can erase profits at an alarming rate. If a company has a low margin, the profits can disappear altogether.

Operational Planning

  • Budgeting is the process of allotting money to each department and team for a period of time. Budgets are generally created once per year just before the fiscal year begins. Budgets are created by studying the historical trends of revenues, expenses and overhead costs. These trends are carried forward at the same rate in an attempt to predict the future. This information is then used to build a budget. Every department will have its own separate budget that will be incorporated into the overall corporate budget.

Strategic Planning

  • Strategic planning uses many of the same techniques as budgeting. These techniques are meant to bring the future into focus in an attempt to predict their outcome. This is done to determine whether new operations are feasible or recommended. When companies are ready to expand a department, acquire another company or merge with a competitor, some form of strategic forecasting must be performed. This uses historical and industry trends to build a model of what the new organization might look like in terms of financial results. A set of pro forma, hypothetical financial statements is created and presented to the executive team to determine whether the venture should be adopted or abandoned.

Going Concern

  • Management accounting is also used to evaluate a business' results beyond what the financial statements are telling the reader. Financial statements are great for demonstrating a company's performance over an established period of time. However, the statements alone, without analysis, tells us nothing more. However, if the statements are used to perform analysis, much more can be determined about the company's financial position. These techniques are called financial ratios. These ratios are used to determine the company's liquidity, or ability to pay its short-term debt. They are also used to determine a company's solvency, or ability to pay its long term-debts. This leads to the Going Concern Policy. The Going Concern Policy determines whether a company will be viable to remain in operation into future business periods.

Cost Management

  • Cost management is the process of using cost accounting techniques to keep costs within acceptable ranges. Cost accounting is used to determine the true cost of procedures, processes and production processes. Cost accounting is a subcategory of cost control. The cost management system uses cost accounting to determine the true unit cost of a process or product. Once the unit cost has been determined, it can be analyzed for cost reductions, cost cuts and process changes. This process would be pointless if the true cost per unit was nor known. This helps to eliminate wasted materials, time, inventory and energy.

References

  • Photo Credit "Liabilities Spreadsheet" is Copyrighted by Flickr user: Casey Serin (Casey Serin) under the Creative Commons Attribution license.
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