Management accounting systems track costs of production, including traditional cost accounting, adjusted accounting, performance accounting, and transfer pricing. Failure to follow a system can result in overpriced products and lower gross margins. Lean accounting focuses on reducing costs by eliminating waste, while performance accounting identifies constraints to increase production volume. Transfer pricing costs goods as they move through different departments, with opportunity costs representing outsourcing costs.
Management accounting systems focus on tracking the costs associated with the production of goods and services in a business. Some of the more common systems include traditional cost accounting, adjusted accounting, performance accounting, and transfer pricing. Each of these management accounting systems provides businesses with a different method of tracking costs in order to produce goods and services at the lowest possible cost. Failure to follow any system can result in overpriced products and lower gross margins.
Traditional management accounting systems track costs through the use of job order or costing methods. Each of these methods and others determine how a company allocates costs related to direct materials, direct labor, and manufacturing overhead. Job order costing is used for large projects where all costs are easily identifiable for individual projects. Process costing allocates costs based on the number of processes used to produce homogeneous goods. These goods go through a continuous process and are difficult to cost individually.
Lean accounting is one more revolutionary technique in terms of management accounting systems. Instead of focusing solely on costs, lean accounting is a method that presents a strategy to reduce costs by eliminating waste. The accountants in this system will provide almost immediate financial information to make decisions, evaluate value streams and measure profitability. Any excess costs can be wasted and cut from the system based on this information.
Performance accounting is generally not viewed as a cost process under traditional management accounting systems. Accountants focus on identifying constraints within the company’s production system. Constraints include insufficient levels of materials, labor, or production capacity of company facilities. Reducing these restrictions allows for higher throughput to increase production volume, thereby lowering the cost of each individual unit produced. In most cases, this method can work with traditional work order or process cost systems.
Transfer pricing is another common management accounting system. Under this method, companies will cost goods as they move through different departments. Each item goes through transfers to different departments or processes, each adding a small portion of the costs to the product.
Common costs added to the transfer price include variable costs and opportunity costs. Opportunity costs represent the amount of money it would cost the company to outsource production to an external source. Other transfer pricing methods are also available. Transfer pricing flexibility is often seen as a benefit to this system.
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