Management accounting focuses on internal management needs, assigning costs to processes and determining budgets, costs, and profitability. It deals with raw materials, labor, and indirect costs, and uses standard cost accounting and activity-based accounting. Computer systems and IT are important, and IT cost transparency is necessary.
Management accounting is a specialized subset of accounting, which focuses on the internal needs of businesses. While financial accounting focuses on external reporting and history, management accounting focuses on current information and internal management needs. Both management and financial accounting work together to provide management and external users with the required information. Often, a management IT system feeds into a financial IT system, providing users and stakeholders with comprehensive cost information.
Popular among manufacturing settings, management accounting focuses on assigning costs to processes. Rather than dealing with debits and credits, accounts, or financial statements, as financial accounting does, this style of accounting quantifies details, quality controls, and expectations. Cost accounting is one of the fundamental principles of management accounting. It is used to determine budgets, costs and profitability of products or departments.
Cost accounting deals with 3 main areas. The first is the raw materials or resources needed to complete a product. This could include, for example, the costs of leather and wood to build a piece of furniture. Labor, or the wages of employees working on a process, is the second area and would include the cost of a carpenter building a piece of furniture. The third is indirect costs, also known as “overhead”; this would include the cost of liability insurance on a plant.
Standard cost accounting includes the concepts of fixed and variable costs, since analyzes are performed to identify how variable costs affect the cost of a product, excluding fixed costs and vice versa. Budgets are created based on standard costs and variances are identified and analyzed. It is a popular tool used by many manufacturing plants and other businesses.
Another way of looking at cost accounting and management is through Activity-Based Accounting, also known as ABC. This method attempts to measure actual activity costs to assign overhead costs to products. This system is usually expensive to implement, as the activities and ways of measurement can vary drastically.
Most management accounting processes are performed using computer systems that can handle large amounts of data and make it user-friendly. Computer systems and Information Technology (IT) department are very important in management accounting. With this importance come the expenses associated with the IT department; That’s why IT cost transparency is part of management accounting. IT costs need to be measured and controlled in the same way as other processes.
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