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Management Accounting
Management accounting is concerned with the provisions and use of accounting
information to managers within companies and organizations, to provide them with
the basis in making informed business decisions that would allow them to be better
equipped in their management and control functions.
Unlike financial accountancy information (which, for public companies, is
public information), management accounting information is used within an
organization (typically for decision-making) and is usually confidential and its
access available only to a select few.
According to the Chartered Institute of Management Accountants (CIMA),
Management
Accounting
is "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).
Definition
The American Institute of Certified Public Accountants(AICPA) states that management accounting practice extends to the following three areas:
-
Strategic Management—Advancing the role of the management accountant as a
strategic partner in the organization.
-
Performance Management—Developing the practice of business decision-making
and managing the performance of the organization.
- Risk Management—Contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.
The Institute of Certified Management Accountants (ICMA), state "A management
accountant applies his or her professional knowledge and skill in the preparation
and presentation of financial and other decision oriented information in such a
way as to assist management in the formulation of policies and in the planning
and control of the operation of the undertaking. Management Accountants therefore
are seen as the "value-creators" amongst the accountants.
They are much more interested in forward looking and taking decisions that will
affect the future of the organization, than in the historical recording and compliance
(score keeping) aspects of the profession. Management accounting knowledge
and experience can therefore be obtained from varied fields and functions within
an organization, such as information management, treasury, efficiency auditing,
marketing, valuation, pricing, logistics, etc.
Aims:
-
Formulating strategies.
-
Planning and constructing business activities.
-
Helps in making decision.
-
Optimal use of resources.
-
Supporting financial reports preparation.
- Safeguarding assets.
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. Life-cycle 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 life-cycle
(i.e., before the design has been finalized 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 life-cycle 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 activities that drive costs, such as
the provision of a service or the production of a product component.
Role of Management Accountants within the Corporation
Consistent with other roles in today's corporation, management accountants
have a dual reporting relationship. As a strategic partner and provider of decision
based financial information, management accountants are responsible to the business
management team while at the same time also have reporting relationships and responsibilities
to the corporation's finance organization.
The activities management accountants provide inclusive of forecasting and
planning, performing variance analysis, reviewing and monitoring costs inherent
in the business are ones that have dual accountability to both finance and
the business team. Examples of tasks where accountability may be more meaningful
to the business management team vs. the corporate finance department are
the development of business driver metrics, sales management score-carding, and client
profitability analysis.
Conversely, the preparation of certain financial reports, reconciliations of the
financial data to source systems, risk and regulatory reporting will be more useful
to the corporate finance team as they are charged with aggregating certain financial
information from all segments of the corporation. One widely held view of the progression
of the accounting and finance career path is that financial accounting is a stepping
stone to management accounting. Consistent with the notion of value creation,
management accountants help drive the success of the business while strict financial
accounting is more of a compliance and historical endeavor.
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.
Throughput accounting (TA) is an alternative to cost accounting proposed
by Eliyahu M. Goldratt. It is not based on Standard Costing or Activity Based
Costing (ABC). Throughput Accounting is not costing and it does not allocate costs
to products and services. It can be viewed as business intelligence for profit maximization.
Conceptually throughput accounting seeks to increase the velocity at which
products move through an organization by eliminating bottlenecks within the organization.
Cost (or Management) accounting is an organization's internal method used
to measure efficiency. Since no one outside the organization uses such internal
accounts for investment or other decisions, any methods that an organization finds
helpful can be used. Outside parties to a business depend on accounting reports
prepared by financial (public) accountants who apply Generally Accepted Accounting
Principles(GAAP) issued by the Financial Accounting Standards Board (FASB) and enforced
by the U.S. Securities and Exchange Commission (SEC) and other regulatory agencies.
Throughput accounting improves profit performance with better management decisions
by using measurements that more closely reflect the effect of decisions on three
critical monetary variables (throughput, inventory, and operating expense).
Lean Accounting (accounting for lean)
In the mid to late 1990s several books were written about accounting in the
lean enterprise (companies implementing elements of the Toyota Production System).
The term lean accounting was coined during that period. These books contest
that traditional accounting methods are better suited for mass production and do
not support or measure good business practices in just in time manufacturing
and services.
The movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn,
MI. 320 individuals attended and discussed the merits of a new approach to accounting
in the lean enterprise. 520 individuals attended the 2nd annual conference in 2006.
Lean accounting is accounting for the lean enterprise. It seeks to move from
traditional cost accounting to a system that measures and motivates good business
practices in the lean enterprise. Applying lean principles to accounting can be
part of this system.
Those in operations have long argued that accounting does not accurately
reflect the positive gains made through lean initiatives. For example, a reduction
in inventory, cycle time, or new found capacity by shop floor personnel is either
not accurately reflected or understood. The problem comes when business strategy
is made with wrong or misguided metrics.
In addition to the gap between accounting and lean gains, traditional accounting
practices often motivate wrong behaviors in the lean enterprise. These wrong behaviors
typically involve achieving local optimums at the expense of overall company profitability.
For instance, attempts to meet machine efficiency measures may motivate shift production
to create needless inventory.
Management Accounting in Banking
Management accounting is an applied discipline used in various industries.
The specific functions and principles followed can vary based on the industry.
Management
accounting
principles in Banking are specialized but do have some common
fundamental concepts used whether the industry is manufacturing based or service
oriented.
For example, transfer pricing is a concept used in manufacturing but is also applied
in banking. It is a fundamental principle used in assigning value and revenue attribution
to the various business units. Essentially, transfer pricing in banking is the method
of assigning the interest rate risk of the bank to the various funding sources and
uses of the enterprise.
Thus, the bank's corporate treasury department will assign funding charges to the
business units for their use of the bank's resources when they make loans
to clients. The treasury department will also assign funding credit or business
units who bring in deposits (resources) to the bank.
Although the funds transfer pricing process is primarily applicable to the loans
and deposits of the various banking units, this proactive is applied to all assets
and liabilities of the business segment. Once transfer pricing is applied and any
other management accounting entries or adjustments are posted to the ledger
(which are usually memo accounts and are not included in the legal entity results),
the business units are able to produce segment financial results which are used
by both internal and external users to evaluate performance.
Management Accounting Tasks / Services Provided
Listed below are the primary tasks/ services performed by management accountants. The degree of complexity relative to these activities are dependent on the experience level and abilities of any one individual:
-
Variance Analysis
-
Rate & Volume Analysis
-
Business Metrics Development
-
Price Modeling
-
Product Profitability
-
Geographic vs. Industry or Client Segment Reporting
-
Sales Management Scorecards
-
Cost Analysis
-
Cost Benefit Analysis
-
Client Profitability Analysis
-
Capital Budgeting
-
Buy vs. Lease Analysis
-
Strategic Planning
-
Strategic Management Advise
-
Internal Financial Presentation and Communication
-
Sales and Financial Forecasting
-
Annual Budgeting
-
Cost Allocation
- Resource Allocation and Utilization
Business Tips
Some tips on how to avoid business failure:
-
Don't underestimate the capital you need to start up the business.
-
Understand and keep control of your finances - income earned is not the same as
cash in hand.
-
More volume does not automatically mean more profit - you need to get your pricing
right.
- Make sure you have good software for your business, software that provides you with a good reporting picture of all aspects of your business operations.
See More Information On:
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ShopMateWeb Online Cloud Based Business Database Application
-
ShopMate Desktop Automotive Database Software
-
ShopMate Desktop Modules Explained - Screen Shots
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AzureMate Desktop Cloud Data Storage Explorer Software
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Software Downloads and Installations
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MotoShop Automotive Database Software
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Ideas for Business - Business Tips
- Automobile History - Automotive Fuels
Important Note
Because the material covered here and other pages is considered an introduction
to the topic of Accountancy and Accounting, there are many complexities not presented.
You should always consult with a business accounting professional for assistance
with your own specific circumstances.