Management accounting is the accounting discipline concerned with collecting and presenting financial information to be used by a business's managers (that is, internal users) for decision-making within the organization. In this sense, management accounting differs from financial accounting, which provides financial information for external users, such as investors and creditors.
Managers need to make decisions about how the business can best meet the needs of consumers while simultaneously monitoring costs and improving efficiencies. Management accounting looks at how to provide the most appropriate financial information to managers for this type of decision-making. However, there is often a trade-off involved between the costs and benefits of collecting and presenting useful financial information. Because of this, many different management accounting techniques may be used by a company depending on the cost and usefulness of collecting such information. Because management accounting information is only used internally, it does not need to conform the GAAP or IFRS, unlike financial accounting information.
At the end of the day, management accountants develop a range of reports that provide day-to-day information about the business (such as order backlog reports), special reports (such as failing products), reports for evaluating the costs and benefits of decisions or new opportunities (such as adding or dropping a product line), and reports for forecasting and benchmarking. These reports are used for budgeting, short-run decision making and measuring performance.
Management accountants also make long-term capital budgeting decisions. We often think of these decisions as falling under the category of corporate finance; therefore, we look at these types of decisions under the Finance topic at BrainMass.com.
The study of management accounting looks at best practices developed by both academia and industry itself. Most managers have some sense of the importance of financial information for making decisions, whether or not a formal management accounting system is used within the business. Management accounting typically looks at the type of information needed for (1) preparing external financial statements, (2) predicting cost behaviour in response to changes in activity, (3) assigning costs to costs objects such as departments or products, and (4) making decisions. We use different types of information for these uses, identified below:
(1) Preparing external financial statements:
i) product costs: direct materials, direct labor, manufacturing overhead
ii) period costs: non manufacturing costs, marketing/selling costs, administrative costs
(2) Predicting cost behavior in response to changes in activity:
i) variable costs: proportional to level of activity
ii) fixed costs: constant, independent of level of activity
iii) step costs: fixed over certain intervals
(3) Assigning costs to cost objects such as departments or products:
i) direct cost: can easily be traced to a certain product or department
ii) indirect cost: cannot easily be traced, most be allocated
(4) Making Decisions:
i) differential costs: the difference in cost between alternatives
ii) sunk costs: past costs that are no longer relevant to a decision
iii) opportunity cost: forgone benefits if an alternative is chosen