Accounting for Management

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1 Introduction

The purpose of management accounting is to assist management in running the business in ways that will improve the performance of the business.

2 Data and information

One way of assisting management is to provide them with good information to help them with their decisions.

The information can be provided to them in different ways, but is usually in the form of reports. For example, a report analysing costs of producing each of several products may assist management in deciding which products to produce.

It is the management accountant who will be expected to provide the information, and in order to do so he/she needs to collect data.

Data consists of the facts that are gathered and stored. Data has no clear meaning until it is processed – analysed and sorted – into information.

3 What makes good information?

Good quality information should:

• be Accurate

• be Complete (but not excessive)

• be Cost effective (should cost less than the savings to be made)

• be Understandable (to whoever is using it)

• be Relevant (to the decision being made)

• be Accessible ( i.e. communicated by an appropriate channel (for example, be printed or be sent electronically)

• be Timely

• be Easy to use

4 The main managerial processes

The main areas of management accounting are:

• Costing

Cost accounting is identifying the cost of producing an item (or providing a service) in order to, for example, assist in deciding on a selling price.

• Planning

e.g. plan how many staff will be required in the factory next year

• Decision making

e.g. decide on what selling price to charge for a new product

• Control

e.g. check month-by-month whether the company is over or under spending on wages

• Performance evaluation

  Comparing the performance of mangers or departments against budgets or targets

5 The different levels of planning

• strategic planning

long-term plans (e.g. 5 to 10 years) for the business

e.g. what new offices to open? / what new products to launch?

• tactical planning

medium-term, more detailed, plans – usually involving producing budgets for the next year

e.g. how many staff to employ next year?

• operational planning

short-term planning and decisions

e.g. which supplier to choose for a purchase next week

6 Comparison of management accounting with financial accounting