Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to assist management making decisions and managerial control functions.
Management accounting is also concerned with the process of identification, measurement and accumulation of product and service costs; preparation of statements relating to materials, labor and overheads; standard costs; budgeting for decision-making; and the communication of information used by management to plan, evaluate and control an entity to assure appropriate use of and accountability for its resources.
Management accounting also comprises of preparation of financial reports for non- management groups such as shareholders, creditors, regulatory agencies and tax authorities.
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, 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' 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 is of far greater importance than 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.
Management accounting plays a very vital role in the determination of product and service costs; the preparation of statements; budgeting; decision-making; and the communication of information.
To be successful in this field, we must address issues on product rates, causes of quality problems, profitable market segments, higher profit margins, delivery of goods and the costs of introducing new products.
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