Accounting Basics, Management Accounting

What Is Management Accounting & Why Do You Need It?


As companies face new challenges in ever more competitive environments, economic tides can change rapidly—in one moment, turning a successful organization into a struggling one. Change, or newly arising problems, risks, chances, and opportunities, are all rather everyday matters in business life.

Not least, for this reason, it becomes an increasing requirement for any organization to quickly provide adequate and accurate information to its internal decision-makers. Management and executive staff need to be enabled to solve problematic issues and to turn challenges or opportunities to profit, as fast as they are detected. The management accountant supports them in these tasks.

 
The scope of management accounting
In a formerly published article called “The Scope of Management Accounting,” we have already described the different branches of accounting in more detail. Whereas, for instance, financial accounting focuses on external information recipients, like banks or investors, management accounting collects, analyzes, and reports financial as well as non-financial data to internal “customers” within one’s own organization.

In sharp contrast to financial accounting, management accounting is neither a statutory obligation nor based on strict accounting principles. Instead, it is entirely optional and the preparation of reports, for example, is not aligned to any standardized format (at least, if no specific, internal notation guidelines have been defined voluntarily). Besides, reports are always situation-specific, which means they address a specific problem, situation, and/or decision.

 
The definition of management accounting
Simplified, the term “management accounting” is composed of “management” and “accounting”—or in other words, “accounting for the management.” One of the management accountants’ main tasks is to support management and executive staff in their decision-making processes or with their strategizing. They especially fulfill that task by providing quickly, accurately, and reliably prepared information about the business (summarized in reports), thereby reducing a specific amount of uncertainty, which is a characteristic of every decision-making process.

A certain level of information or data enables managers to plan the strategic route and set specific goals for the company, monitor their achievement or the business performance in general, and initiate counteractive measures if and where necessary.

The aggregation and presentation of information to foster decisions has special relevance in today’s modern business times, as a specific kind of decentralization and delegation is followed by most organizations. This means information is, for example, needed to measure, analyze, and check the performance of smaller single business units or divisions on the one hand, but reports should also draw more complete pictures about the functioning of the enterprise in total.

Taking a closer look at the specific definitions of management accounting as they are represented in economics-related literature, they are defined with differing degrees of precision. More general definitions of the term describe it as being “any form of accounting which enables a business to be conducted more efficiently” or being “a tool to present such information to the management that will ease efficient planning and control.”

But there are also more specified definitions like the one by CIMA (Certified Institute of Management Accountants). It describes management accounting as being an integral part of the management function while identifying, interpreting, and presenting information for different kinds of usage, i.e. shaping strategies, making decisions, optimizing the use of confined resources or budgets, planning and controlling particular business activities, informing stakeholders, and achieving the company’s goals in general.

Therefore, the management accountant needs to collect and measure data or information from both internal and external sources about the organization’s own business performance or its competitors’ performance, for instance. Then, process it, analyze and interpret it, and communicate it to relevant decision-makers.

 

The functions and objectives of management accounting

In accordance with the general object of an enterprise, management accounting is primarily aimed at maximizing profits, or rather minimizing losses. It fulfills this goal by taking over several functions which support management and executive staff in decision-making and control of the organization.

A. Supplying and storing reliable information and data as decision support
Decision-making is a process of choosing among alternative solutions. Management accounting collects and measures a variety of data from different sources from inside or outside the company. Furthermore, it makes sure that the data is reliable. Every level of management requires a different kind and amount of information according to various subject matters to decide about, as well as a varying time-horizon, within which the decision has to be made.

So the management accountant must ensure that he can satisfy the various needs, and to store the information for adequate usage, as and when needed. The supply of the right information at an appropriate time increases efficiency in total.

 
B. Modification and presentation/reporting of information and data
Financial and non-financial information is supplied to various information recipients via a variety of reports. These reports not only present the data in text form (e.g., explanation of variances budget/actual), but also contain tables, graphs, or diagrams. They are prepared by a management accountant on a quarterly, monthly, weekly, or even daily basis. Thus, reporting is also an important instrument to regularly review the business performance and the achievement of goals which have been already set in an earlier planning stage.

Information is also often reported to such recipients who do not have a direct link to or responsibility for those figures. They may even lack an academic background in economics, which is especially significant in the case of financial management ratios. Furthermore, variances between actual and planned numerical data always need to be seen in a broader light, including the actual situation and development of the company or its markets.

All this makes it compulsory for every management accountant to explain the figures and occurring variances in detail, as well as to draw attention to those subjects and details that really matter. Eventually, the information should become completely understandable for its recipients, so that the right conclusions can be drawn from the data. This also includes the initiation of counteractive measures, if necessary, to finally achieve the desired results.

Each management accountant should furthermore try to meet the individual information requirements of his/her “customers,” which means that the reports are prepared specifically for each target-group. So these groups do not need to invest great personal effort into filtering necessary information from unnecessary or read through bulky reports.

 
C. Support in budgeting, forecasting and strategic planning, as well as subsequent control
Planning sets the starting point of any business activity. Management accounting comprehensively helps in the periodic planning and forecasting procedures of the organization.

Planning defines the organization’s short-term and long-term targets—e.g., an increase in profits or ROI in general, a growth of sales volumes or reach of a determined market position in a specific region, or a defined cost-cutting in a particular division. Besides, it also determines the actions necessary to achieve the planned goals (what should we do, how should the goals be pursued, when should they be achieved, what measures should be initiated/finished?).

As a matter of course, this planning process is aimed at accomplishing as much efficiency as possible, straining the minimum costs and resources necessary. Therefore, budgets are prepared as a fixed allocation of liquid funds and non-financial resources (personnel, commodities, etc.) to departments, divisions or single cost centers, and eventually, those (shall) serve the achievement of the planned objectives.

A forecast, which is an actualization of such a (budget) planning during the fiscal year, provides greater indicators whether the specific goals have already been achieved, whether their achievement is still likely, or whether counteractive measures need to be initiated. The management accountant, based on his sound knowledge, might also give profound recommendations concerning those possible, necessary actions.

Planning stages in short-term planning (one business year) usually comprise the specification of production output and turnover, manpower requirements, costs, capital expenditures, etc.—taking into account projections about the development of the company itself as well as its markets/its competitive environment, the current labor market situation, or other macroeconomic correlations.

Strategic planning (usually, planning horizon of 3-5 years and longer) is concerned with more complicated, long-term decisions which may have quite a significant influence on the company’s sustainability. For example, making or buying a specific product, adding or eliminating a product (line) in the actual product mix, or the exploration of new market areas.

The management accountant himself normally does not bear direct responsibility for the achievement of the company’s targets. Instead, the management and other executive staff usually are accountable for the superior goals, which especially affect the entire company and which may have a tremendous impact on its competitiveness and sustainability. To perform their control function properly and monitor the pursuance of the envisaged results steadily, these enterprise members constantly need information about the business performance with all its particulars.

The management accountant not only coordinates and moderates/mediates during the planning discussions, but also consolidates the individual planning (of single departments, etc.) into the ultimate corporate planning. Subsequent to the planning stage and its setting of goals and strategies, management accounting also tries to provide the required information to the persons that are responsible for the targets.

Thus, target achievements and performances are constantly monitored, measured and evaluated, and then, meaningful information is reported to the appropriate departments and divisions. Variance analysis functions as an instrument to immediately bring a potential non-achievement of the desired results to the attention of the concerned—and finally, to bring those to exercise control, determine the required course of action and initiate counteractive measures.

 
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Karsten

Karsten

Being a management accountant himself, Karsten has worked in the discipline of management accounting for various companies in different roles, and in both national and international contexts. He holds a Master’s degree in Business Administration from the University Mainz, Germany. Currently, he lives near Frankfurt, Germany, and works as a management accountant for a company group that specializes in waste management and recycling. For further information, you can visit his LinkedIn profile given below.

http://www.linkedin.com/in/karstenbauer


About this blog
Must-read blog posts about management accounting and financial control—classical topics, as well as modern subjects, latest trends, and current challenges in the management accounting discipline. Aimed to inform, inspire, and entertain management accountants and anyone with a deeper interest in management accounting.
Karsten
Filed under: Accounting Basics, Management Accounting

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Being a management accountant himself, Karsten has worked in the discipline of management accounting for various companies in different roles, and in both national and international contexts. He holds a Master’s degree in Business Administration from the University Mainz, Germany. Currently, he lives near Frankfurt, Germany, and works as a management accountant for a company group that specializes in waste management and recycling. For further information, you can visit his LinkedIn profile given below. http://www.linkedin.com/in/karstenbauer About this blog Must-read blog posts about management accounting and financial control—classical topics, as well as modern subjects, latest trends, and current challenges in the management accounting discipline. Aimed to inform, inspire, and entertain management accountants and anyone with a deeper interest in management accounting.