Management accounting is the internal business function responsible for collecting and reporting financial information for internal business use. Management accounting information often relates to the cost of materials and labour used to produce goods or services sold to consumers. This information is necessary for companies to determine the effectiveness and efficiency of business operations and how well they earn profits based on the assets used to produce consumer products. Management accounting information is usually specific to each company and the managers meeting to review the information for decision-making purposes.
Cost allocation is a primary function of management accounting. Management accountants prepare reports showing how much capital is spent for each type of economic resource or input and how the business will allocate these resource costs to goods or services. Common cost-allocation methods include job costing, process costing, throughput costing and activity-based costing. Managers use this information to ensure that goods or services that the company produces are receiving an accurate amount of costs and the price charged to consumers ensures the company recoups production costs, along with a specific level of profit.
Management accountants often prepare budgets to determine how much money the business should spend on each business function. Managers use budgets to set limits for certain business expenditures to ensure the company is not overpaying for economic resources or other business inputs. Master budgets, standard budgets and flexible budgets are the most common budget types used in management accounting. Master budgets include all financial expenditures of a company. Management accountants may prepare budgets for individual departments that eventually roll into the master budget. Standard and flexible budgets relate specifically to the production process of a company.
Standard budgets create specific dollar amount that the company allows for each production function. Staff members compare actual production numbers to the standard budget to determine if any favourable or unfavourable variances occur during the production process. Favourable variances usually occur when the company has spent less money on its production processes; unfavourable variances occur when a company spends more money than expected on production processes.
Flexible budgets allow for a specific variance range in the production process. Flexible budgets ensure that minor production variances, such as unexpected increases in consumer demand or the build-up of extra inventory for future sales, are not counted as unfavourable variances in the company’s production budget.
Forecasting is another important part of management accounting. Management accountants prepare economic forecasts to determine the potential sales of goods or services to consumers under specific market conditions. Common forecasting reports may include decision trees, net-present value calculations or other various statistical and mathematical forecasting models. This information allows company management to make decisions regarding the increase of production output or to seek new business operations to meet future consumer demand.