Management Accounting Definition
The management accounting definition is accounting with the specific purposes of informing managers. Management vs financial accounting: financial accounting is mainly for the purpose of informing outside parties – shareholders, lenders, creditors, and government. Ultimately, company controllers including the CEO, other executive officers, and department leaders use managerial accounting.
Management Accounting Explanation
Management accounting explains the up-to-date financial standing of businesses to leading parties. As such, it has no format which is required by law: management accounting best practices showing vital information related to control and leadership. Though reports follow generally accepted accounting principles, they are made by internal controllers and for internal controllers.
Management accounting concepts and techniques include a few pieces of information that are somewhat standard. Sales, costs, profits, available cash, accounts receivable and payable, assets, liabilities, inventories, and certain statistical analyses. Additionally, they contain business or industry specific factors. In a contracting firm, stats will include work-in process, raw materials, and more. For an e-commerce store, website statistics will be of utmost importance. For every business, you must include unique measurements to show the effectiveness and growth of the business.
Management Accounting Example
For example, Raj is the CFO for a manufacturing company. Everyday, Raj deals with financial decisions that could make or break the company. As a result, he advises the business from the perspective of its profits, cash standing, and costs. Raj fills an important role in the business.
Raj must create a managerial accounting report for the business. Company controllers have asked for this in the process of a quarterly review. So, Raj must make a quality report so that the company can make educated decisions from it. He must attack management accounting from a strategic approach.
Raj has compiled the company financials into the report. This part was not difficult since there is a precedent on this that has been continued for decades. However, Raj must choose the important variables related to their new business operations. These relate to the two following fields: online commerce and a new, very large client.
Raj decides to keep the report more relevant to his duties as a CFO. Instead of including the analysis of the website and deals with the recently acquired big name client, he instead focuses on how these operations relate to company finances. He includes only this information as he finishes his report.
When he is finished, the board of directors loves his work. Raj has made the right decision. Furthermore, the company has other resources allocated to find answers to questions unrelated to finance. By truly understanding his role in the company, Raj has secured a professional name, kudos, and even a raise. Raj thanks his accountancy training as he moves on to bigger and more important projects.
If you want to learn more financial leadership skills, then download the free 7 Habits of Highly Effective CFOs.