Management Accounting

Management accounting provides information to management on present and projected costs and on the profitability of individual projects, products, activities or departments as a guide to decision making and financial planning.

Management accounting uses the following techniques:

• Cost accounting – the recording and allocation of cost data.
• Cost analysis – the classification and analysis of costs to aid business planning and control.
• Absorption costing – the assignment of all costs, both fixed and variable, to operations or products.
• Marginal costing – the segregation of fixed and variable or marginal costs and the apportionment of those marginal costs to products or processes.
• Standard costing – the preparation of predetermined or standard costs and their comparison with actual costs to identify variances.
• Variance analysis – the identification and analysis of differences between actual and standard costs, or between actual and budgeted overheads, sales and profits, with a view to providing guidance on any corrective action required.
• Cost–volume–profit analysis – the study of the relationship between expenses, revenue and net income in order to establish the implications on profit levels of changes in costs, volumes (production or sales) or prices.
• Profit–volume charts, which specifically reveal the impact of changes in volume on net income.
• Break-even analysis, which indicates the point where sales revenue equals total cost and there is neither profit nor loss. It also shows the net profit or loss that is likely to arise from different levels of activity.
• Sales mix analysis, which calculates the effect on profits of variations in the mixture of output of the different products marketed by the company.
• Financial budgeting, which deals with the creation of budgets (statements in quantitative and financial terms of the planned allocation and use of the company’s resources). The basic form of budget is a static budget, ie one which assumes a constant level of activity.
• Flexible budgets, which take account of a range of possible volumes or activity levels.
• Zero-based budgeting, which requires managers to justify all budgeted expenditure and not to prepare budgets as no more than an extension of what was spent last year.
• Budgetary control, which compares actual costs, revenues and performance with the fixed or ‘flexed’ budget so that, if necessary, corrective action can be taken or revisions made to the budget.
• Overhead accounting – direct attention to the identification, measurement and control of overheads.
• Responsibility accounting, which defines responsibility centres and holds the managers of those areas responsible for the costs and revenues assigned to them.
• Capital budgeting – the process of selecting and planning capital investments based on an appraisal of the returns that will be obtained from the investments. The main capital appraisal techniques comprise accounting rate of return, payback and discounted cash flow.
• Risk analysis, which assesses the danger of failing to achieve forecasts of the outcome or yield of an investment.