Management accounting also called managerial accounting usually deals with the arrangements and application of accounting information. Management accounting is a blend of accounting, finance and management with the leading techniques which are very important for the successful businesspersons. The process of management accounting is very important for making day to day or short term decisions. In this the managers prepare reports of financial and statistical information. Managerial accounting is different from financial accounting, as it is largely concerned on providing vital business information to those who are outside an organization like stockholders, creditors and others.
The information, that managerial accounting provides, is as follow:
- It provides information on costs of the products and the services of an organization. In a good example, management level could utilize such product costing information as guide while setting products selling prices. Further, product costs analysis are also used in inventory valuation and income determination.
- It gives information related to budgets which is a quantitative expression of an organization business planning.
- It helps in the preparation of performance reports of the organizations. Such performance reports mostly consist of budgets planning versus actual business results. The deviations of actual results from as plan are termed as Variances.
- It also provides other vital information which would help the managers in planning and controlling of their activities. For instance information on revenues , sales logs, quantities and demands, products and services status, resources status and capacity fulfillment, and so on.
Conventionally managerial accounting systems were mainly designed to measure the efficiency of internal processes. Towards the end of the 1980’s there was a lot of criticism for the mentors of the management accounting. The critics believed that the curriculum and the practices of the managerial accounting had undergone little change in spite of excessive variations in the business environment. Various accounting foundations applied various resources for the development of the field. The cardinal method of the management accounting is cost accounting. Variance analysis was the traditional technique of the management accountants.
Variance analysis is the comparison or explanation of the difference between the actual cost and the standard cost which is allowed for the output of the good. Keeping in view the modern business environment and performance reports such as the balanced scorecard various new techniques have been drafted which can be combined with the variance analysis. Balanced scorecard is a set various performance measure that benchmark against agreed standard versus actual performance . The Scorecard could consist of operational measures, financial measures, customer satisfaction scale, internal processes and improvement .
Life-cycle costing and activity – based costing are the two important techniques which have been developed to be used in combination with variance analysis for better results. Both these techniques give more importance to the avoidance of the troublesome events rather than giving importance to the reduction of the cost of the raw materials.
In contrast, Traditional Variance Analysis however does not pinpoint the cause behind unfavorable difference between actual sales versus target plan. But the managerial accountants are able to determine the bottlenecks and the loss of revenue potential each bottleneck withing organization. Such detailed analysis could help in tackling the hidden issues.