Management Accounting

As such it involves the application of accounting and financial management to create, protect, preserve and increase value for the stakeholders of the organisation concerned.

The managerial processes of planning, decision making and control

The main functions that management are involved with are planning, decision making and control.

Planning

• Planning involves establishing the objectives of an organisation and formulating relevant strategies that can be used to achieve those objectives. In order to make plans, it helps to know what has happened in the past so that decisions about what is achievable in the future can be made. For example, if a manager is planning future sales volumes, he or she needs to know what sales volumes have been in the past.
• Planning can be either short-term (tactical planning) or long-term (strategic planning).  

Decision making

Decision making involves considering information that has been provided and making an informed decision.

• In most situations, decision making involves making a choice between two or more alternatives. Managers need reliable information to compare the different courses of action available and understand what the consequences might be of choosing each of them.
• The first part of the decision-making process is planning, the second part is control.

Control

Information relating to the actual results of an organisation is reported to managers.

• Managers use the information relating to actual results to take control measures and to re-assess and amend their original budgets or plans.
• Internally- sourced information, produced largely for control purposes, is called feedback.
• The 'feedback loop' is demonstrated in the following illustration.

Illustration - The managerial processes of planning, decision making and control

Here, management prepare a plan, which is put into action by the managers with control over the input resources (labour, money,materials, equipment and so on). Output from operations is measured and reported ('fed back') to management, and actual results are compared against the plan in control reports. Managers take corrective action where appropriate, especially in the case of exceptionally bad or good performance. Feedback can also be used to revise plans or prepare the plan for the next period.

Cost accounting

Cost accounting is a system for recording data and producing information about costs for the products produced by an organisation and/or the services it provides. It is also used to establish costs for particular activities or responsibility centres.

• Cost accounting involves a careful evaluation of the resources used within the enterprise.
• The techniques employed in cost accounting are designed to provide financial information about the performance of the enterprise and possibly the direction that future operations should take.
• The terms 'cost accounting' and 'management accounting' are often used to mean the same thing but strictly speaking, cost accounting is one element of management accounting.

Differences between management accounting and financial accounting

The role of management accounting within an organisation's management information system

The management information system of an organisation is likely to be able to prepare the following:

• annual statutory accounts
• budgets and forecasts
• product profitability reports
• cash flow reports
• capital investment appraisal reports
• standard cost and variance analysis reports
• returns to government departments, e.g. Sales Tax returns.

Management information is generally supplied to management in the form of reports. Reports may be routine reports prepared on a regular basis (e.g. monthly) or they may be prepared for a special purpose (e.g.ad hoc report).

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