Management Accounting - An Introduction

An introduction to management accounting

At the most basic level, accounting is the process of recording financial information, measuring it and telling/communicating it to users who will use that information to make decisions beneficial to them.

Who are these users? They can be divided into 2 categories: external parties and internal parties.

External parties are people who are outside of the business. They may be potential investors, lenders/bankers and creditors. They are usually interested in whether the business is profitable and creditworthy, and thus is a good business prospect and is able to repay loans/borrowings. Such parties will refer to the past financial statements that have been prepared, through the financial accounting process. This has been discussed in the Accounting Cycle section of this website.

Internal parties, on the other hand, are people within the business, who have an insider’s knowledge of it. Examples are the managers, operators and staff, who would not rely on the financial statements to know the financial affairs of the business. However, they would need detailed, up-to-date information in order to make decisions on the running of the business. Such information is generated by the management accounting process.

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The Management Accounting Information System (MAIS) takes in accounting/non-accounting data, and then measures and analyses them, and reports the results which will be used to make decisions to improve business operations.

An example of how this works: Let’s say that there’s this cafe that serves drinks and food. The flagship drink is called a Mango Mambo Shake. From analysing the process of making the shake, we found that the cost of the raw materials going into the shake (mango pieces, sugar, milk, water) is $1.50. The estimated cost of electricity used in blending the shake is $0.20. The estimated cleaning costs (of washing the glass after the shake has been consumed) is $0.05. The estimated cost of hiring a waiter to serve the shake (based on wages per hour) is $0.25. We get a total shake cost of $2. Let’s say the menu price of the shake is $2; we see that the shake is underpriced. Our next action is therefore to raise the price accordingly to take into account the costs, as the shake will not be profitable otherwise.

Hence, the MAIS serves to:

1. provide information for determining the cost of services, products, and other objects of interest to management.

For examples of this, refer to [ABC].

2. provide information for planning, controlling, evaluation and continuous improvement.

For examples of this, refer to [Standard Costing], [Budgeting], [Performance Measurement], etc.

3. To provide information for decision making and problem solving.

For examples of this, refer to [ABC], Pricing decisions, Target costing, Kaizen costing, Cost-plus Pricing, Make or buy decisions, Discontinuation decisions.

Return to Accounting Adventurista from Management Accounting.

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