| Management accounting is concerned with the | | | | most manufacturing firms, it nowadays tends to be |
| provisions and use of accounting information to | | | | used in conjunction with innovative techniques such |
| managers within organizations, to assist management | | | | as life cycle cost analysis and activity-based costing, |
| making decisions and managerial control functions. | | | | which are designed with specific aspects of the |
| Management accounting is also concerned with the | | | | modern business environment in mind. |
| process of identification, measurement and | | | | Life cycle costing recognizes that managers' ability to |
| accumulation of product and service costs; | | | | influence the cost of manufacturing a product is at its |
| preparation of statements relating to materials, labor | | | | greatest when the product is still at the design stage |
| and overheads; standard costs; budgeting for | | | | of its product life cycle, since small changes to the |
| decision-making; and the communication of | | | | product design may lead to significant savings in the |
| information used by management to plan, evaluate | | | | cost of manufacturing the product. |
| and control an entity to assure appropriate use of | | | | Activity-based costing (ABC) recognizes that, in |
| and accountability for its resources. | | | | modern factories, most manufacturing costs are |
| Management accounting also comprises of | | | | determined by the amount of 'activities' and that the |
| preparation of financial reports for non- management | | | | key to effective cost control is therefore optimizing |
| groups such as shareholders, creditors, regulatory | | | | the efficiency of these activities. |
| agencies and tax authorities. | | | | Activity-based accounting is also known as Cause and |
| In the late 1980s, accounting practitioners and | | | | Effect accounting. Both life cycle costing and |
| educators were heavily criticized on the grounds that | | | | activity-based costing recognize that, in the typical |
| management accounting practices (and, even more | | | | modern factory, the avoidance of disruptive events |
| so, the curriculum taught to accounting students) had | | | | is of far greater importance than reducing the costs |
| changed little over the preceding 60 years, despite | | | | of raw materials. Activity-based costing also |
| radical changes in the business environment. | | | | deemphasizes direct labor as a cost driver and |
| Professional accounting institutes, perhaps fearing | | | | concentrates instead on activities that drive costs, |
| that management accountants would increasingly be | | | | such as the provision of a service or the production |
| seen as superfluous in business organizations, | | | | of a product component. |
| subsequently devoted considerable resources to the | | | | Management accounting plays a very vital role in the |
| development of a more innovative skills set for | | | | determination of product and service costs; the |
| management accountants. | | | | preparation of statements; budgeting; |
| The distinction between 'traditional' and 'innovative' | | | | decision-making; and the communication of |
| management accounting practices can be illustrated | | | | information. |
| by reference to cost control techniques. | | | | To be successful in this field, we must address issues |
| Traditionally, management accountants' principal | | | | on product rates, causes of quality problems, |
| technique was variance analysis, which is a | | | | profitable market segments, higher profit margins, |
| systematic approach to the comparison of the actual | | | | delivery of goods and the costs of introducing new |
| and budgeted costs of the raw materials and labor | | | | products. |
| used during a production period. | | | | Copyright 2007 Ismael D. |
| While some form of variance analysis is still used by | | | | |