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