As businesses continue to evolve and grow, it is crucial for managers to make informed decisions about their operations, finances, and strategies.
However, the abundance of information available can make it challenging to identify what information is useful and relevant. This can lead to poor decision-making, which can ultimately affect the organization's bottom line.
Fortunately, management accounting methods can help businesses navigate this challenge by providing tools and techniques that enable managers to make informed decisions based on accurate critical thinking and relevant information. In this blog post, we will explore what management accounting methods are, how they can be used to improve decision-making, and some of the most commonly used methods that businesses can implement to achieve their objectives.
Management Accounting Methods Vs Tools
Management accounting methods refer to the techniques and approaches employed by businesses to assist in making informed decisions regarding their operations, finances, and strategies. Commonly used methods include cost accounting, budgeting, variance analysis, activity-based costing, balanced scorecard, and value chain analysis.
Management accounting tools, on the other hand, are models, frameworks, or processes that aid management accountants in carrying out different accounting methods. Some examples of these tools include cash flow modeling, SWOT analysis, balanced scorecards, and value chain analysis. These tools enable management accountants to better understand their operations, make informed decisions, and improve financial performance.
In short, Management accountants prepare reports that focus on current and future activities that are relevant to decision-making for the future and make informed decisions. By producing dedicated reports, management accountants help to ensure that the information provided is specific to the needs of decision-makers.
The Functions of Management Accountants
Management Accountants perform a range of functions to guide organizational operations toward achieving their goals. These functions include:
- Establishing and organizing objectives, and defining their categories to provide a clear direction for the company
- Developing policies to support goal attainment, providing guidelines for decision-making across the organization
- Formulating strategies that align with objectives and policies, guiding the pursuit of the company's goals
- Planning business operations that are in line with objectives, policies, and strategies, taking into consideration available resources
- Coordinating activities to prevent any issues or bottlenecks that may arise, ensuring that all parts of the organization work well together
- Executing production, sales, and other important functions to achieve organizational goals and objectives
- Monitoring actual performance to ensure that it aligns with plans, identifying and analyzing deviations, and taking appropriate corrective action to eliminate weaknesses
- Providing day-to-day guidance and instructions to subordinates on matters that require attention
- Revising plans, policies, and strategies if necessary, to adapt to changes in the environment or market
- Conducting long-term planning to provide a clear direction for the company over an extended period, ensuring that executives are well-informed and prepared for the future.
Most used management accounting methods
Some of the most commonly used management accounting methods include:
Cost accounting
This involves tracking and analyzing the costs of production, distribution, and sales to identify ways to reduce costs and increase profitability. This information can be used to make informed decisions, such as determining the most profitable products to produce or identifying which areas of the business require investment to increase efficiency.
Budgeting
Budgeting is an important tool for businesses of all sizes, as it helps to ensure that resources are allocated effectively and efficiently to achieve the organization's goals and objectives. A well-designed budget can also help to identify potential problems and opportunities, allowing the organization to take proactive measures to address them.
The budgeting process involves several steps, including:
- Establishing goals and objectives
- Estimating revenues
- Projecting expenses
- Developing the budget
- Monitoring and controlling
Variance analysis
This involves comparing actual results to budgeted or expected results to identify areas where performance is better or worse than expected, and then investigate the reasons for these variances.
For example, if a business budgeted to sell 1000 units of a particular product in a given month but only sold 800 units, variance analysis would help to identify the reasons for this shortfall in sales. The analysis could reveal that there was a supply chain issue that affected production, or that the marketing campaign did not perform as well as expected.
Activity-based costing
Activity-based costing (ABC) assigns costs to specific activities or processes, rather than simply assigning costs to products or services, to more accurately determine the true cost of production. This involves identifying all the activities and processes involved in producing a particular product or service, and then assigning costs to each of these activities based on the resources they consume.
These costs may include direct costs, such as labor and materials, as well as indirect costs, such as rent, utilities, and overhead. For example, in a manufacturing setting, ABC might reveal that the majority of production costs are tied to a specific machine or process, indicating that investments in improving that process could lead to significant cost savings.
Balanced Scorecard
Balanced Scorecard (BSC) is a strategic tool that involves creating a set of metrics that measure both financial and non-financial aspects of the business, such as customer satisfaction, employee engagement, and innovation. By focusing on multiple perspectives, the BSC approach helps organizations balance short-term financial goals with longer-term strategic objectives and ensure that all aspects of the business are aligned towards achieving the organization's vision and mission.
The BSC approach typically involves the following steps:
- Developing a clear vision and strategy for the organization
- Identifying the key drivers of success for each perspective
- Developing a set of metrics to measure progress towards each goal
- Setting targets for each metric
- Implementing the BSC and monitoring progress over time
- Making adjustments to the BSC as needed to ensure alignment with changing business needs and priorities.
Value chain analysis
The value chain consists of two primary types of activities: primary activities and support activities. Primary activities are those that are directly involved in creating and delivering the product or service, such as production, marketing, and distribution. Support activities are those that support the primary activities, such as procurement, technology development, and human resource management.
By analyzing the value chain, organizations can identify opportunities to reduce costs by eliminating non-value-adding activities, improving efficiency by streamlining processes, and creating value by improving the quality of the product or service.
Master Management Accounting Methods to Stand Out
In today's highly competitive business environment, clients are looking for more than just basic accounting services. They want partners who can help them achieve their financial goals and provide strategic guidance. By mastering management accounting methods, accounting firms can not only meet these expectations but also differentiate themselves from their competition. This can lead to increased client satisfaction, retention, and referrals, ultimately contributing to the firm's growth and success.
Kevin Mitchell, CPA
Senior Manager and CPA with over 20 years of experience in accounting and financial services, specializing in risk management and regulatory compliance. Skilled in managing audits and leading teams to deliver exceptional services. Proud father of two.
References:
Here Are 7 Tried-And-True Management Accounting Methods. (2021, September 28). Client Hub Blog. https://clienthub.app/blog/management-accounting-methods
