Purpose of management accounting
Managers must make decisions every day: what to make, what price to charge, whether to buy a machine. Management accounting gathers numbers and shapes them so these decisions are better.
It has three jobs:
- Planning: set goals and budgets.
- Control: compare what happened with the plan.
- Decision support: compare choices, for example make or buy.
Its reports are for people inside the firm only. They can be weekly or daily, rough or exact, and they look forward as well as back.
Management accounting and cost accounting
Cost accounting records and adds up the cost of products, jobs and services. It answers "what does one unit cost?".
Management accounting uses that cost data, but goes wider: it adds sales forecasts, profit plans, budgets and performance measures. So cost accounting is the main supplier of data, and management accounting is the user that turns it into decisions. In many firms the two are done by the same team.
Compare the three kinds of accounting
| Cost | Management | Financial | |
|---|---|---|---|
| Reader | Managers | Managers | Outsiders |
| Time | Past and present | Mostly future | Past |
| Rules | Own method | Free format | Fixed by law and standards |
| Question | What does it cost? | What should we do? | How did the firm do? |
Management and the plan-do-check-act loop
Business administration (management) works as a loop. Managers plan, the team does the work, managers check results against the plan, then act to fix gaps and plan again. Management accounting supplies the numbers for each step: budgets for plan, records for do, variance reports for check, and what-if figures for act.
Key formulas and definitions
- Unit cost = Total cost ÷ Units made
- Variance = Actual - Plan (budget)
- Planned profit = Planned sales - Planned costs
Worked examples
1. A bakery wants to know the cost of one loaf. Which accounting answers this?
Cost accounting. It adds flour, labour and oven costs and divides by loaves made.
2. The same bakery asks: should we open a second shop? Which accounting helps?
Management accounting. It uses cost data, sales forecasts and a profit plan to compare the choices.
3. The bakery must file annual accounts for the tax office. Which accounting is that?
Financial accounting. It follows fixed rules and goes to outsiders.
4. Cost data: material $300, labour $200, 250 loaves. Find unit cost, then planned profit if 250 loaves sell at $4.
Unit cost = 500 ÷ 250 = $2. Sales = 250 × 4 = $1,000. Planned profit = 1,000 - 500 = $500.
Common mistakes
- Thinking management accounting is only for big firms. Any firm that plans uses it.
- Mixing up who reads each report. Managers read management reports, outsiders read financial ones.
- Saying management accounting must follow fixed legal rules. Its format is free.
- Believing cost accounting and management accounting are the same. One supplies data, the other uses it to decide.