Managerial Accounting

What is Managerial Accounting?

Managerial accounting is concerned with providing information to managers, that is, to those who are inside an organization and who direct and control its operations. Managerial accounting can be contrasted with financial accounting, which is concerned with providing information to stockholders, creditors and others who are outside an organization (Garrison and Noreen, 1999).

Managerial accounting information include:

• Information on the costs of an organizations products and services:
  For example, managers can use product costs to guide the setting of selling prices. In addition, these product costs are used for inventory valuation and income determination (Horngren and Foster, 1987).
• Budgets:
  A budget is a quantitave expression of a plan.
• Performance reports:
  These reports often consist of comparisons of budgets with actual results. The deviations of actual results from budget are called variances (Horngren and Foster, 1987).
• Other information which assist managers in their planning and control activities:
  Examples are information on revenues of an organizations products and services, sales back logs, unit quantities and demands on capacity resources (Kaplan and Atkinson, 1989).

Managerial Accounting Practices

Traditional managerial accounting systems are mainly designed to measure the efficiency of internal processes (for example Solomons, 1952). In the 1980’s, traditional managerial accounting practitioners were heavily critized on the grounds that their practices had changed little over the preceding 60 years, despite radical changes in the business environment (see also Johnson and Kaplan, 1987). For more information on traditional managerial accounting practices see the Traditional Managerial Accounting page.

The last decades new managerial accounting practices such as activity-based-costing, the balanced scorecard and bottleneck accounting were developped:

Unlike traditional managerial accounting, activity-based-costing deemphasizes direct labor or raw material as cost drivers and concentrates instead on activities (e.g. the number of production runs per month) that drive costs. Activity-based costing gives the management of an organization a clear picture of the cost drivers and the opportunities to reduce costs (Kaplan and Norton, 2001). For more information on activity based costing, see the Activity Based Costing page.

Traditionally, management accountants’ principal performance report was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs and revenues during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with other performance reports such as the balanced scorecard. A balanced scorecard is a set of financial measures, operational measures on customer satisfaction, internal processes and the organization's innovation and improvement activities (Kaplan and Norton, 1992). Kaplan and Norton also argue that the balanced scorecard can be used as a strategic management system which identifies the value drivers of an organization's strategy and a management system to align the organization to the strategy (Kaplan and Norton, 2001). For more information on the balanced scorecard, see the Balanced Scorecard page.

In a traditional variance analysis, managerial accountants compare the actual sales with the budgeted sales. A traditional variance analysis however does not point out which bottleneck coursed an unfavorable difference between actual and budgeted sales (see also Veltman et al, 2014). With bottleneck accounting however, managerial accountants are able to determine:

• the bottlenecks of an organization and;
• how much money was lost because of each bottleneck.

BIBLIOGRAPHY

• Garrison, R. H., and P. E. Noreen, 'Managerial Accounting', Irwin McGraw Hill, 1999.
• Horngren, C. T. and G. Foster, 'Cost Accounting, A Managerial Emphasis', Prentice-Hall, Inc. 1987.
• Johnson, H. T. and R. S. Kaplan, 'Relevance Lost: The Rise and Fall of Management Accounting', Harvard Business School Press, 1987.
• Kaplan, R. S. and A. A. Atkinson, Advanced Management Accounting, Prentice-Hall International Inc. 1989.
• Kaplan, R. S. and D. P. Norton, 'The Balanced Scorecard - Measures that Drive Performance', Harvard Business Review, January - February 1992.
• Kaplan, R. S. and D. P. Norton, 'The Strategy Focused Organization', Harvard Business School Publishing Corporation, 2001.
• Solomons, D., 'Historical Development of Costing', Studies in Costing, Sweet & Maxwell, 1952, pp. 1-51.
• Veltman, M., R. Kooij and S. Marban, 'Sales Bottlenecks And Their Effect On Profit', Journal of Applied Business Research, Vol 30, No 6, November / December 2014