Guide to management accounting: Importance, types, and techniques

Most businesses have a finite amount of resources. Because of this, management and executives need to be strategic about the decisions they make, especially regarding the use of business resources. 

By looking at historical data, businesses will be able to determine which product lines, investment opportunities, and inventory items are the most important. It helps reduce and manage risks when making decisions.

Management accounting importance can also be attributed to the fact that businesses will have an easier time with their overall operational efficiency when the accounting data is being used by management to reevaluate. 

If the records state that the business is spending too much on a particular type of raw material, for example, managers will be able to identify this issue and nip it in the bud quickly.

Financial reports allow businesses to monitor staff performance, as the numbers tell a story. This increases accountability within the organization. Employees will know that their contributions are recognized and recorded accordingly.

Not only does this help management recognize which employees should be rewarded for their contributions, but it also promotes accountability and makes it known to employees that their performances are controlled accordingly.

Businesses will have an easier time preparing for unfavorable circumstances if they know what it is that they have to prepare for. This is why accurate forecasting is key.

One of the reasons why it is important to know what is management accounting is because doing so will enhance risk management. Knowing potential risks in advance helps to mitigate and manage them.

It’s important for any business to understand the market in which they operate. Good management accounting aids senior managers and executives get a better picture of not only the market but also the company’s position in it.

This can give the company a competitive advantage over other businesses. By forecasting accurately, a company can stay a couple of steps ahead.

Put simply, the cost of goods sold, often abbreviated to COGS, is a term that encompasses all the direct costs of a particular product. This includes the raw materials and labor costs but does not account for marketing or distribution costs. Management accounting can help senior managers decide on reducing COGS.

Every business will have to work with a budget for its operations. Typically, this would be forecasted in advance based on what the business thinks it will need. However, the actual costs may end up differing from the budget. These instances of differences are referred to as budget variances.

It’s normal for businesses to face losses during their early stages. This is because it’s unlikely that the total revenue will be equal to or greater than the total costs.

The break-even point refers to a point where the total revenue comes equal to the total costs. Managerial accounting can provide analysis on how to break even faster.

Investments come with a cost, which makes them risky. Return on investment, or ROI, is a way to measure what the profitability of a particular investment is like.

Managers may be able to use historical accounting data to determine whether the ROI makes an investment worth it or not.

Standard cost refers to an accounting method that uses historical costs to predict and supplement actual costs. Instead of using actual costs, —which cannot be known in advance, historical data is used to measure the costs. Material, labor, and manufacturing historical costs are taken into account to calculate the standard cost.

While COGS refers to direct product costs, activity-based costing (ABC) takes overhead and indirect costs into account. ABC is an accounting method that assigns indirect costs to a product, as it recognizes that overhead activities, marketing, and even office staff can have an impact on the product beyond its manufacturing costs.

A contribution margin of a particular product represents the potential profit it can give a business. It is measured by subtracting the variable cost per unit of any product from the selling price per unit of the same product. The larger the margin is, the more that product contributes to the business’ overall profits.

The cost per unit of any product a business sells will depend on the volume the business is manufacturing and selling. A larger volume of products being made usually means that a company will be able to bulk buy materials at a cheaper price. A cost-volume-profit (CVP) analysis examines how changes in costs and volumes affect profits.

Forecasting is not always accurate. But when a forecast isn’t accurate, it’s important to analyze the deviation in behavior. This is what is referred to as variance analysis.

In management accounting, managers will look at how the deviation affects the business. This helps in monitoring actual behaviors and numbers.

Just-in-time, or JIT, is an inventory method that can help businesses reduce costs by only having suppliers send materials when they are needed.

Instead of holding inventory and increasing storage costs or risking it going to waste, businesses will only have a small amount of inventory ready to be used with this method.

As with traditional financial accounting, data collection is key in managerial accounting. Managers will want data such as production costs, overhead costs, revenue, common business expenses, and more.

The more complete the collection of finance reports that a business has, the better the data will be. It’s also important that the organization maintains that all the data is accurate and easily searchable.

Once there is enough available data, managers will have to start classifying and analyzing data. In management accounting, costs are classified into groups based on their relation to production levels. 

Managerial accountants will need to analyze the data that they have classified to identify patterns. The management accounting importance can be seen when classified and analyzed data help in forecasting price changes.

Based on the existing historical data, managers are able to determine how much budget they must set for an upcoming fiscal year. However, it’s not enough to simply plan for how much money is needed for expenses.

Rather, budgets must serve as an outline for the coming period’s financial plans and goals. They should provide the organization with a roadmap for further planning and forecasting.

After setting general budgets, managerial accountants must use the data available to them in parallel with the budget plans. One of the reasons why managerial accounting is so important is because it allows managers to predict and estimate costs.

These forecasts should use historical data and reports to ensure the best accuracy possible. Managers will use methods such as activity-based costing for this step.

While budgeting is key in the planning step, it’s equally important to monitor the company finances after the budget has been implemented. Managers and executives may set key metrics and come up with ways to monitor performance.

Other than creating policies to track the actual financial performance, many businesses may also enlist the help of budgeting and expense management tools.

It’s not enough to simply track performance. Managers will also have to actively analyze and evaluate performance records. Comparing the actual figures against the forecasts and budgets is key.

A crucial step in management accounting is analyzing the budget variance. This not only allows businesses to nip any issues in the bud but also to create better forecasts for coming years.

Managers want to make sure that all the previous steps are well-documented. Given that management accounting is about using historical data to make smarter forecasts and decisions, it is important to keep the cycle moving.

Managerial accountants will have to prepare financial reports consisting of the current fiscal year’s data. This ensures that the information can be easily communicated to executives.

The last step in the process is to make sure that all financial information is communicated effectively amongst the management team, executives, and eventually the larger finance team.

With financial reports ready, everyone should have an easier time reading, understanding, and analyzing historical data. Make sure that these reports are communicated to decision-makers in a timely manner to ensure the best decisions.

Understanding how management accounting works can reveal key opportunities for integrating financial services more effectively. Explore our blog on what is embedded finance to see how embedded finance solutions can complement and enhance your management accounting practices.

If financial accounting focuses on keeping records of past transactions to communicate with external parties, management accounting is for the internal team. One of its main functions is to help the management team set financial goals and create a roadmap for the next fiscal year. 

By analyzing historical data and financial reports, managers will be able to identify patterns to help them create better goals. These will be realistic and data-driven.

Other than setting goals, management accounting also helps businesses allocate resources. Considering that most businesses have a finite amount of resources, they want to allocate resources optimally to get the best return for resource usage. 

Looking at existing trends and forecasting future ones can determine where resources are best spent. Managers will also know when they are overspending on a particular resource by identifying past patterns in the managerial accounting data.

The best and most accurate forecasts rely on good historical data. To plan smartly, plenty of businesses will try to forecast the future and devise strategies based on these forecasts. 

Managers who take their tasks seriously and understand management accounting importance are more likely to generate more accurate forecasts.

The more data that a business has on hand, the easier forecasting will be, as there are numerous instances that the business can pull from.

Coming up with pricing strategies that work requires a lot of research and trial. In most cases, if the first price that a business sets for its product is selected at random, it will not be the best price.

Management accounting takes into account direct and indirect costs, volume, inventory, and more. This allows businesses to weigh their costs against their pricing more carefully, thus allowing them to create better pricing strategies.

A good manager must be able to confidently and firmly make decisions, but it’s not enough to simply make these decisions based on instinct—especially without past experiences. Managers will want the right information to back up their decisions. 

This is one of the reasons why management accounting is a key process that managers must understand. The data collection and analysis processes provide businesses with the ability to back their decisions with the necessary data.

Businesses grow year after year to get closer to their goals. However, it can be difficult to track how much progress has been made toward these goals without a proper system and regular monitoring. 

Managerial accounting ensures that someone is always monitoring the progress. Managers will spend some time regularly reviewing the business’ finances and how they are with their goals and objectives. The process also makes sure that businesses don’t stray far from budgets.

Knowing what is management accounting is useful when trying to identify areas of improvement. Considering that one of the main components of management accounting is to analyze data, managers are bound to discover certain patterns that stand out.

With these patterns, managers will be able to find common threads and put together ways to improve. For example, a company might be overspending on electricity bills each month. Tracing the source will help to improve these costs.

Identifying areas of improvement and measuring efficiency often come hand in hand. The best way to determine what it is that the business needs to improve is by measuring how effective and efficient the current processes are.

Management accounting is designed to help the internal management team monitor current processes and analyze how effective they are. By collecting enough data and regularly reviewing financial reports, managers can tell whether a particular process is already optimal or not.

Chances are a business will run into issues such as overspending or inventory challenges at some point. With management accounting, managers can identify these issues early or even before they happen.

Making sure that these issues are identified and anticipated is crucial as they need to be addressed as soon as possible to make sure that they don’t create lasting problems. Forecasting helps with identifying what the risks are before plans are set in motion.

Ensuring compliance can be a challenge for businesses. While managerial accounting is more geared toward the internal team, it can also help with double-checking that all finances comply with the legal requirements.

This includes monitoring transactions to ensure that they are correct. All goods ordered from suppliers, for example, must be paid for accordingly.

Business sales numbers must also match up. Businesses that perform regular evaluations are more likely to stay on the right side of the law.

Managerial accounting is not just about maintaining the day-to-day operations and cash flow. Managers can also use it to evaluate investments and estimate the value of major projects, helping a company use its capital wisely.

As every business will want to avoid any major losses, it is key that they budget, forecast, and monitor performance accordingly. With management accounting, businesses can rest assured that their assets are purchased, their amortization accounting process is performed strategically and the assests are used wisely.

It can be hard for companies, especially sizeable ones, to promote transparency and accountability within the organization. This is especially true when there isn’t a proper system in place to ensure that everyone is being transparent about the work they do.

Luckily, management accounting can function as a method to improve transparency and accountability. Frequent data collection means that every transaction will be recorded and managers are checking these transactions on a regular basis.

All businesses have the same goal, which is to make a profit. However, there is an endless number of strategies that a business can implement, with the hopes of ensuring that its operations are profitable. 

To choose which strategies are the best to maximize profitability and minimize losses, managers and executives must know what is management accounting. This knowledge will help them make smarter decisions with fewer or more manageable risks.

Every business should continuously seek ways to improve its processes. With managerial accounting, business executives are able to take a closer look at existing business processes and identify both their positive and negative points. 

Financial reports provide the necessary data to identify patterns and pain points within the company’s daily business operations. This allows managers to improve resource allocation, which in turn will improve operational processes and make them more efficient.

Most of the best business decisions are made with sufficient information to back them up. Senior managers and executives will want to be well-informed about the subject matter before they commit to a decision.

Management accounting provides businesses with the right, relevant, and accurate information to ensure that decisions made by the business are data-driven.

This is also crucial as decisions made by management will affect the business’ financial performance.

Businesses must remember that there are accounting standards, principles, and regulations that they must follow. This is important to note, as adhering to these standard practices when performing management accounting can help businesses ensure compliance. 

Not only will it be easier to enforce company policies for employees to follow, but an organization will also find complying with governmental and legal regulations more intuitive to do with the right accounting procedures.

Performing managerial accounting indicates that managers and executives within an organization are keeping a close eye on the performance of the business.

Aside from budgeting and forecasting for planning reasons, having a roadmap also helps create a benchmark for the actual performance.

When regular tracking and monitoring are done and actual performance is consistently compared to the existing budget, businesses will naturally promote a higher level of company-wide transparency and accountability.

Looking at historical data and forecasting based on that helps businesses to identify any potential risks in the near future. When managers are aware of what risks may occur, it also becomes easier to prepare for them.

If a business is running short on cash, for example, it’s important that this is identified when performing management accounting. Not only can managers optimize the business’ cash usage better, but they can also strategize to mitigate these risks.

Management accounting is a process that businesses will use to create a better roadmap when achieving goals and objectives. If a business has a goal in mind, it will require some strategies to be able to achieve that goal.

This is where the management accounting importance shines through. Managers will be able to formulate better strategies based on past performances and forecasts of future ones to reach the business goals faster.

One of the most common goals a company will have, especially in the early stages, is to break even. When performing managerial accounting, managers can specifically do a break-even analysis. This will help with determining how much production is necessary to recoup costs and hit zero profit or loss.

Managers must look at the business capital and expenses to identify the breakeven point and start the breakeven analysis. Pricing and production decisions can then be made accordingly.

Put simply, a margin analysis refers to the calculations and analysis of estimated costs of producing additional units in a particular product line.

A margin analysis is also the same as a cost-volume-profit (CVP) analysis, which looks at how much more of a contribution margin a product will have toward the company's profits by changing the production volume.

Managers will decide whether or not adding additional units will be more profitable for the organization.

No business is always smooth sailing. However, when a business hits a bottleneck or a pain point, particularly when they are not easily solved, it’s important for managers to analyze why and identify the pain points.

Constraint analysis is a type of management accounting process that calls for managers to look at how these limitations affect costs, revenue, and profit. It hopes to help them in addressing it to maintain better efficiency.

Given that inventory costs can be quite steep, businesses want to make sure that these costs are not greater than the gains. Inventory turnover analysis helps businesses estimate how fast or slowly they can sell their products within a given time frame.

Managers may use this analysis to determine whether the business should be buying new inventory or not. It allows businesses to maintain a lower inventory cost and improve the way inventory is managed.

Cash is necessary for businesses to continue maintaining smooth daily operations. When making plans for purchases, for example, managers must make sure that the business has comfortably enough cash.

In a cash flow analysis, managers will look at the historical data to determine the cash health of the business. This type of management accounting both the historical data and predicts what inflows and outflows will be generated by a particular decision.

Often companies grow through investments and acquiring new assets. Financial leverage metrics, or leverage ratios, determine how a business uses its borrowed capital and invests it—such as by acquiring assets. 

In managerial accounting, financial leverage metrics are used by managers and executives to look at the company’s borrowed capital in greater detail. With measures such as debt to equity, return on equity, and return on investment, businesses can strategize how to use borrowed capital better.

As the name suggests, costing techniques, or cost accounting, deal with the costs associated with production. Managerial accountants will have to track, record, and analyze both direct and indirect costs. Costing techniques are generally used to optimize costs and create pricing strategies.

● Standard costing

As a standard cost refers to the predicted standard average cost of materials or overhead, standard costing helps managers set a benchmark for when the actual costs from transactions come in. 

Historical data will be reviewed and analyzed by managers to forecast standard costs for future expenses. This is helpful when accounting for costs in advance, replacing the actual costs with estimated expected costs for projections. Costs such as material, manufacturing, and overhead can be calculated using this technique.

● Marginal costing

Marginal costing is a technique that uses the cost-volume-profit (CVP) analysis method. It refers to the change in costs of a particular product when the volume of the units created in that product line increases by one. 

Managerial accountants will use this costing technique to evaluate whether changing the quantity of units produced will be more profitable for the business. This optimization can be done through utilizing economies of scale.

● Activity-based costing (ABC)

While indirect costs and overhead are typically attributed to their corresponding departments, ABC attributes these costs to activities. This management accounting technique recognizes that overhead activity costs have an impact on manufactured products. 

The goal of activity-based costing is to accurately track costs and resource consumption. When using ABC, managers will be able to see how much a product’s direct and indirect costs are, allowing them to formulate better pricing strategies.

By reviewing trends and patterns in an organization’s historical data, managers will be able to budget and forecast for future periods. This particular technique aids businesses in creating a roadmap and identifying goals for an upcoming month, quarter, or year. 

Managerial accountants can look at past trends and try to estimate and predict what the near future will look like. Doing this allows businesses to determine what actions to take based on the budget and forecasts.

When a budget has been set and the budget period begins, it’s important to track the actual performance of the business and compare it with what has been budgeted.

Managers may find that the business’ actual finances will look different from what has been budged. This is referred to as a budget variance.

Variance analysis allows managers to determine what the causes of these variances are. Internal factors, for example, can be controlled and fixed.

As the name suggests, performance measurement is a management accounting technique that measures and analyzes the performance of existing projects, departments, systems, or even individuals. Managers will generally collect data and perform evaluations on a regular basis.

To be able to measure performance effectively, it is required to create a benchmark to measure it against. This is done by setting goals and objectives, as well as picking key performance indicators or metrics to use for measurements.

Theoretically, capital budgeting serves the same purpose as regular budgeting. The only major difference is that capital budgeting refers specifically to budgeting for major projects or investments.

Managerial accountants will be able to use this technique to evaluate whether or not these projects and investments are worth it. They will create forecasts, do outlines, and measure potential risks while performing their analysis. Projected cash inflows and outflows will also be calculated.

Business managers and executives can ensure that they have better data collection and analysis with management accounting. Having more complete and accurate information readily available on hand makes it easier to formulate better decisions.

Each time a decision must be made, managers can refer to the information they already have to provide a better framework and use data to forecast future outcomes. A decision can then be made based on this result.

Similar to how decisions will be more informed with managerial accounting, the process can also improve the way businesses plan. There is a lot of research that must be done to plan accurately.

Managerial accountants will be able to use the data they gather to put together a plan for the next fiscal year. With standard costing, budgeting, and other techniques, the plan will have measurable objectives and manageable strategies.

When budgeting, managers must consider how to optimize the business costs. Management accounting gives them a point of reference on how much is approximately spent on business expenses. This allows managers to strategize on how to save costs whenever possible.

When there is a benchmark, there are also fewer risks of extreme overspending. Managers can always refer back to the initial budget and compare actual costs when monitoring expenses and other transactions.

Improve business performance by keeping a close eye on and monitoring it. While this can be done to control costs, it is also applicable to many other use cases within the organization. 

Budgeting and forecasting allow managers to also predict sales, revenue, profits, and more. Track the actual numbers and performances against the forecasts.

Management accounting helps to identify variances and analyze why they happen. It helps with maintaining accountability when achieving business goals.

Managerial accounting can sometimes feel like it has a bigger focus on short-term goals. However, managers can align the company’s long-term plans with other instances of managerial accounting importance, such as coming up with budgets and strategies for immediate use. 

In fact, stronger forward-looking short-term plans built through management accounting are strategic so long as they are in line with what the business plans to achieve in the long term.

As most businesses have finite resources, managers must be smart about resource allocation. Management accounting recognizes that this is a crucial part of maintaining smooth business operations and maximizing profitability. 

Using historical data to analyze things such as constraints, inventory turnover, and more, can give managers and executives a better idea of where resources are best used. Business managers will be able to optimize accordingly to ensure the highest returns.

No business can survive off just one instance of success. Continuous improvements are necessary in order to ensure business sustainability and achieve long-term goals.

By having a managerial accounting process in place, managers are able to establish a system for continuous improvement. Regular reviews of business performance and budget variance analysis help with identifying pain points. As a result, the business can come up with solutions and optimize faster.

While management accounting is a more flexible internal process with less rigid standards and principles, it doesn’t make it less valuable as a tool for communication. As long as a company has its own standardized policies on the process, it can be used to effectively communicate.

Financial reports are easy ways to deliver information across multiple departments. All stakeholders can be kept informed about the business's financial health and the decisions surrounding it.

As the market is constantly changing, businesses that can stay flexible and adaptable have the best chances of staying ahead of the curve. Luckily, knowing what is management accounting can help with this, as the process itself is extremely adaptable. 

It can be used by businesses in many different industries and offers a series of different techniques. Businesses are guaranteed to have the right tools to tackle changing conditions.

Being well-informed and prepared are attractive traits for businesses seeking or answering to investors. A business that has a proper management accounting system in place can instill confidence in investors, as it signifies that the company is on top of its data. 

Investors generally like knowing that the management team is well-prepared. Not only is it less risky for the internal team, but also for the business investors involved.

One major part of management accounting is collecting, recording, and analyzing historical data. In fact, it’s difficult for businesses to perform the rest of the process without access to this information. 

For newer businesses, managerial accounting may be more challenging, or even impossible, to do. This is because the organization will not yet have enough historical data to pull from to create budgets and forecasts. If data is compromised, the process will also be greatly affected.

There is a lot of guesswork involved in management accounting. While the goal of using historical data is to provide management and executives with enough information to make well-informed decisions, there is no denying that there will be bias and subjectivity that will impact the estimates. 

Different methods and individuals may have different assumptions, which will lead to varying estimates. This can happen even with the same data set.

Often management accounting only looks at the short-term goals of a business. When it’s time to budget and forecast, managers and executives will likely create a roadmap for the upcoming fiscal year.

This could lead businesses to limit their scope and focus too much on short-term targets. Although the management accounting importance can’t be denied, too much focus on it may also negatively impact a business’ long-term sustainability plans.

Given the number of steps involved in the managerial accounting process, it’s no surprise that its complexities can lead to challenges. It’s often a highly technical process that requires managerial accountants who are skilled in the field and possess a high level of understanding of it.

Managers involved in the process must be willing and know how to analyze financial reports and contend with their complexities. Only then will they be able to make better-informed decisions.

There’s no denying that managerial accounting is a time-consuming process that takes long hours to complete. Employees will either have to spend more time working or new employees must be hired to speed up the process. 

The more complex the process is, the more difficult it also gets to maintain that all the historical data is accurate. Double-checking this and ensuring that the organization has accurate data will also cause delays.

A major part of management accounting heavily relies on budgeting and forecasting. While these forecasts are formulated to be as accurate as possible, there are also no concrete guarantees that the actual financial performance will remain identical to the forecast. 

As most forecasts also won’t be able to factor in any changes in the market after they have been made, this resistance to change is a limiting factor for many businesses. It’s important to be willing to adapt to changes.

As with any other business process, implementing efficient management accounting will have costs attached to it. Whether that is labor costs or the cost of an automation tool, it may not come out cheap, especially for smaller businesses. 

Companies will have to think carefully about what they can budget for managerial accounting costs. While this cost can likely be recouped over time, it does take a little more planning to ensure it’s not burdensome.

Optimizing production operations is key for manufacturing businesses. With management accounting, manufacturers will have an easier time estimating and forecasting costs. Managers can determine what the standard cost of production will be.

They will also be able to use historical data and analysis methods to make decisions that will streamline production costs and improve pricing. Manufacturers may also choose to employ the just-in-time method to reduce their expenses after analyzing the costs.

Like businesses in the manufacturing sector, retail businesses can also utilize managerial accounting to budget expenses and forecast revenue better. Understanding the historical data helps these businesses create better pricing strategies.

Activity-based costing methods may be used to determine how much they must sell a product. As retailers often have to buy in bulk from manufacturers and other suppliers, the cost-volume-profit analysis is also especially useful for retail businesses. This way, they can maximize profits.

Businesses operating in the healthcare sector often have plenty of different types of costs to contend with. Starting from administrative expenses to the costs of medical technologies, there are a lot of things that healthcare businesses must consider.

Management accounting aids healthcare providers evaluate their costs and estimate what they need to budget for in the next fiscal period. It also helps them decide which new technologies should be purchased as soon as possible.

With how fast-moving the technology industry is, businesses that operate in that sector must be able to quickly and confidently make decisions to keep up with the market. Both research and development and investments are crucial in this field.

The management accounting importance can be felt in this industry when managers are trying to make decisions on which projects or investments to undertake. The more data and analysis a business has, the more well-equipped it is.

While organizations in the non-profit sector don’t share the profitability goals of other businesses, budgeting and forecasting are still crucial processes to keep these organizations running. In this case, budgets formulated during the management accounting process will aid with planning expenses and activities such as fundraising. 

Non-profit organizations will be able to utilize management accounting to forecast how much a project would cost, allowing them to allocate resources more optimally.

Financial accounting is a process where accountants ensure proper bookkeeping and reporting of transactions and other financial activities over a particular period of time. This is perhaps what most people commonly think of when they consider the term accounting.

There are some rules and generally accepted and standardized principles that financial accounting should follow, which will differ from country to country. Regardless, it involves financial statements such as the balance sheet and cash flow statements.

As we have already explored managment accounting above, let's dive into the aspects which make management accounting different from financial accounting: