Management accounting information is focused at internal managers and decision makers. Its intended use is to provide financial data relevant to a manager's operations in an effort to make sound business decisions. Management accounting information comes in the form of financial ratios, budget forecasts, variance analysis and cost accounting. Without management accounting practices, making these decisions would be more like gambling and less of a science.
All businesses must conduct strategic planning in order to stay competitive. This is the process of planning for future operations through the use of forecasts. The goal of the forecasting process is to try to predict the outcome of future operations through trend analysis. Trend analysis takes past revenue, sales and growth statistics and carries these calculations out into future periods. If the average revenue growth has been 10 percent per year, then the forecast model will use an annual growth rate of 10 percent.
The forecasting process allow a company to build a model of the anticipated future revenue figures. Once the forecast models are built, the budget process can begin. The budget process allots capital--money--for the future operations. Estimates of the future costs and liabilities are made. These dollar amounts are constructed from analyzing the past liability and cost trends. If the costs of materials have gone up an average of 20 percent year over year, then this same 20 percent will be used to create the budget for next year. The budget takes into account the current cash on hand and the projected revenue from sales.
Variance Analysis and Cost Accounting
Variance analysis is the process of comparing the actual realized expenses with the budgeted expenses. Any variations are examined and corrected, if correction is necessary. This can include man-hours, machine hours, raw material consumption and production time, among other input items. All of these factors can affect the company budget and, ultimately, the profitability of the company. For example, if the production of a product takes 20 percent more man-hours to produce than budgeted, then the labor costs are over budget. This can be said about many different input items as listed above. Variances that are over budgeted tolerances require immediate corrective action. However, if a positive variance occurs, it could be used to help offset a negative variance or to increase production in an effort to improve the profit margin of the operation. An example of a positive variance is when man-hours are 20 percent less than budgeted to produce a product. The result is a 20 percent reduction in labor costs.
Ratio analysis is completed at the end of each accounting period--monthly, quarterly and annually--to determine the company's ability to pay its long- and short-term debts. These rations demonstrate a company's solvency and liquidity. These same ratio analysis tools can be used to determine a company's effective use of inventory and raw material. This analysis tells the management team whether the company is operating within the overall guidelines that will promote profitability. Many other ratios can be used to determine what their receivable collections periods are like and whether they are using and maintaining proper levels of inventory.
Accounting for Decision Making
Managerial accounting is the process of using all of the accounting data available to make better business decisions--solid decisions based on trends, facts and projects. These decisions are critical to the future of any company. Effective managerial accounting takes much of the risk out of decision making and bases it more on fact. However, there is always financial risk in doing business. Analyzing past trends can create a clear picture of the future.