Management accounting methods help senior leadership gauge a company's profit potential, operating performance and competitive standing. Unlike financial accounting, it focuses primarily on cost variance analysis and internal decision-making processes. Key activities of management accounting include budgeting, internal financial reporting, cost analysis and monitoring of internal controls, systems and procedures.
Budgeting is a business practice that helps senior management set limits or thresholds for expense items in corporate activities. It also helps department heads and segment managers forecast revenue levels, depending on economic trends. Revenue is income that a firm generates by selling goods or providing services. An expense item is a cost or charge that a company incurs when selling goods or providing services. Department chiefs analyze cost variances, or overages, at the end of each month or quarter to detect business performance. In management accounting parlance, overage is the difference between actual cost and budget amount.
A management accountant prepares ledger reports to gauge an organization's operating trends and financial robustness. Segment chiefs also review ledger statements to measure corporate cash inflows (receipts) and cash outflows (payments) over a period of time. There are four types of ledger reports—balance sheet (also referred to as statement of financial position), statement of profit and loss (P&L or statement of income), statement of cash flows and statement of retained earnings (otherwise known as statement of equity). Top leadership analyzes overages by comparing ledger reports to budget worksheets.
Variance analysis is a pivotal management accounting tool. It helps senior management identify significant expense overages in corporate operating activities. A positive overage means budget amounts exceed actual costs, and is the preferred outcome. The opposite is true for revenue items. Identifying expense overages is critical since costs reduce key performance indicators, such as profit margin and return on equity. Profit margin equals net income divided by total revenue. Return on equity equals net income divided by shareholders' equity. Department heads review processes in which business unit managers note negative overages and take corrective initiatives or reduce expenses.
Internal Controls Monitoring
Senior corporate management accountants ensure that a company's internal controls in cost processes are adequate, functional and conform to regulatory guidelines. He also ensures that employees abide by industry practices, top leadership's directives and professional standards when performing tasks. A control is a set of guidelines that a management accountant puts into place to prevent overages and losses in operating activities resulting from theft, error and technological breakdowns. A control is adequate if it stipulates clearly how to perform tasks, report internal problems and make decisions as work is in progress.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.