Management accounting is used to help managers make solid business decisions. Managerial accounting is an inward-focused process that delivers factual financial and operational data to line managers.The strategies are usually forward-looking and kept confidential, rather than being publicly reported.
The Chartered Institute of Management Accountants says, “Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its Resource (economics)resources”. The idea is to examine the accounting data to determine if the organization is using its resources efficiently, operating at optimum capacity and staying within the assigned budget. There are circumstances where decreasing production can increase net profit. In other circumstances, the same data can be used to determine if a product is better off made or purchased outside of the company.
Management accounting budgets for upcoming production runs and manufacturing operations. Although management accounting can be used for other industries, it is used most often within a production-focused and quantifiable setting. The budgeting process looks at past production figures, raw material costs, labor costs and the average labor hours used to perform certain tasks and processes. The budget is then used as a measurement tool and guide to make certain a project stays on budget. Variance analysis is used to ensure adherence to the budget and provide the data necessary to correct any possible variances.
Variance analysis calculates variances in either direction, over or under, an established level of production, cost or labor hours. If a company has budgeted the use of 5 units of raw material per finished unit and the manufacturing process uses 5 1/2 units, then there is a negative variance of 1/2 unit. This process can determine variances within raw material consumption, labor hours, cash used in production and several other performance and input numbers. These variances can help a manager determine where to focus on making changes within the production process.