Managerial, or management accounting, is a fairly new term that describes practices that most companies perform in some fashion, but don’t necessarily label as accounting practices when referring to them.
The Institute of Certified Management Accountants describes management accounting as a method of using the data generated by a bookkeeper or accountant to make decisions regarding company policies, planning, and control. While traditional accounting methods can provide data about every financial function of a company, the practices involved in managerial accounting allow leadership to use that data to make decisions on a variety of topics.
These are critical functions for every company but relatively few growing businesses take the time to formalize who handles these duties and how the data that is produced from them is used.
Most companies already perform some of the functions of management accounting. The reports generated by an accountant are reviewed by many people in key leadership positions who then employ the data in those reports as evidence when citing the reasons for making a policy change or other financial decision. An accountant can produce a report showing the sales figures and expenses involved in a particular product line, but it is the management team that uses that data to decide whether or not the product line needs additional promotion or if it should be pulled from production.
Management accounting is more than simply looking at hard data and making educated guesses about what that data means for company policy and direction. It is a science with specific mathematical formulas that solve problems. For example, management accounting will combine raw material cost, production cost, and overhead together in order to produce a number that represents the true cost to the company of a particular product. While many companies will make educated guesses about these numbers (e.g., estimating the marketing costs or adding in overhead at the end of the calculation), practitioners of management accounting will follow specific formulas.
The result is that users of management accounting know exactly how their data was computed and their decisions were made. Thus, they are able to compare that data with the data produced by other practitioners of management accounting. Rather than looking at profit figures for different product lines that were all produced with different methods, a company that uses the practice of management accounting can compare profit figures quickly and accurately, since they were all computed using the same formula. Similarly, possible production changes can quickly be computed and compared.
For growing companies, instituting the practices of management accounting can be very useful. Since a common problem among companies experiencing rapid growth is that it is difficult to decide on a standard method of computing data, it can make a lot of sense to choose a method with wide industry acceptance. Since many accounting software programs use the formulas associated with management accounting, it is relatively simple to standardize practices throughout an entire company. An added benefit to the use of management accounting tools is that when new employees are brought in and new divisions are opened, training personnel to the company standard is less difficult.