Management accounting

What it means

Management accounting is the processing of accounting and operational data for the needs of a company’s management. Unlike financial accounting, which follows the Accounting Act and leads to financial statements for the state, banks and the public, it serves internal decisions only.

It works with costs by cost centre, job, product and customer. It distinguishes direct from overhead costs and fixed from variable, and calculates margin, contribution margin and the break-even point.

Its form is not prescribed. It may be monthly spreadsheets, price costings, a budget and its performance, or profitability reports. The point is to answer questions the financial statements cannot: what makes money, what loses it and why.

How it works in practice

We lay the foundation for management accounting in the ordinary bookkeeping: analytical accounts, cost centres and jobs by which documents are sorted when posted. Sorting hundreds of documents after the fact is expensive and imprecise; getting the set-up right from the start costs almost nothing extra.

From data organised this way we prepare monthly reports: results by cost centre, margins by product or customer, and comparison with plan. This underpins controlling and decisions on pricing, investment or winding down unprofitable activities.

Larger companies process management data in an ERP or business intelligence tools; for smaller ones well-structured books and a spreadsheet are enough. Discipline in coding matters more than the price of the software.

What to watch out for

Management results may differ from the accounting ones, for example through overhead allocation, imputed depreciation or internal valuation. The difference is fine, but it must be explainable and reconciled with the books, otherwise management does not know which number to trust.

The biggest risk is allocating overheads with unsuitable keys. A product or customer that looks loss-making only because it received a disproportionate share of overheads may actually be profitable, and dropping it would reduce profit. We therefore review allocation keys regularly.