In its simplest form, management accounting is the management of a business to produce financial results that align with the objectives set out by the owners. In other words, it is about running an organization that complies with the rules and regulations laid down by stockholders and other external stakeholders. Many people associate management accounting with budgeting and planning the financial requirements of an organization, but this is only part of what it entails. To effectively manage a business, you need to understand how financial statements and income statements relate to one another and how profit and loss statements interact with them. This article explains what each of these terms represents and the functions of management accounting that best suit your needs.

What is Management Accounting? 

Management accounting describes how an organization “manages” its business operations. In other words, it refers to how an organization reports its financial results to shareholders, creditors, and other stakeholders. The essential functions of management accounting are budgeting and planning the financial requirements of an organization.  

Beyond these basics, management accounting offers a variety of other functions, such as identifying risks that may affect an organization’s financial results, budgeting and forecasting future cash flow, and managing the organization’s debt. 

Different Types of Management Accounting 

There are four main types of management accounting that are different according to the needs of the business:  

  • Inventory accounting: This is the process by which an entity tracks the movement of goods and how much is expected to cover the goods.  
  • Cost of goods accounting: It is the process by which an entity accounts for the cost of materials used to produce goods.  
  • Merchandise accounting: It is the process by which an entity accounts for the cost of products it sells.  
  • Cash accounting: This is the process by which an entity accounts for the receipt and expenditure of cash.  

The terminology used to describe different accounting methods is often the same, but the method itself can vary. 

The Function of Management Accounting 

Management accounting performs numerous functions in a business. It manages the business inventory, oversees internal controls, etc. Following are some of the functions of management accounting: 

  • Forecasting: It is possible to answer questions such as whether a firm should adopt more equipment or diversify into different markets and regions by predicting future trends. Forecasting assists in making decisions and answering questions like: Should this firm invest more in equipment? Should it acquire another firm? Should it invest in various regions and markets? Should it buy another company? 
  • Decision-making: Considering the data from managerial accounting, management accounting insights determine purchasing decisions. At both an operational and strategic level, data from managerial accounting enable decisions. 
  • Forecasting cash flows: It is critical to assess how cash flows and their effects on the business will affect future costs and earnings. A company’s next move can be based on its estimates of future expenses and future earnings. Management accounting involves budgeting and forecasting to track growth rates to meet company sales objectives. 
  • Helps understand performance variations: What was predicted and achieved are two different things. In management accounting, the technique involves using analytical methods to manage the differences between predicted and achieved. 
  • Analyzing the business rate of return: It’s crucial to understand the rate of return (ROR) before undertaking a project requiring a lot of investment. Management accounting questions include, how does a firm choose the most profitable investment? In how many years will a company make money on a project? What is the estimated balance? 

Summing up 

The main functions of management accounting are budgeting and planning the financial requirements of an organization. Beyond these basics, management accounting offers a variety of other functions, such as identifying risks that may affect a business’s financial results, forecasting future cash flow, and managing the organization’s debt.