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Management accounting involves using accounting figures to inform managerial decisions about the operation of a business. This is in contrast to financial accounting, which is designed to inform people about the financial health of a company, as well as allowing tax liabilities to be calculated. Popular management accounting techniques include cost accounting, resource accounting and throughput accounting. There are also some industry-specific management accounting techniques such as transfer pricing in finance and banking.
Cost accounting works in a different way than traditional accounting because of its emphasis. Traditional accounts look at the overall costs and revenues of a company to determine profitability. Cost accounting puts the emphasis on the money a company has to spend, going into far greater detail than is needed in traditional accounts.
In many cases, the overall costs will be stated more than once, broken down into different classifications. These could include fixed and variable costs, direct and indirect costs, or even classifications based on the organizational structure of the company. Such a detailed approach not only gives a company a clearer insight into the revenues it needs to achieve to be profitable, but may also highlight areas where costs can be better controlled.
Resource accounting, which is based on a German system known as Grenzplankostenrechnung — which may be translated as flexible analytic cost planning and accounting — is among the more complex management accounting techniques. It works from the standpoint that the key to a business is its resources. In such accounts, every cost and element of revenue is specifically assigned to a resource. The idea is to track the quantity of resources and thus judge how well the company is using its resources.
Throughput accounting measures three main factors, designed to cover all revenue and spending: throughput, investment and operating expenses. Throughput, which is sales revenue minus the raw materials costs for the relevant products. Investment, in this context, covers assets such as machinery and equipment, plus unsold stock. Operating expenses comprise any production expenditure other than raw materials, which means it covers factors such as rent and labor costs. A company using throughput accounting will usually judge management decisions by whether they are likely to increase throughput while reducing investment and operating expenses.
Transfer pricing is a way of applying management accounting techniques to banking, where there are no physical goods or production. It involves attempting to break down the bank's overall finances into its different departments. This is done by assigning a financial value to the credit of a department that brings in money such as customer deposits, while placing a debit cost to reflect the money that a department risks by lending to customers.
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