Management accounting is a specialized sub-set of accounting, focusing on internal needs of businesses. While financial accounting focuses on external reporting and history, management accounting focuses on current information and the needs of in-house management. Both management and financial accounting work together to give management and external users the information required. Often a management computer system feeds into a financial computer system, providing users and stakeholders with complete cost information.
Popular with manufacturing environments, management accounting focuses on assigning costs to processes. Instead of dealing with debits and credits, accounts or financial statements, as financial accounting does, this style of accounting quantifies details, quality controls, and expectations. Cost Accounting is one of the main principles of management accounting. It is used to determine budgets, costs, and profitability of products or departments.
Cost accounting deals with 3 main areas. The first is raw materials, or the resources needed to complete a product. This could include, for example, costs of leather and wood to build a piece of furniture. Labor, or the salaries of employees working on a process, is the second area, and would include the cost of a carpenter building a piece of furniture. Third is indirect costs, also known as "overhead;" this would include the cost of liability insurance in a plant.
Standard cost accounting includes the concepts of fixed and variable costs, as analysis are performed to identify how variable costs affect the cost of a product excluding fixed costs and vice-versa. Budgets are created based on standard costs and variances are identified and analyzed. It is a popular tool used by many manufacturing plants and other businesses.
Another way of looking at management and cost accounting is by using Activity Based Accounting, also known as ABC. This method tries to measure actual activity costs to assign indirect costs to products. It is usually expensive to implement this system, since activities and ways of measurement may vary dramatically.
Most management accounting processes are performed using computer systems that can handle large amounts of data and make the data usable by users. Computer systems and the Information Technology (IT) department are very important in management accounting. With this importance comes expenses associated with the IT department; that is why IT cost transparency is part of management accounting. There is a need for IT costs to be measured and controlled the same way that other processes are.