The Advantages of Using Management Accounting

By Osmond Vitez, eHow Contributor , last updated February 21, 2012

Management accounting is the business function of recording and reporting internal financial information. Financial accounting reports are prepared for internal purposes such as decision making or internal controls. Management accountants work on the frontend of the financial information work flow. They interact with various departments in the company to gather and assess financial information. Management accounting has transformed over the past few decades from a traditional collecting and reporting function to becoming an active business partner in the decision making process. This transformation has several advantages for companies.

1. Improves Profitability
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Management accountants can improve the profitability of their company by carefully monitoring each operational process. Cost allocation, waste reduction and efficiency reviews are tasks conducted by management accountants that may have significant impact on a companys profits. Improperly allocating costs may interfere with recouping the production costs of materials, labor or overhead. These costs could quickly outpace revenues, causing the company to lose profits. Reducing wasted production materials is another important area of management accounting. Poor production processing may create too much materials waste, increasing overall product costs. Efficiency reviews will determine if production labor is too slow when producing goods or adding to production process waste.

Stronger Decision Making

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Traditional business decision making consists of executive managers reviewing potential deals with other companies and pulling the trigger if they feel good about the decision. Management accountants help executive managers make that decision by giving them an objective review on the potential financial impact of the decision. Accountants may also conduct sales forecasting or cash flow calculations to determine the growth potential of future business decisions. Companies may specifically development management accounting teams for reviewing business decisions and determining how potential acquisitions or new product lines will affect current business operations. Adjustments to the companys cost allocation method may also need to be reviewed during the business decision process.

Better Financial Reporting

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Strong management accounting systems may improve financial reporting since management accountants are intimately involved with the collecting and reporting of

financial information. Variances or deviations from current accounting policy found by management accountants can be corrected before financial statements are prepared and released to external stakeholders. Improved financial reporting may help a company secure debt or equity investments from outside sources. Improving the external financing portion of their business operations usually helps companies expand or improve operations. Better financing operations may also create a competitive edge over a companys competitors; this competitive edge can be used to gain market share over other companies and improve overall profitability.

The Disadvantages of Management Accounting

There are certain problems associated with management accounting.

Management accounting can be an effective tool for business planning, strategic development and internal monitoring. At the same time, there are potential problems that can arise by relying exclusively on management accounting information. Relying only on

management accounting can be dangerous and lead a business in the wrong direction. Managers need to be aware of the disadvantages of management accounting so that they can evaluate the information provided in a critical manner. Managers who can do this will be able to use management accounting information in conjunction with other information to make informed business decisions.

Lack of Standardization
Financial accounting is highly standardized, with financial accountants using guidelines such as Generally Accepted Accounting Principles (GAAP). In stark contrast to this, management accounting does not have a set of standard procedures. A management accountant can devise her own systems and metrics to evaluate the finances of an organization. The disadvantage of this is that one accountant's method can vary greatly from another's method. This can result in inconsistencies in the way that financial benchmarks and evaluations are measured. It also requires accountants to be much more knowledgeable and able to interpret the accounting systems developed by others.

Over-emphasis on Quantitative Information

Quantitative data can be valuable in making informed business decisions. Management accounting, however, focuses exclusively on quantitative measures and ignores factors that cannot be measured in dollars and cents. For instance, it might appear to make financial sense to relocate a production facility to a region with lower wage costs. Management accounting can calculate the wage savings and certain increases in cost that might occur (for example, shipping costs or import duties). Management accounting cannot, however, factor in things such as the savings related to the goodwill of community members in the region, or public relations problems that can arise from such a decision. Management accounting is very rational, but sometimes being entirely rational can be a disadvantage.

Subjectivity
Management accounting allows for a great deal of subjectivity when creating metrics and methods for measuring performance. This is problematic because the accountant's personal beliefs and biases can have an impact on the way performance is measured. For example, if a management account is required to measure the productivity of workers, she may focus exclusively on outputs and not take into account worker inputs that can have a profound effect on overall productivity. This affects both the company and employees. The company is affected because the information that it is using may not be the best and employees can be affected if they feel they are not being evaluated fairly.