Management accounting involves collecting, analyzing, and presenting financial information used to help company management make sound business decisions. This would include everything from providing detailed financial statements for different divisions within a large company, to analyzing the financial impact of a potential expansion or business acquisition. Management accounting is at the center of almost every significant business decision made.
Management accountants are called upon to assess whether a company’s current products and processes are still viable. By comparing data on the projected profits generated by a line of business against the cost of shutting it down, management accountants can determine if operations should be discontinued. In this scenario, a comprehensive analysis would involve consolidating human resource data to assess the costs of potential layoffs, and using data from engineering and marketing to decide whether a new product needs to be added to the production line. A complete analysis of this nature would also consider the potential profits that could come from using resources from a discontinued line of business elsewhere.
Management accountants prepare detailed analyses of both business problems and opportunities. Their reports are ultimately used to assist a company’s senior management in making the major decisions that determine the company’s financial success.
The accounting methods used by management accountants differ from those used by traditional accountants, financial controllers, and internal auditors whose jobs are focused on providing reports to external users. External parties privy to a company’s financial data generally include investors, or bankers considering the issuance of a loan, or regulators concerned with regulatory compliance. The question of whether the data is intended for external or internal users is the important factor that differentiates management accounting from other forms of accounting.
Generally accepted accounting principles (GAAP) must be followed for external reporting to ensure these reports are standardized, but GAAP serves only as a guide in management accounting. For internal decision-making, management accountants often forgo the use of GAAP in order to develop the most accurate and useful picture of the future. They apply best practices documented by leading management accountants in a similar industry along with statistical processes to provide the most complete analysis possible. Internal users are more focused on how a cost will benefit the company in the future, while financial accounting is dedicated to presenting a picture of the past that allows for an easy and standardized comparison to other companies.
Financial accounting for external parties follows strictly defined rules, but may not always present management with the information required to make sound business decisions. As an example, GAAP rules allowed Internet based companies to appear profitable even when they weren’t, which helped fuel the .com bubble in 1999 and early 2000. At that time, GAAP rules allowed companies to recognize revenue based upon service sharing agreements rather than cash transactions. If two companies sold banner ads to one another under a barter agreement, it would lead to higher revenue for both companies under GAAP, even through the reported revenue couldn’t actually be used to pay the bills. As a result of this, GAAP rules now require cash sales to take place before any revenue is recognized. Management accountants would’ve disregarded these barter transactions because they didn’t actually add to the company’s cash flow.
Learn more about financial accounting.
Cost-benefit analysis is the most common goal of management accounting. As an example, a company could build up excess cash after a few profitable years. The business then must choose how best to use that money. Company officers may consider acquiring a competing business or may return the money to shareholders. Senior executives may also want to consider the possibility of investing in the current business to expand output, or increase productivity by buying new equipment.
Management accountants would prepare a detailed analysis of each choice. This would involve reducing each of these options to a single number representing its net present value, which is an estimate of how much money the company will make from moving forward with each option. The decision to return cash to investors would be the preferred option only if the company can’t earn at least as large a return on the investment as individual investors would likely get investing the cash on their own. Generally, a company will consider whether it can use cash to boost shareholder wealth, and management accountants will consider this question carefully in their analysis. If the business is likely to see lower returns than a safe bond investment would yield, or if it will generate returns that are less than those of the average company, it is usually best to return the cash to shareholders.
Every mutual fund warns that past performance is not an absolute assurance of future performance. However, investors realize that the past is the only clue they have to what future performance is likely to be. Businesses face the same dilemma. Management accounting attempts to take the past, as documented by financial accountants, and extend those trends into the future by adding the necessary assumptions to make an educated guess about what the future holds. This offers company executives a statistical picture based on justifiable data of what the outcome of a given strategy will likely be.
Management accountants are skilled analysts that make reasonable assumptions based on their expertise, experience, and accumulated past data. This means management accountants must really understand the business. Based on this understanding, they make assumptions about the likelihood of success of each option, costs associated with implementing each alternative, and the likely profit stream each offers within the current economic climate.
A great deal of judgment is required in management accounting. Future outcomes hold a great deal of uncertainty and the management accountants will need to make estimates of the various factors that could impact business decisions. Senior executives rely on management accountants to gather all the relevant information needed to make fully informed decisions so as to create some degree of certainty in the otherwise uncertain world of economics. Without management accountants, senior executives would be gambling on the future. Their decisions would be based on instinct rather than justifiable data.
There are a wide variety of tasks performed by management accountants. In large companies, there will most likely be a team of professionals specializing in each area, while at a small company there is likely to be only a single person responsible for addressing the entire area of management accounting.
Financial analysis: Companies often must decide whether to replace equipment, expand operations, or make an acquisition of another company. In the end, management will usually choose to proceed only if the potential benefits outweigh the costs. Management accountants prepare the cost-benefit analysis that incorporates all the available information. Costs include all long-term expenses and non-cash factors including tax benefits from depreciation allowances. Benefits are the profits the project will deliver over its entire life cycle.
Management accounting also requires considering alternative uses for company assets to compare the projected profits from the project under analysis with other available options. It is even possible that a project may have more benefits than costs, but it still might not meet the company’s minimum requirement for profitability in which case the management accountant would still recommend passing on the project.
Budget preparation: Management accountants identify all costs associated with a project or a division when they prepare a budget. Traditional budget analysts look at cash flows exclusively, while management accountants think about the full spectrum of costs associated with the project. As an example, fringe benefit costs are paid from different accounting categories than labor costs, but management accountants add these costs to the equation to assess the true expenses of production.
Financial management: Deciding which expenses to cut involves more than just looking at dollars and cents. Management accountants are charged with looking at the impact that potential savings will have on the quality of the product, and sometimes the savings will not be justified when looking at the big picture. Homebuilders face this dilemma all the time since they have the option of substituting less expensive materials, but at the cost of lowering the quality of the home and decreasing the selling price. Management accountants can help strike the balance between what expenses can be reduced without lowering profits.
Auditing: An audit is defined as a methodical and thorough review of the data shown in financial statements. Management accountants may go through financial statements prepared with GAAP rules to verify that they reflect the actual costs of a project, and they may also enhance those statements by including a non-GAAP analysis that helps management understand the complete financial impact of the project. Audits can follow GAAP standards, or management accountants may apply their expertise and specialized knowledge to deliver a report that goes beyond GAAP. In doing so, they follow best practices guidelines identified by other management accountants and apply statistical information and projections that help make their work more reliable.
Management consultation: The Big Four accounting firms retain a staff of management accountants prepared to advise large companies on questions related to restructuring and potential tax savings. Sole practitioners can offer these services to small companies, generally serving as independent management consultants on a contract basis.
There are also some professionals who conduct research into best practices for management accounting, while others teach courses to professional audiences or to college and university students.
The Chartered Institute of Management Accountants offers a professional designation that requires passing ten tests. Candidates generally take a few tests a year, and complete the program in less than four years. The total cost associated with earning the designation is about $2,000. A bachelor’s degree and professional experience are also required to earn the CIMA designation. Forty hours of continuing education every two years is required to maintain certification in active status.
Professionals can also earn the Certified Management Accountant (CMA) designation conferred by the Institute of Management Accountants, an association made up of more than 60,000 accountants and financial professionals. The designation requires a bachelor’s degree from an accredited university as a prerequisite for the testing program. CMAs pass two four-hour exams – one focused on Financial Planning and Performance Analysis and the second on Control and Financial Decision Making. An enrollment fee of $200 and exam fees of $350 for each exam are required. Two years of professional experience are also required before applicants can become CMAs. Thirty hours of continuing education are required annually, and needs to include a minimum of two hours in specialized ethics training.
Some colleges offer an associate’s degree in management accounting to prepare graduates to enter the corporate world in entry-level positions. However, a bachelor’s degree will be required to obtain one of the professional certifications in management accounting. Accounting, finance and business management majors are also well prepared for management accounting positions.
In addition to general business courses, undergraduates should also complete courses in statistics and economics. Operations management is also a helpful course, as it will generally involve issues related to manufacturing processes. An overview of business operations strategies, facilities design, production planning and scheduling, inventory management, and quality control will be valuable for the aspiring management accountant. Courses in business law, ethics, organizational structure, and information systems technology will also generally be a part of the management accounting curriculum.
For those pursuing master’s and doctorate level degrees in management accounting, coursework builds on core accounting skills and also helps develop critical thinking, decision making, and analytical skills that are required to meet the challenges faced by business organizations.
Management accounting jobs often serve as entry-level positions for those with an eye on senior management positions, as they are able to draw from their expertise to control costs and increase profitability. CEOs often start in accounting, as do corporate controllers who are effectively the lead accountants within companies.
The Institute of Management Accountants reports that professionals who have earned the CMA certification make nearly $28,000 more in total compensation each year than their non-certified peers. CMAs earned an average annual salary of $108,455 as of the most recent survey conducted in 2013. The total average compensation for CMAs that year was $125,734 including bonuses.
As of 2013, those just beginning their careers reported an average annual salary of $70,276 in the first few years after earning their CMA designation. The survey data revealed that those working in public accounting earned the highest average salary at $141,685. The business services sector followed considerably further behind, where the average annual salary was reported to be $115,962 that year. Those working in the finance and insurance industry reported an average salary of $109,226 in 2013.