Last updated: May 14 2008

What Is Management Accounting?

There was a young man who was being trained by his father to take over a large clothing store. The father had emigrated from Europe after the war, and had started the business with only a pack of needles and a spool of thread. He walked his son through the large store which was stacked to the ceiling with bolts of cloth, dresses, suits, shoes, coats, boots, etc.

"How do you keep track of inventory, Dad?" the young man asked.

His father opened a drawer and took out a pack of needles and a spool of thread. "This is inventory, son," he said. "Everything else is profit."

There may have been a time when a business required as little information as the father did in order to operate successfully, but that time has long since passed. Today even the smallest business requires timely information about a variety of the attributes of the business, if it is to succeed and thrive. It is the job of the management accountant to produce the financial and other information that is needed to manage a business enterprise.

In the first course of this Professional Bookkeeping series, we examined the role of the bookkeeper in identifying, classifying and recording financial transactions arising from a business undertaking. We reviewed the importance of the bookkeeper ensuring that such information is complete and accurate, that it is recorded on a timely basis, and that it is reported to the owners and managers of the business. We reviewed how that information ultimately ends up in the general ledger, from which the enterprise's financial statements are prepared.

Virtually every business, however, needs to "get behind" the financial information that is reflected in a business's financial statements. It is almost always true that the aggregate information reflected in financial statements does not give the complete story.

Example ñ Making a Business Decision on Incomplete Information

The general manager of Universal Construction was under pressure from the business owners to meet the sales targets for the year. In order to boost sales, he authorized his sales team to offer a 10% discount to any customer who placed an order before year end. Sure enough, there was big boost in sales revenue.

However, it soon came to light that several large customers had long-term standing orders for Universal's products, and they were upset to find that customers ordering in the short term were getting a better price. The general manager had not been aware of the significance of the long-term supply agreements to Universal's business.

In order not to alienate the long-term customers, Universal had to give them a 10% discount too, and many of them insisted on having the discount apply to all their purchases for the year. When the adjustments were reflected in the financial statements, Universal fell well short of its sales goals for the year.

This is a simple example, but it is illustrative of the need for the management accountant to be involved in providing information to be used in making business decisions.

There is no place in the general ledger or the financial statements that a business owner or manager can go to find the dollar value of sales that are made to customers with long-term supply contracts. That information must be accumulated outside the regular financial systems, analyzed and reported separately. Universal's general manager would obviously have been well advised to have that information before he instructed his sales force to offer a 10% price discount.

It is the role of the management accountant to accumulate this information, in order to assist the owners and managers of a business in making rational business decisions. In many businesses, the responsibility for accumulating and reporting this information rests with the professional bookkeeper, as it is the bookkeeper who knows best how the information flows through the business's information systems.

However, the bookkeeper cannot accumulate this management information in a vacuum. It flows from an understanding of how management decisions are made.

Excerpted from Managerial Accounting for Professional Bookkeepers, one of the courses that comprise the Certified Bookkeeping Specialist program.