What is Management Accounting?

Management accounting is a branch of accounting that assists managers with their decision-making. It focuses on the revenues and expenses of a business, as well as asset usage. Someone engaged in management accounting notes unusual spikes and declines in revenues and expenses, and reports these variances to management. The intent of this analysis is to take action to improve the financial performance of a business.

Management accounting does not just result in variance reports. It can produce reports covering any aspect of a business. Examples of the types of information that may be reported include the amount of cash on hand, capital budgeting analyses, and the inventory record accuracy percentage. Other types of information include loan covenant compliance, the order backlog, the percentage of overdue accounts receivable, and project profitability.

Management accounting results in reports that are intended for use within a business. Since this information is not viewed by outsiders, it does not have to comply with the reporting requirements of any accounting frameworks, such as generally accepted accounting principles. Instead, the accounting staff can generate reports in any format they want, in order to highlight actionable information.

Management Accounting vs. Financial Accounting

Management accounting is designed to support management decision-making, while financial accounting focuses on reporting financial statements to outsiders, such as investors and lenders. These are entirely different disciplines, for the following reasons:

Purpose. The focus of the management accountant is on dredging through the accounting data to uncover anomalies and findings that assist in running a business, while the financial accountant is only concerned with the preparation of an accurate set of financial statements.
Reporting methodology. Management accountants are not subject to any reporting methodology, whereas financial accountants will be subject to an accounting framework, such as GAAP or IFRS.
Targeted audience. The reports generated by management accountants are usually intended entirely for in-house consumption, while the reports generated by financial accountants (such as financial statements) may be issued to outsiders, such as investors, creditors, and lenders.
Time horizon. Management accountants are future-oriented, trying to spot issues that can be fixed to enhance future performance. Conversely, financial accountants are historically-oriented, preparing reports that are based on the prior results of the organization.
Types of training. Management accountants are more likely to have been trained in-house or always worked in the private sector, while financial accountants are more likely to have come from public accounting and been certified as CPAs.