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What is Business Management Accounting?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 15 October 2018
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Business management accounting is a process that focuses financial information for the sole use of internal stakeholders. Some aspects of this accounting process are similar to financial accounting, such as journal entries, general ledger reviews and the preparation of reports for management review. A significant difference, however, is that business management accounting does not follow national accounting standards. This allows for the creation of reports that meet the needs of decision makers, rather than investors or creditors. Almost all companies use some form of this accounting to record transactions from normal business operations.

Another difference between business management accounting and financial accounting is the lack of accounting periods in the former. Owners and managers who set up the internal management accounting system often require a continual reporting of financial information. This is especially true of manufacturing companies, primary users of this accounting method. Manufacturing firms often have continuous operations that rarely stop; the flow of materials through production systems often remain smooth, even when production output drops due to lower sales expectations.

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Accounting for costs is another focus of business management accounting. Costs typically fall into one of three groups: direct materials, direct labor and manufacturing overhead. Direct materials are the items needed to produce the goods or services the company will eventually sell to end users. Direct labor represents the manpower needed to run machinery or turn the raw materials into usable goods for the production process or as finished products ready to sell. Manufacturing overhead includes all costs that do not fall into the first two groups; the costs must relate to the production process, however. All costs that do not relate to the production process are period costs, expensed during the normal accounting period as dictated by financial accounting rules.

Companies will also select a costing method as part of the business management accounting process. Typical systems include job order, process or activity based costing. Job order applies costs to individual items produced by a company. Common examples include construction or made-to-order cars or yachts. Process costing is common when companies produce homogeneous goods, such as food products like kidney beans or soda beverages. Activity based costing focuses on activities, rather than the cost of materials in each process. Both service-based and manufacturing firms can use activity based costing. The company must identify cost drivers that are in each activity and then associate the amount of overhead to products via the cost driver.

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Charred
Post 4

@NathanG - I think that process costing would be the trickiest of the costing methods above. After all, all your manufacturing materials get bundled into a single product that becomes one.

My dad used to work for General Foods for many years and of course they make all sorts of food products and also coffee.

How do you figure out what it costs to make coffee? You have to cost out the different parts of the process, assigning a unit value to them, and then you wind up with the total cost.

I think that after time however each additional unit becomes cheaper to produce, once you’ve ramped up your production to the maximum capacity. I didn’t understand any of this stuff at the time. All I knew growing up was that my dad would come home every week with bundles of free coffee.

NathanG
Post 3

@allenJo - We do cost accounting in our company, since we are in a service industry. We sell software. That’s a digital good.

We don’t have to worry about physical materials, but we do very much have to worry about labor overhead. Our boss held a meeting with us recently where he announced that we had posted a million dollar loss, and he blamed it on overhead.

Apparently we hired too many people and he flat out told us there may be layoffs. That wasn’t the kind of news everyone wanted to hear, but I’ve been there, done that. I feel ready for anything.

I do believe that companies find it easier to lay people off in managing costs than in trying to make business operations more efficient, the way that a real business management solution would.

allenJo
Post 2

@hamje32 - I’d say that account executive wouldn’t last long at the company. Eventually the truth wins out and the business manager will find out. The formal accounting process (done by the accountants) will reveal the actual numbers.

No, there is no point in fudging internal accounting numbers. If anything, companies tend to be brutally honest with themselves about where they stand, so that they can position themselves well for future growth.

Secondly the article points out that the business management accounting tends to happen regularly, as opposed to quarterly as standard accounting does. Therefore, if there’s any deception, in my opinion it would have to be a continual, never ending stream of deception.

That’s tough to pull off, even for the most experienced fudge artists.

hamje32
Post 1

Since this form of accounting doesn’t follow national accounting standards, as the article mentions, doesn’t this open up the possibility for fraud and abuse?

I would think that businesses could fudge numbers and figures and stuff like that. I realize that these reports are prepared for the use of internal stakeholders, not investors, and so there might be less of an incentive for a company to lie to itself.

Still, I can think of at least one scenario; one where an account executive might tweak the numbers to make the bottom line look better than it should, so that he looks better than he otherwise should.

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