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The Advantages of Using ManagementAccountingBy Osmond Vitez, eHow Contributor , last updated February 21, 2012

Management accounting is the business function of recording and reporting internalfinancial information. Financial accounting reports are prepared for internal purposessuch as decision making or internal controls. Management accountants work on the front-end of the financial information work flow. They interact with various departments in thecompany to gather and assess financial information. Management accounting hastransformed over the past few decades from a traditional collecting and reporting

function to becoming an active business partner in the decision making process. Thistransformation has several advantages for companies.

1.Improves Profitability

o Management accountants can improve the profitability of their company by carefullymonitoring each operational process. Cost allocation, waste reduction and efficiencyreviews are tasks conducted by management accountants that may have significantimpact on a companys profits. Improperly allocating costs may interfere with recoupingthe production costs of materials, labor or overhead. These costs could quickly outpacerevenues, causing the company to lose profits. Reducing wasted production materials isanother important area of management accounting. Poor production processing maycreate too much materials waste, increasing overall product costs. Efficiency reviews willdetermine if production labor is too slow when producing goods or adding to production

process waste.

Stronger Decision Makingo 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 anobjective review on the potential financial impact of the decision. Accountants may alsoconduct sales forecasting or cash flow calculations to determine the growth potential of

future business decisions.

Companies may specifically development management accounting teams for reviewingbusiness decisions and determining how potential acquisitions or new product lines willaffect current business operations. Adjustments to the companys costallocation method

may also need to be reviewed during the business decision process.

oBetter Financial Reporting

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

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financial information. Variances or deviations from current accounting policy found bymanagement accountants can be corrected before financial statements are prepared andreleased to external stakeholders. Improved financial reporting may help a companysecure debt or equity investments from outside sources. Improving the external financing

portion of their business operations usually helps companies expand or improveoperations. Better financing operations may also create a competitive edge over acompanys competitors; this competitive edge can be used to gain market share over othercompanies 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

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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 moreknowledgeable 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 thatmight 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 andmethods 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.

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