Differences between financial accountancy and management accounting

Management accounting information differs from financialaccountancy information in several ways:

while shareholders, creditors, and public regulators use publicly reported financial accountancy, information, only managers within the organization use the normally confidential management accounting information

while financial accountancy information is historical,management accounting information is primarily forward-looking;

while financial accountancy information is case-based, management accounting information is model-based with a degree of abstraction in order to support generic decision making;

while financial accountancy information is computed by reference to general financial accounting standards, management accountinginformation is computed by reference to the needs of managers, often using management information systems.

Traditional versus innovative practices

The distinction between traditional and innovative accounting practices is perhaps best illustrated with the visual timeline (see sidebar) of managerial costing approaches presented at the Institute of Management Accountants 2011 Annual Conference.

Traditional standard costing (TSC), used in cost accounting, dates back to the 1920s and is a central method in management accounting practiced today because it is used for financial statement reporting for the valuation of income statement and balance sheet line items such as cost of goods sold (COGS) and inventory valuation. Traditional standard costing must comply with generally accepted accounting principles (GAAP US) and actually aligns itself more with answering financial accounting requirements rather than providing solutions for management accountants. Traditional approaches limit themselves by defining cost behavior only in terms of production or sales volume.

In the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment. In 1993, the Accounting Education Change Commission Statement Number 4[8] calls for faculty members to expand their knowledge about the actual practice of accounting in the workplace.[9] Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.

Variance analysis is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labour used during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind. Life-cycle costing recognizes that managers' ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product life-cycle (i.e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the products.