Management accounting provides information to management to facilitate decision-making and improve performance. It is also called managerial accounting or management accounting and together with financial accounting and cost accounting it forms what is known as the accounting structure of the organization.

Next, based on the exploration of academic sources, we will answer the questions:

  • What is management accounting?
  • What are its main characteristics?
  • What are your fundamental objectives?
  • How does it differ from financial accounting?

What is management accounting?

Administrative accounting is the branch of accounting that identifies, records, analyzes, evaluates, and communicates internal financial information to the decision-makers of organizations, so that they, through the implementation of the administrative process, lead them to achieve their objectives by appropriately using its resources.

This accounting provides managers with historical and projected information, as well as detailed calculations and estimates useful for day-to-day management, verifying the efficient use of resources, planning future operations, and developing general business strategies.

Definition according to authors

The following are some definitions of scholars of this branch of accounting, from which it will be possible for you to develop your concept of what administrative accounting is:

Managerial accounting can be defined as an information system directed toward the interior of the company to improve the planning, organization, direction, and control of economic units. (Cano, p. 21)

Administrative accounting is the field of accounting that performs in the quantitative comparison of what was done with what was planned; that is, in the planning and generation of new business policies for the good administration and control of the entity from the same financial chronological records. (Guzmán, et al., p. 25)

Administrative accounting is a set of tools that produce financial information for the internal use of the company, whose main objective is decision-making related to the future and whose support is the administrative process: planning, direction, organization, and control. (Gomez and Lopez, p. 14)

Managerial accounting is an integral part of the managerial process, focused on the efficient and effective use of resources, which provides essential information so that the organization can: control its ongoing activities; plan its future strategies, tactics, and operations; optimize the use of its resources; assess and evaluate their performance; reduce subjectivity in the decision-making process and improve internal and external communication. (Flowers, p. 23)

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Characteristics of management accounting

The characteristics of management accounting are influenced by the variable needs of management (Warren, Reeve, and Fess, p. 2):

  • First, the reports generated by management accounting provide both objective measures of past operations and subjective estimates of future decisions. Using subjective estimates in management accounting reports helps management respond to business opportunities.
  • Second, management reports do not need to be prepared by generally accepted accounting principles. Since management accounting information is used only by management, the accountant can supply the information as needed by management.
  • Third, management accounting reports may be provided periodically, as with financial accounting, or any time management needs information. For example, if top management wants to make a decision about geographic expansion, a management accounting report may be developed, in a certain format and within a certain time frame, to assist management in that decision.
  • Finally, management accounting reports can be prepared to report information for the entire economic entity or a segment of it, such as a division, product, project, or territory.

Objectives of management accounting

Fundamentally, the objectives of administrative accounting are: to facilitate decision-making and improve the exercise of control.

In the first place, it is about providing suitable information to decision-makers to facilitate the improvement of the performance and efficiency of the processes.

This information must be available at the different levels of the organization, in such a way that, for example:

  • The workshop operator finds out how efficient his work has been based on the hours spent on a specific task.
  • The head of the maintenance area knows the profitability of his department by examining costs and income
  • The branch manager can compare the general performance of his affiliate with the other agencies in terms of volume, profitability, and efficiency.

Secondly, the purpose is to establish a performance and responsibility evaluation system that encourages the motivation of those who make up the organization.

It is about laying the foundations for the design of remuneration schemes that encourage staff at all levels to carry out their work with all requests. In addition to incorporating into the work culture the commitment to maximizing value for the client and the company.

Example of application of administrative accounting in a company

Imagine that you are the sales manager of a clothing manufacturer that only produces for third parties (maquila) and that your bosses have asked you to help them decide on the convenience of opening a point of sale for their brand.

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To decide if it will be a good business strategy for your area, you will have to make estimates about sales, so you will prepare a sales budget together with the production and finance areas to present it to your bosses and thus help them make the decision. around this project.

This task is your contribution to the administrative-accounting information system with which the functions of the administrative process are supported. In this case, the sales budget that you prepared will form part of the stages of said process, since, based on it and other tools, the managers will decide what will be done and how it will be done both in the field of production and in the clothing workshop, as well as in the area of ​​sales in the new store. In addition, in the future, it will serve as a control element to determine what was done well, as well as what needs attention and what needs to be improved.

Administrative accounting and financial accounting

Sometimes these two types of accounting are confused because they are related to their purpose of helping to improve decision-making, let’s see how they differ and how they are assimilated to identify each specialty.

Differences

Let’s see in the following table what their main discrepancies are:

Characteristic Administrative Accounting Financial Accounting
main users Organization administrators of different levels. External actors, such as investors and government agencies; are also administrators of the organization.
Freedom to choose accounting measures There is no restriction other than costs versus benefits in making the best management decisions. Restricted by Generally Accepted Accounting Principles (GAAP).
Behavioral Measurement Implications When Selecting Accounting Measures The choice should consider how the measurements and reports will influence the day-to-day behavior of managers. The choice is based on the way of communicating and on the communication of economic phenomena itself. Behavioral considerations are secondary, although executive compensation based on reported results could influence their behavior.
time focus Orientation to the future: formal use of budgets, as well as historical records. Example: 2022 budget versus 2022 actual performance. Orientation to the past: historical evaluation. Example actual performance in 2022 versus actual performance in 2021.
time horizon Flexible, it varies from one hour to 10 or 15 years. Less flexible; usually a year or a quarter.
Report Types Detailed reports that include details about the parts of the entity, products, departments, territories, etc. Report Summaries: Reports are about the entire entity as a whole.
Description of activities The field of action is less clearly defined. Greater use of economic, decision, and behavioral sciences. The field of action is more clearly defined. Less use of these disciplines.
Source: Horngren, Sundem and Stratton (p. 6)
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Similarities

The similarities between these branches of accounting are found, fundamentally, in the following points (Ramírez, p. 15):

  1. Both are based on the same accounting information system: both start from the same database (it would be illogical and unaffordable to maintain a different data collection system for each area). Each one adds or modifies certain data, according to the specific needs that they want to cover.
  2. Another similarity is that both demand responsibility for the administration of the resources placed in the hands of the administrators: financial accounting verifies and performs this work globally, while administrative accounting does it by areas or segments.

Bibliographic references

  • Cano Morales, Abel Maria. Managerial and budgetary accounting. Editions of the U, 2017.
  • Flores Soria, Jaime. Management accounting. Business management accounting. Theory and practice. Center of Specialization in Accounting and Finance EIRL, 2012
  • Gomez Agundiz, Xochitl and López Alcántara, Martha Beatriz. Administrative accounting. Homeland Editorial Group, 2021.
  • Guzman Vasquez, Alexander, Guzman Vasquez, David and Romero Cifuentes, Tatiana. Financial Accounting. Editorial Center University of Rosario, 2005.
  • Horngren, Charles T., Sundem, Gary L., and Stratton William O. Management Accounting, Pearson Education, 2006.
  • Navarro, Peter (Editor). Management accounting. Tools for decision-making. Profit Editorial, 2010.
  • Ramirez Padilla, David Noel. Administrative Accounting, McGraw Hill Interamericana, 2008.
  • Warren, Carl S., Reeve, James M., and Fess, Philip E. Management Accounting, Cengage Learning Publishers, 2005.