Analyzing Your Management Accounting System

Management (or managerial) accounting is a somewhat artificial discipline. When it was conceived (it was many decades ago when business management was nowhere as complex as it is nowadays), it was supposed to become an internal (‘management’) counterpart to external financial accounting that cater to ‘external’ investors.

Foundations of management accounting were developed during the ‘old times’ where managers were mostly concerned about managing costs. They did need financial statements – to speak the same language with their shareholders, but of a slightly different nature.

Shareholders needed financial statements delivered by financial accounting to make investment decisions while managers needed financial statements delivered by management accounting to make management decisions. Which at that time mostly dealt with cost management decisions.

As the result, ‘traditional’ management accounting mostly covers developing financial statements (modified from their GAAP/IFRS ‘parents’) and using various cost management methodologies to develop the corresponding reports that are supposed to help managers make optimal decisions and execute them in the most efficient ways.

Well, for better or worse, but those ‘good old times’ are long gone. Nowadays, corporate managers need a whole lot more information (actually, knowledge) to radically improve both quality of their decisions and the efficiency of their execution. And knowledge about the right cost allocation  is only a small part of this ‘whole lot’. In fact, most of this ‘lot’ is not even financial.

Therefore, it makes little sense to analyze your ‘traditional’ management accounting function. What needs to be analyzed, is development of the comprehensive corporate knowledge base that corporate managers need to do their jobs well. Which must include all knowledge – financial and non-financial (operational).