8.02 - Management Accounting

Previously, in financial accounting, we were looking backwards and reporting events in the past. In contrast with that management accounting takes a forward looking view. Management accountants provide information to managers to assist with decision making and forward planning in the three main areas of Strategic Management, Performance Management and Risk Management. The linkage to financial accounting and reporting is shown the diagram below.

The management accounting profession is working hard to rid itself of the traditional approach to cost accounting which was fine for the slower and consistent nature of business in previous times. The profession is now equipped and able to assist engineers with tools and techniques to assist with decision making in fast paced and competitive business environments.

For instance there has been a move from the variance analysis focused approach to the more dynamic and comprehensive life-cycle cost analysis and activity based costing approaches much more suited to modern businesses.

Users of technology are now more concerned about the total life cycle costs of a product either because they are environmentally aware or big end users are concerned with the maintenance and disposal costs of products. So accounting is concerned with the four main phases of a products life – introduction, growth, maturity and decline. Each of these product life-cycle phases is managed differently and needs a different variation of the cost reporting and assessment activities.

Also because product life-cycles seem to be getting shorter and shorter more attention needs to be placed on the project / product selection and preliminary design phases not previously considered. Generally they were included in the overhead called R&D. Now senior business managers want to know what value they are getting from their R&D activities. That provides a focus on the effectiveness of the design methods and tools used to assist with the generation of design ideas and their realisation as marketable hardware or software. That leads to a logical expansion of the life cycle to include – Product Planning, Design and Production Preparation.

Here management accounting can be of considerable help to the R&D group. In some companies the management accountant can be seconded to a project team to assist with the costing issues that arise in this environment. For instance he may be required to establish a Target Cost or Product Cost Management environment to support the design team in selecting design proposals from a range of alternatives and possible manufacturing processes.

Some of the key activities the cost engineer or management accountant can be involved in are - the creation and maintenance of comparative material cost tables and comparative process cost modelling using activity based costing. S/he can also assist with the strategic cost comparisons at suppliers, competitors and partners. Assisting with or leading the compilation of results from reverse engineering and product teardown activities provides a valuable and insightful contribution to the new product design effort.