There are numerous management accounting methods you can use in your firm. As different clients come in, they often need help in various areas of their business.
Maybe they’re struggling to keep inventory costs low, or are constantly facing unfavorable budget variances—the problems are many but the solution is one: employ the best managerial accounting methods, aka management accounting.
Different business problems call for different management accounting solutions to help with better decision-making. This article will look at seven accounting methods you can use for your accounting firm.
Let’s start with the definition.
What Is Management Accounting?
Management accounting refers to the practice of identifying, measuring, analyzing, and interpreting accounting information to make informed decisions.
Business leaders use this information to plan. They use management accounting methods to determine costing strategy, identify the number of resources to be allocated to a project, evaluate the performance of the business, and control operations.
This type of accounting is more detailed than financial accounting. It also doesn’t follow the principles of financial accounting, making it much more adaptive to a firm and its needs.
Its adaptive nature makes it great for analyzing businesses internally to find problems and fix them for a smoother, leaner, and more cost-effective process.
Given below are the 7 most effective management accounting methods you will find useful in running your business:
7 Management Accounting Methods
There are numerous accounting methods used to achieve the specific goals of a company. Let’s look at seven tried-and-tested ones.
Method #1: Capital Budgeting Analysis
When businesses invest in capital assets, they need to assess whether the benefits of the assets justify the investments made. This assessment then helps them decide on whether to invest or not.
Capital budgeting analysis allows managers to determine which projects are likely to return higher yields over a specified period.
Accounting firms use capital budgeting techniques to determine the yield rate of a project for a business. The techniques include discounted cash flow analysis which uses a discount rate, payback analysis that looks at how soon the investment can be earned back, and throughput analysis.
Throughput analysis gives the most accurate predictions, even though it is the most complicated. It will take more time, requiring a more intensive effort from your team, but gives more value to the clients.
Method #2: Constraint Analysis
Constraint analysis looks at the operations and tries to find bottlenecks within the process. Instead of analyzing the entire process, it aims to identify and optimize the bottlenecks.
For instance, there may be a manufacturing bottleneck wherein a toy company’s battery supply is lower than its manufacture rate.
Once discovered, the manager may set the speed of the production at the rate of the bottleneck, that is, the supply of batteries.
Otherwise, there would only be a lag where there are more toy parts than batteries, lying in waiting for more batteries to arrive. This would increase the working capital costs and reduce profitability for the company.
Your analysis would include the clients’ problematic areas in their production and calculations on the impact on the cash flow, revenue, and profit. It helps the manager make a better decision for effective processes.
Method #3: Inventory Costing Management
Inventory is one of the most valuable assets of a business and often the most costly too.
Inventory costing refers to the process of putting the inventory in monetary value. This includes all the goods a business has, from raw materials to unfinished products and finished goods.
It shows a business how much their inventory costs them—which includes overhead costs such as storage and administration fees, giving them a broader decision spectrum.
Proper financial management of inventory enables better control of the goods’ purchasing cost and the quantity of goods purchased at a given period.
Management accountants can use LIFO, FIFO, or the weighted average methods of inventory costing to keep track of their stock.
Method #4: Budgeting Management
Budgeting management enables businesses to plan. The company can set goals for the period, and accounting firms can help them create a budget aimed at achieving their goals.
Planning enables the coordination of activities across different departments. It also ensures that employees and managers know what they are doing instead of playing it by ear. Businesses need to have a well-thought-out budget also to help them keep track of their finances.
The budget also works as a performance benchmark by comparing the actual expenditure against the business plan. Accounting firms can help analyze budgets for clients to determine the budget variance and pick out whether there is a need for investigation of potential problems.
Budgeting needs reliable data provided by the client—and attention to detail—to increase chances of favorable variance.
Accounting firms can use different techniques for budgeting management. Some are easy to use, like the incremental method where actual figures from the previous years are either added to or subtracted from.
Others are more complex and time-consuming for both the firm and their clients, e.g., the zero-based budgeting technique. This one would require departments to start from zero and justify every single expense they add.
Method #5: Cash Flow Analysis
Next on our list is cash flow analysis which looks at the movement of cash from operational, financial, and investment activities.
It gives a clear picture of the business’s financial health. When the company is running low on cash, it may be unable to pay its bills, or purchase inventory, putting it in financial jeopardy. Accounting firms can help businesses ensure that their cash flow is sufficient.
And with the help of accounting firms, businesses can make decisions based on cash flow analyses, such as whether to purchase new trucks or acquire short-term loans.
Cash flow can be recorded through accrual accounting or cash-basis accounting. Accrual accounting gives a better picture of the company’s financial position, while cash-based accounting lets managers have a clearer view of the impact of each financial transaction.
Method #6: Total Quality Management
The total quality management (TQM) method looks to continuously improve the production process of an organization and ensure quality products.
The lean method requires the participation of everyone, including senior management and employees. It streamlines the value chain to ensure improved quality in the final output.
This method is based on the principle of continuous learning, where businesses keep measuring their production process and the output to find ways to improve it further.
It is big on teamwork and job training, with people expected to find and improve areas with wastefulness or errors that reduce the quality of end products or services.
Accounting firms may suggest TQM for companies trying to improve their production process and increase customer satisfaction.
Method #7: Trend and Forecasting Analysis
Lastly, trend and forecasting analysis is a management accounting method that uses current and past information to predict what is likely to happen in the future.
It helps to answer questions such as:
Is the business heading toward failure?
Are there potential problems you could face in the next 3-5 years?
Are there any inventory issues that can be fixed today?
Trends analysis is also essential to detect unusual variances and deviations in expenses.
Through methods like the simple high-low cost estimation technique or the more sophisticated regression analysis, you can help a business predict where it is headed.
Such predictions can help businesses set up strategies to improve their processes and business activities for better results.
Applying These Methods for the Success of Your Accounting Firm
Helping clients through these management accounting methods needs a lot of collaboration with the clients. Your firm needs to communicate with them, access the correct data promptly, and study the company inside-out.
This can be hard to achieve and often leads to email backlogs, confusion, and repetitive processes.
It is high time you put all of your communication, files, and processes in one place. And Client Hub would like to help you with this.
Client Hub assists firms like yours automate their accounting activities by providing an all-in-one platform for you and your clients. Join other accounting firms like yours to ease the process of management accounting for you and your clients.
Originally published Sep 22 2021
Frequently Asked Questions
What are the methods of management accounting?
The management accounting methods include capital budgeting analysis, inventory costing, budgeting, total quality management, trend and forecasting analysis, cash flow analysis, and constraint analysis.
How many types of management accounting are there?
There are over ten types of management accounting. Some include cash flow analysis, budgeting management, trend and forecasting analysis, and inventory costing.
What are management accounting tools?
Management accounting tools are models, frameworks, or processes that aid management accountants in carrying out different accounting methods.
They include cash flow modeling, SWOT analysis, balanced scorecards and value chain analysis, among others.