Chapter 19 - Management Accounting

Abstract

This chapter focuses on management accounting. Management accounts are detailed internal accounts prepared on a regular basis throughout the financial year to enable the management to review business activity and profitability. The regular review of management accounts is most useful when the details for the period are compared with a related budget as well as with the equivalent details for the previous year. Budget assumptions should be established at an early stage and should be set out in writing to help ensure consistency between different departments and functions. The annual budget should also encompass balance sheet and cashflow details as well as profit and loss account information. Proposed capital projects should be analyzed in detail so that the impact on the profit and loss account, and on the cashflow forecast, can be properly assessed. Management accounts are usually prepared monthly, although quarterly reporting may be considered adequate in a smaller business. There is no standard format for management accounts although the structure should be designed to provide the required information to the directors and senior managers for managing the business effectively. Ratio Analysis is often helpful to incorporate a number of performance ratios into the management reporting package. The directors and senior managers should agree in advance on the most relevant ratios for the business, adding appropriate new information as the business expands and develops. Management may also find it helpful to consider certain investment ratios as part of the regular reporting package.