For a company’s management to anticipate profit and loss, plan cash flow, and set effective goals for the business, the coming year’s incomings and outgoings need to be set out in detail. Unlike financial accounting, which is primarily for external users such as investors, lenders, or regulators, management or cost accounting takes place within a business to project expected sales revenue and expenses, so that the business can decide how to best use its available resources.

80%
of accountants and financial professionals in the US are employed within a business or organization

COST ACCOUNTING PRINCIPLES

The Chartered Institute of Management Accounting (CIMA) in the UK and the American Institute of Certified Public Accountants (AICPA), with members in 177 countries, have established Global Management Accounting Principles.

• ❯ Communication provides insight that is influential Facilitate good decision-making through discussion.
• ❯ Information is relevant Source best material.
• ❯ Stewardship builds trust Protect financial and nonfinancial assets, reputation, and value of organization.
• ❯ Impact on value is analyzed Develop models to demonstrate outcomes in different scenarios.

---

Management accounting process

Planning is done for the financial (fiscal)
year that lies ahead—this is also called the accounting year and is made up of 12 consecutive months. Start and end dates differ from country to country.

Department budgets Managers estimate what funds will be needed for expected outgoings

Purchase orders (POs) POs tell the finance department exactly how much money to reserve for payment.

Timesheets Staff employed on an hourly or daily basis fill in timesheets; these help managers to calculate overall staff costs

Invoices Invoices submitted by contractors and suppliers have to be matched against purchase orders and paid out.

Goods received Employees log receipt of merchandise, describing what the goods or services are and the quantity received.

---

Management

Managers create budgets and document business costs to monitor business performance, and plan for the short and medium term. The information they collate sheds light on the financial implications of ongoing projects

Information is passed to finance
department

Finance department

Accountants in the finance department (or contracted from outside the business) receive information about
the costs from managers. They then use these to generate reports and statements for the managers, who use this information to make decisions for the next financial year.

Profit-and-loss statement Also called an income statement, the P&L statement tells management how much money the business made or lost over a particular time period.

Balance sheet The balance sheet estimates the value of assets and inventory held, so that management can reduce it if necessary.

Cash-flow statement This shows how well the business will be able to meet its financial obligations and generate cash in the future.

Budget reports Reports help management to determine the accuracy of budgets and analyze business performance.

Cost of production report (CPR)CPR shows all of the costs that can be charged to a particular department