Business management accounting is a process that focuses financial information for the sole use of internal stakeholders. Some aspects of this accounting process are similar to financial accounting, such as journal entries, general ledger reviews and the preparation of reports for management review. A significant difference, however, is that business management accounting does not follow national accounting standards. This allows for the creation of reports that meet the needs of decision makers, rather than investors or creditors. Almost all companies use some form of this accounting to record transactions from normal business operations.
Another difference between business management accounting and financial accounting is the lack of accounting periods in the former. Owners and managers who set up the internal management accounting system often require a continual reporting of financial information. This is especially true of manufacturing companies, primary users of this accounting method. Manufacturing firms often have continuous operations that rarely stop; the flow of materials through production systems often remain smooth, even when production output drops due to lower sales expectations.
Accounting for costs is another focus of business management accounting. Costs typically fall into one of three groups: direct materials, direct labor and manufacturing overhead. Direct materials are the items needed to produce the goods or services the company will eventually sell to end users. Direct labor represents the manpower needed to run machinery or turn the raw materials into usable goods for the production process or as finished products ready to sell. Manufacturing overhead includes all costs that do not fall into the first two groups; the costs must relate to the production process, however. All costs that do not relate to the production process are period costs, expensed during the normal accounting period as dictated by financial accounting rules.
Companies will also select a costing method as part of the business management accounting process. Typical systems include job order, process or activity based costing. Job order applies costs to individual items produced by a company. Common examples include construction or made-to-order cars or yachts. Process costing is common when companies produce homogeneous goods, such as food products like kidney beans or soda beverages. Activity based costing focuses on activities, rather than the cost of materials in each process. Both service-based and manufacturing firms can use activity based costing. The company must identify cost drivers that are in each activity and then associate the amount of overhead to products via the cost driver.
