Cost & Management Accounting Methods

• Cost accounting, also called management accounting, is a practice that enables organizations to evaluate the operating performance of their production processes. Unlike financial accounting, management accounting has an internal orientation, meaning it focuses on expense reduction tools to help spur growth. Financial accounting has an external orientation, and typically helps investors assess the economic soundness of companies.

Cost Analysis

• Cost analysis is an integral part of corporate management. All organizations --- including government agencies, businesses and philanthropic institutions --- must run their operations adeptly to survive in the long term. Reviewing administrative expenses and production costs requires analytical acumen and financial dexterity, according to the Federal Accounting Standards Advisory Board. When analyzing costs, companies focus on production expenses, such as the cost of labor and goods. Administrative costs consist of salaries, rent, taxes and general charges, such as insurance and asset depreciation. Depreciation is an accounting practice that enables a firm to spread the costs of its operating assets over many years.

Overhead Monitoring

• Overhead, or factory overhead, constitutes all costs incurred in the production process, except materials costs and labor charges. Overhead charges are usually fixed, unlike labor costs which vary, depending on production levels. Overhead monitoring is an important cost accounting method because it helps a company rein in waste in manufacturing activities.

Financial Reporting

• In addition to cost analysis and overhead monitoring, a company prepares financial reports to measure the performance of its business segments. Financial reporting is key to management accounting, as this practice provides valuable data that help corporate leadership make adequate decisions in the short and long terms. A complete set of accounting reports includes a statement of financial condition or balance sheet, a statement of profit and loss, a statement of cash flows and a statement of equity.

Budgeting

• Budgeting is a cost-reduction effort that allows department heads and segment chiefs to set spending limits in operating activities. An important part of cost accounting, budgeting provides senior leadership a clear vision of expense levels at the end of a month or quarter. Key activities in budgeting include the preparation of fixed and flexible budgets, according to Future Accountant, which is an online accounting and accounting management resource. In a fixed budget, employees adhere to strict spending limits. Flexible budgets allow personnel to raise spending levels proportionately to profit levels.

Variance Analysis

• Variance analysis is a sub-part of budgeting and provides senior corporate leadership the acumen necessary to define liquidity levels and set spending limits in the long term. Liquidity levels constitute cash that a company needs to operate effectively in the short term. When reviewing variances, management pays attention to thresholds and ensures that subordinates adhere to spending limits when performing tasks.