Everybody wants to start with a definition…
I’ll give you definitions in a minute, but a general description is probably more useful for getting started and in particular for understanding Management Accounting.
Accounting is essentially about the numbers in a business, not just those with a currency sign in front of them (£, $, Euro etc.), but all the numbers that are important (units sold, tons of material used, hours spent etc.).
It’s about understanding the numbers so you can make decisions (mostly Management Accounting) and report to others on your success (Financial Accounting).
Both use all the numbers, but in Management Accounting we use the money figures (financial) and the numbers of other things we count (non-financial). In Financial Accounting, the emphasis is nearly exclusively on the financial figures.
So, what do we use the numbers for as Management Accountants?
It’s not just about working out what things cost, although we do a lot of that. It is really about having the information you need to be able to make decisions.
If you know what something costs, you can decide what to charge, you can decide what number you are likely to sell, decide how many you need to make, decide how many people you will need to employ and so on.
Let’s have a definition.
You’ll find thousands, but I like this one from the American Accounting Association.
Accounting is ‘… the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information’
Note the identifying and measuring part. That’s working out what things are going to cost and keeping records of the costs.
Note the communicating. It’s no good the Management Accountant keeping the information to themselves. We need to be able to make the information available to others. That’s the main reason for having standard terminology – allowing us to have a common language.
The other reason, as with all professions, is to keep out those who don’t have the same training as us. One of the biggest advantages you will get from studying accounting, even if you don’t ever work as an accountant is that you will have a pretty good idea when someone is bullshitting you.
Note the ‘economic information’ part in accounting means both the financial and non-financial information we talked about earlier.
Note that the informed judgements and decisions parts is the real reason we do all of this.
It is all about knowing enough to make better, more successful choices.
Much of what we cover will also help you do this in life, not just in business situations.
The importance of information. It should be both accurate and timely. No point having perfectly accurate information if it is too late to act on it.
Services v Products.
Don’t think though that Management accounting is just about making things. All the things we learn are also applicable to the service sector (the rest of the economy where we don’t make things. Many of the topics we look at are related to production, but most are also applicable to Services. The difference between the two in cost terms is which aspects are the most important, but we ‘do’ management accounting with services too.
The importance of the Service sector.
“Overall, the services sector represents more than three-quarters of UK output ….”
The differences between Products (Things) and Products (Services).
There are five major differences between services we ‘make’ and sell and things we make and sell.
Intangibility – products are tangible i.e. physical things, whereas services are intangible (you can’t kick a service). this means that there is usually little if any physical component to a service. The fillings when you go to the dentist? Usually Labour and Overheads are the main costs of providing a service.
Inseparability – you can take your product home with you and use it tomorrow, most services are created at the same time as they are ‘consumed’. Your seat at the cinema tonight is for tonight’s showing, you can’t go and watch the film again in a fortnight without buying the service again (another ticket). I could watch the DVD I bought again though. Along with this goes Perishability. Yes, your product will wear out/go off over time, but in this context Perishability means ‘Time Bound’, if you don’t us it now, you will lose it. Forget to go to the gig? Hard luck mate. One friend of mine had tickets to a Morrissey concert. When his friend texted him from the concert to find out how he was enjoying it……
Variability – a tin of Heinz Baked Beans is a tin of Heinz Baked Beans. There isn’t going to be any difference between this tin and that tin. Each item of a product is essentially the same, but each time a service is delivered it could be substantially different. Your Doctor says a different things to each patient, but they are all getting the service of a GP Consultation.
No transfer of ownership – buy a cake and you get to do what you want with it, buy a seat on a train home tonight, you don’t get to keep the seat. Or the train.
