Is management accounting merely financial and cost accounting adapted to management's needs?

The statement

The statement suggests that management accounting has no content of its own: it simply takes the data produced by financial accounting and cost accounting and rearranges them to suit management. The view contains an important truth, but it understates what management accounting does.

Why the statement is partly true

1. Its raw material is financial and cost data. Management accounting draws heavily on the books of account and on cost records: costs of products and departments, revenues, assets and liabilities.
2. Many of its tools come from them. Ratio analysis and cash-flow analysis come from financial accounting; standard costing, marginal costing and budgetary control come from cost accounting.
3. Its essence is tailoring. Management accounting presents this information in the form, detail and timing that managers need: for example, monthly departmental cost reports instead of annual financial statements.

Why it is not the whole truth

1. It is forward-looking. Financial and cost accounting chiefly record what has happened. Management accounting prepares budgets, forecasts and projections and evaluates alternatives that have not yet occurred.
2. It uses other data and disciplines. Statistics, economics, operations research and behavioural science are used in forecasting, capital budgeting, linear programming and performance evaluation.
3. It uses non-financial information. Market share, quality, customer satisfaction, delivery time and employee productivity are part of modern performance measurement.
4. It has techniques of its own. Relevant and differential costing, responsibility accounting, transfer pricing, decision models and balanced performance measures go beyond adapting existing accounts.
5. Its purpose is different. Financial accounting serves external users and the law; management accounting is designed for decisions: whether to make or buy, accept an order, drop a product or invest.
6. It is not bound by accounting standards. It uses whatever concepts suit a decision, such as opportunity cost and imputed cost, which never appear in the books.
7. It is concerned with people and organisation. Responsibility accounting, participative budgeting and performance evaluation are designed to influence managers' behaviour, not merely to report figures.

Example: in deciding whether to accept a special export order below the normal price, management needs the relevant costs of the order, the spare capacity available and the effect on the home market: information that neither the financial accounts nor the routine cost accounts provide in that form.

Conclusion

Financial and cost accounting supply much of management accounting's data, so the statement is true as far as it goes. But management accounting adds a future orientation, wider data, its own decision techniques and a focus on management's choices. It is better described as an information system for management that uses financial and cost accounting as its base.