What are the different types of management accounting systems?

woman holding a book

Management accounting systems focus on tracking the costs associated with producing goods and services in a company. Some of the more common systems include traditional cost accounting, lean accounting, processing accounting, and transfer pricing. Each of these management accounting systems provides companies with a different method of tracking costs in order to produce goods and services at the lowest possible cost. Failing to follow any system can result in overpriced products and lower gross margins.

Traditional management accounting systems track costs using work orders or process costing methods. Each of these methods and others determine how a company allocates costs related to direct materials, direct labor, and manufacturing overhead. Work order costing is used for large projects where all costs are easily traceable to individual projects. Process costing allocates costs based on the number of processes used to produce homogeneous goods. These goods go through a continuous process and are difficult to cost individually.

Lean accounting is a more revolutionary technique in terms of management accounting systems. Instead of just focusing on costs, lean accounting is a method that presents a strategy to reduce costs by eliminating waste. Accountants in this system will provide near-immediate financial information for decision making, assessing value streams and measuring profitability. Any excess costs can be wasted and eliminated from the system based on this information.

Income accounting is not typically viewed as a costing process in traditional management accounting systems. Accountants focus on identifying constraints within the company’s production system. Restrictions include insufficient levels of materials, labor or production capacity at the company’s facilities. Reducing these constraints allows more yields to increase production volume, thus reducing the cost of each individual unit produced. In most cases, this method can work with traditional work orders or process costing systems.

See also  What is a Glide Path? (with photos)

Transfer pricing is another common management accounting system. Under this method, companies will cost products as they move through different departments. Each item goes through transfers to different departments or processes, with each adding a small portion of the costs to the product.

Common costs added to transfer pricing include variable costs and opportunity costs. Opportunity costs represent the amount of money it would cost the company to outsource production to an external form. Other transfer pricing methods are also available. Transfer pricing flexibility is often seen as a benefit to this system.

Leave a Comment