Over time we have published different articles regarding the scope of management accounting. For example, we talked about its importance for businesses. This article is more practical than a theoretical one and shows three real-world management accounting examples.
#1 Management accounting example: Variance analysis
One of the most classical examples in management accounting is variance analysis. In a nutshell, it comprises of comparing two values for the same measurement. This could be comparing actual and planned figures or two different months.
Because variance analysis is such an essential concept in management accounting, we already published some information on this topic. For more details, we propose you read the 5 benefits of variance analysis.
How such a report may look can bee seen in the following illustration:
This is a real classical management accounting example. If you are interested in designing such reports, we recommend browsing through our article “how to design a variance analysis report“.
#2 Management accounting example: Budgeting
Another important example of managerial accounting is budgeting. This means in essence planing the future period(s) of a company. Typically this task is a major task in a finance department and takes place from late summer or autumn until the end of the year.
Budgeting is such an important area that we published several posts about it. You can also find a collection of the best articles on budgeting.
Showing a very specific example of this task seems difficult because it is more of a process than a simple final paper. Nevertheless, if we look at a possible process, it could run like that:
- Finance draws the process of next year’s budget
- Board of directors issues main financial expectations
- Sales budget is prepared
- Based on the sales budget the production budget is created
- Overhead budget creation
- Consolidation and discussion in the executive board
- Correction round
- Presentation in front of the board of directors and sign off
This is just an example of a budgeting process. Keep in mind that such a process may look completely different from company to company.
#3 Make or buy example
The third management accounting example we like to discuss is “make or buy decisions”. In essence, this is the choice between making a product in-house or buying the product from another company.
The basic rule applying here is that a product should be manufactured in-house if the relevant cost is lower than the cost of purchasing the product. To determine the relevant cost, it is important to distinguish between two cases.
- The company possesses spare capacity.
- There is no spare capacity available.
If there is spare capacity available, the production of the new product will not interfere with the production of other products. Consequently, relevant costs are variable costs of the production plus a share of the fixed costs.
However, if there is no spare capacity, relevant costs also include opportunity costs. For example, the lost margin of another product that can not be fully produced anymore because of the new product.
This management accounting example appears easy to apply but in reality, it is a challenge because companies produce many different parts and products.