woman holding a book
Management accounting systems focus on tracking the costs associated with the production of goods and services in a business. Some of the more common systems include traditional cost accounting, adjusted accounting, process accounting, and transfer pricing. Each of these management accounting systems provides companies with a different method of tracking costs to produce goods and services at the lowest possible cost. Not following any system can result in overpriced products and lower gross margins.
Traditional management accounting systems track costs using job order or process costing methods. Each of these methods and others determine how a business allocates costs related to direct materials, direct labor, and manufacturing overhead. Job order costing is used for large projects where all costs can be easily traced back 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 afford 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. The accountants of this system will provide almost immediate financial information for decision making, the evaluation of value flows and the measurement of profitability. Any excess costs can be wasted and removed from the system based on this information.
Revenue accounting is not typically viewed as a costing process in traditional management accounting systems. Accountants focus on identifying the constraints within the company’s production system. Constraints include insufficient levels of materials, labor, or production capacity at the company’s facilities. The reduction of these restrictions allows to obtain more yields to increase the volume of production, thus reducing the cost of each individual unit produced. In most cases, this method can work with traditional work order or process costing systems.
Transfer pricing is another common management accounting system. Under this method, companies will calculate the cost of products as they move through different departments. Each item goes through transfers to different departments or processes, 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 outside source. Other transfer pricing methods are also available. Transfer pricing flexibility is often seen as a benefit of this system.