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Management accounting is a related discipline that analyzes and explains what is going on and attributes cause and effect relationships to the results.

Management accounting is reporting for the insiders, in other words, the managers of the business. It’s designed to help managers run the business better. As an executive or a director, you may not be provided with reports that provide this level of detail, but there are times you may want to drill into important issues.

SALES VARIANCE ANALYSIS:

Pricing variance arises when our selling prices vary from plan for whatever reason. Sometimes it’s competitive forces, sometimes it’s commodity driven, and sometimes it relates to supply and demand imbalances.

Volume is the other most common causes of variance. You sell more or less than you expected.

Mix variance arises when we sell a different proportion of higher or lower margin products than we had planned.

Quantity variance arises when we sell more or less total product than plan. Quantity variance can arise because we gained or lost market share relative to our competition. It can also arise when the market itself grew faster or slower than expected.

PRODUCTION COSTS VARIANCE ANALYSIS:

Pricing variances come from the amount paid for raw materials, direct labour or variable overhead costs like electricity or other utilities.

Production cost variances relate to quantity usage variances. Quantity variance can arise from changing the amount of inputs or yield issues on the back end which might arise from defect or scrap.

FIXED OVERHEAD VARIANCES:

Fixed overhead variances are the hardest to interpret because bear in mind the two-step recognition of production costs to the financial statements.

First, production overhead costs get capitalized to finished goods inventory based on actual amounts spent. This bucket of fixed costs is capitalized to inventory based on what is called a “cost driver.” A cost driver tries to identify one or more most likely causes of cost.

Second, the finished goods inventory cost get recognized as cost of sales once the product is sold. That is when the production cost actually hits the income statement. So, sometimes figuring out that you have a production facility that is inefficient and spending too much isn’t self-evident immediately.

COSTING ANALYSIS

Costing analysis looks at the true cost of producing each SKU.

• Low volume SKUs often get under-allocated their fair share of costs because these SKUs incur a disproportionate amount of set up, ordering, handling costs.
• More complex SKUs often get under-allocated their fair share of costs as they often require additional machine or labour to produce or can’t be produced at the same rate as simpler SKUs.
An important part of costing analysis is to determine which costs are variable, which vary with volume, and which are fixed, those costs that don’t vary with volume.

BUDGETING:

Forecasting is a term you can use when you are looking for any financial forecast that is not a budget. It’s often just an update of the budget assumptions for new or better information. Forecasts can be updated monthly, quarterly, or only after the budget assumptions lose validity.

Traditional budgeting takes last year’s results and then adjust them for any known changes in sales and operations for the upcoming year.

Zero-based budgeting takes nothing for granted. Sales are built up by product line and customer. Cost of sales is built up using BOMs and production schedules. Operating expenses are budgeted on a line-by-line basis for all labour and non-labour expense accounts.