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What are the Different Types of Management Accounting Systems?

Osmand Vitez
Osmand Vitez

Management accounting systems focus on tracking the costs associated with the production of goods and services in a company. A few of the most common systems include traditional cost accounting, lean accounting, throughput accounting, and transfer pricing. Each of these management accounting systems provides companies with a different method for tracking costs in order to produce goods and services at the lowest cost possible. Failing to follow any system can result in overpriced goods 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 company allocates costs relating to direct materials, direct labor, and manufacturing overhead. Job 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 run through a continuous process and are difficult to cost individually.

Woman holding a book
Woman holding a book

Lean accounting is a more revolutionary technique in terms of management accounting systems. Rather than focusing solely on costs, lean accounting is a method that presents a strategy for reducing costs by eliminating waste. Accountants in this system will provide almost immediate financial information for making decisions, assessing value streams, and measuring profitability. Any excess costs may be waste and cut from the system based on this information.

Throughput accounting is typically not seen as a costing process under 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 from the company's facilities. Reducing these constraints allow for more throughputs to increase production volume, thereby lowering the cost for each individual unit produced. In most cases, this method can work with traditional job order or process costing systems.

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

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

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