Lesson 1 of 5
Why management accounting
9 min
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Dan, Contoso Motor Co.'s finance process owner, gets two kinds of questions. The auditors and the bank ask what the company earned and owns: revenue, profit, assets, under US GAAP in the leading ledger 0L and IFRS in ledger 2L. The plant managers and the CFO ask different questions. What does it cost to run maintenance in Detroit? What does one CMC-ALT-100 alternator really cost to build, and why is Chicago $6 more expensive than Detroit? Do fleet customers or aftermarket customers make us more money? The first set is financial accounting. The second set is management accounting, which SAP calls Controlling.
| Financial accounting | Management accounting (Controlling) | |
|---|---|---|
| Audience | External: auditors, tax authorities, investors, banks | Internal: managers, plant leads, sales leadership |
| Purpose | True and fair statements under accounting principles | Information management can use to make decisions |
| Rules | Fixed by GAAP, IFRS and law | Designed by the company to fit how it is managed |
| Typical objects | Company code, G/L account, ledger | Cost center, internal order, product, market segment, profit center |
| Typical question | What was our profit last quarter? | Which products and customers produced that profit, and where did costs arise? |
SAP's learning material puts it in one sentence: management accounting provides information that management can use to make decisions. It does not replace financial accounting. Both look at the same business transactions; management accounting adds the "where", "for what" and "for whom" dimensions that statutory reports do not need.
Cost objects: where costs are collected
Management accounting works by collecting costs and revenues on cost objects, each answering a different question. A cost center collects costs by area of responsibility: the Detroit maintenance department, IT, fleet sales. An internal order collects costs for a time-limited job, such as a trade show or a plant relocation. A production order collects the costs of making a batch of alternators. A market segment (in SAP terms, a profitability segment) is a combination of characteristics such as product, customer and region, used to see where margin is earned. A profit center represents an area of the business run for profit, such as Contoso's Fleet business.
Primary and secondary costs
Two more terms appear in every controlling conversation. Primary costs come from outside the company: salaries, energy bills, supplier invoices, depreciation. They enter through financial accounting and logistics postings. Secondary costs arise inside management accounting when costs are moved between cost objects, for example when maintenance hours are charged to the assembly line. SAP's material notes that secondary costs are used only in management accounting to identify internal cost flows: they move costs between objects but do not change the company's total costs.
| Contoso question | Who asks | Cost object that answers it |
|---|---|---|
| Are we within budget for Detroit maintenance this month? | Plant manager | Cost center |
| What did the fleet customer conference cost? | Marketing lead | Internal order |
| Why did the last batch of alternators cost more than standard? | Production controller | Production order variances |
| Is Great Lakes Fleet Services profitable after discounts and freight? | Sales director | Market segment in margin analysis |
| How is the Fleet business doing against Aftermarket? | CFO | Profit center |
Matching management questions to cost objects.
What would you do?
A new analyst asks Dan why Contoso needs cost centers at all, "since the G/L already shows maintenance expense". What is the best answer?
- Financial accounting serves external reporting; management accounting serves internal decisions.
- Cost objects answer different questions: cost centers, internal orders, production orders, market segments, profit centers.
- Primary costs come from outside; secondary costs move costs between cost objects inside controlling.
- Secondary costs do not change total company costs.
- Both views describe the same business transactions.
Check your understanding · not graded
Lesson check
1. Which object collects costs by area of responsibility, such as a department?
2. Which cost is a primary cost?
3. What is a market segment in management accounting?
4. Who are the main users of management accounting information?