Table of contents
- How does management accounting differ from financial accounting?
- Which owner questions does management accounting answer?
- What does a manufacturer’s month look like in three numbers?
- Where do you start with management accounting in manufacturing?
- Which reports build the picture and in what order should you open them?
- What does automation of management accounting give, and what stays with people?
- What does Bimp do and what does it leave out?
- When is accounting software not needed yet?
- FAQ
- Management accounting is accounting for the owner's decisions. It answers what a product costs, which line of business makes a profit and how much cash will be left in two weeks. The company chooses the report format, unlike statutory reporting.
- You can start with four steps: income and expense items, lines of business, the habit of posting documents on time, and opening balances. After that three reports (P&L, cash flow, cost price) form the base.
- In the example manufacturer, profit before tax per the P&L is €8,000, while cash fell by €6,000 over the month. The €14,000 difference is explained by unpaid shipments, materials in stock and depreciation.
- Bimp keeps management accounting and does not replace statutory accounting and tax reporting.
An owner opens the bank statement for the month and sees that the accounts hold €6,000 less than before. At the same time the accountant shows a report in which the company earned €8,000. Both numbers are right, and management accounting for manufacturers exists so that they explain each other.
Management accounting is the accounting that the owner and the finance director keep for their own decisions, outside statutory reporting. It answers questions about product cost price, profitability by line of business, expense trends and cash for the next weeks. The company defines the report format, and there are no mandatory forms for it.
How does management accounting differ from financial accounting?
Financial and tax accounting follow rules under which the company reports to the state. The set of indicators, the deadlines and the forms are given from outside. Management accounting is built around a manager’s questions, so you can look at the profit of one order, product or sales channel.
The two kinds of accounting complement each other. Bimp keeps management accounting. Statutory financial and tax reporting is prepared separately and is not covered in this article.
Which owner questions does management accounting answer?
The first question is what a product costs. Cost price is made of materials by specification, piecework pay and a share of shop overhead, and without it prices are set by eye. The second is which line of business or channel makes a profit. Wholesale, your own online store and orders made for one customer have different margins, and in total revenue the margin gets averaged.
The third question is where expenses go and why they grew. The fourth is whether there will be enough cash for payroll and suppliers over the next two weeks. Profit does not answer it, because cash arrives later than the shipment.
What does a manufacturer’s month look like in three numbers?
The example is fictional: a shop makes cabinet furniture. During the month it shipped products worth €80,000, but customers managed to pay only €67,500, and the other €12,500 is owed. Materials bought and paid for came to €35,000, materials used in production €32,000, so €3,000 sits in stock.
Other costs for the month. Piecework pay of production workers €12,000, production overheads (shop rent and foremen’s pay) €7,500, administrative €8,000, selling €10,000, loan interest €1,000. Equipment depreciation of €1,500 needs no payment. All other expenses were paid in the same month.
Now three ways to look at one month.
| View | Calculation | Result, € |
|---|---|---|
| Bank statement (cash movement) | Receipts 67,500 − payments 73,500 | −6,000 |
| Profit and loss statement (P&L) | Revenue 80,000 − expenses 72,000 | +8,000 |
| Difference | 8,000 − (−6,000) | 14,000 |
Payments of €73,500 are 35,000 + 12,000 + 7,500 + 8,000 + 10,000 + 1,000. P&L expenses of €72,000 are 32,000 + 12,000 + 7,500 + 8,000 + 10,000 + 1,500 + 1,000, where only the €32,000 of materials used is counted, plus depreciation.
The difference of €14,000 breaks down completely. Unpaid shipments put profit above cash by €12,500. Materials in stock worth €3,000: the money is already spent, and they become an expense only after write-off. Depreciation of €1,500 reduces profit but takes no euros, so it is subtracted. The total 12,500 + 3,000 − 1,500 = €14,000 matches the difference above.
The statement shows cash movement, and the P&L shows the result on an accrual basis. The difference between them can be explained only when both reports are built on the same documents.
Where do you start with management accounting in manufacturing?
Accounting starts with directories, and reports come after them. Data reaches reports in the structure given when it was entered, and changing that structure afterwards is hard.
The first step is income and expense items and their groups. In Bimp each line of the P&L is built from the groups “Production overheads”, “Administrative expenses” and “Selling expenses”, so shop rent and office rent must sit in different groups. Setup is described in the article on income and expense items. An expense appears in the “Accumulated cost” report only when its item belongs to the “Cost price” group.
The second step is lines of business and projects. If wholesale and retail have different margins, you need separate cuts already in the first document, because they are hard to restore later. How to do it is explained in the article on projects and lines of business.
The third step is posting documents on time. Bimp reports are built from posted documents only, so an unposted payment or sale will not appear in them. When several people keep the books, the habit of closing documents on the same day is set as a separate rule.
The fourth step is opening balances. A trial balance is correct only when balances exist on the accounting accounts, and balances of cash, inventory and settlements are needed for any reconciliation. The procedure is described in the article on entering opening balances.
All of this happens before the first report. The first month goes to bringing the initial data together, so its figures remain only a rough starting point for the months that follow.
Which reports build the picture and in what order should you open them?
The general features of all reports are described in the article Reports in Bimp. They share one screen with a period, filters, the “Group by” and “Detail by” fields and saving of a template. Six are enough to start.
| Report | Question it answers | Details in the knowledge base |
|---|---|---|
| “Income and expenses (P&L)” | Is the business profitable, which expense groups are largest | P&L |
| “Cash flow” | How much cash came in and went out | Cash flow |
| “Cost of produced goods” | How many materials went into a product and what a unit costs | Cost of produced goods |
| “Accumulated cost” | Which costs are accumulated and how much of them is allocated to products | Accumulated cost |
| “Gross profit” | Which products, customers or managers give margin | Gross profit |
| “Trial balance” | Whether balances and turnovers on the accounts reconcile | Trial balance |
The order of opening follows from how the questions arise. P&L first, because it shows whether there is anything to analyze. Then cash flow, which explains why profit does not match the bank account, as in the example above. Then cost price if gross profit slipped, and gross profit if you need to find the product or customer where margin is lost. The trial balance is for reconciling balances when reports show odd numbers.
For the structure of the report in detail, see the article on the Income and expenses (P&L) report, and for how a product’s cost price is calculated, the guide to manufacturing cost calculation.
What does automation of management accounting give, and what stays with people?
Automation removes manual reconciliation between files. Warehouse, production, sales and cash write to one database, so shipments, material write-offs and payments reach reports with no copying of figures. Software for a manufacturer’s management accounting gives cost price by specification, cuts by line of business and the same numbers for everyone who looks at a report.
Decisions are not made by the software. Expense items, the rules for allocating shop overhead to products and the choice of cuts are defined by a person, and the software reproduces them. If you decide to allocate shop rent by the number of units produced, the “Cost allocation” document moves it to products on that base, and the owner chooses the base.
What does Bimp do and what does it leave out?
Bimp is a Ukrainian cloud ERP for manufacturers, and management reports are collected in the “Reports” menu. They are built from posted documents, filtered by period, line of business and project, grouped and detailed, and filter templates are saved. Cost price is calculated by specification, and indirect costs are moved to products with the “Cost allocation” document described in the article on cost price in Bimp. An overview of the finance features is on the Finance page.
The limits are these. Bimp keeps management accounting and does not replace statutory accounting and tax reporting, so the P&L report should not be used as a tax return. The quality of reports depends on the items and lines of business you set up and on whether documents are posted. Budget planning by item is outside this article.
When is accounting software not needed yet?
In a small shop a spreadsheet is enough. One person keeps the books, the range is a few items, balances can be seen on the shelf and one file answers the profit question. In such conditions software adds setup and gives almost no benefit.
Several signs show that spreadsheets are no longer enough, and one is enough here: two people give different answers to the same question about balance or profit, and each looks at their own file.
The month in the example showed that “profit” and “cash” can differ by €14,000 and both numbers can still be exact. Management accounting exists so that each of them has an explanation you can trace through documents.
Related reading: a manufacturer’s P&L with an example statement and overhead cost allocation.
FAQ
What is management accounting in manufacturing?
Accounting that the owner and the finance director keep for their own decisions. It shows product cost price, profitability by line of business, expenses by item and cash movement. The company defines the report format, and there are no mandatory forms.
How does management accounting differ from financial accounting?
Financial and tax accounting follow set rules for reporting to the state. Management accounting is built around the manager's questions, so it can have cuts by product, order and line of business that statutory reporting does not require.
Which reports should management accounting start with?
Three. The profit and loss statement (P&L) shows the result on an accrual basis, the cash flow report shows actual cash, and the cost of produced goods report shows what a product costs. Together they explain why profit and cash diverge.
Does a manufacturer need software for management accounting?
For a small range and one accounting person a spreadsheet is enough. When three or more people enter data, production runs on specifications and there are several sales channels, spreadsheets stop agreeing with each other and accounting moves into software.
Does Bimp replace statutory accounting?
No. Bimp keeps management accounting: reports on cost price, profit, expenses and cash. Statutory financial and tax reporting is prepared separately.
In a Bimp ERP demo, a specialist walks through your process from specification to the Income and expenses (P&L) and Cash flow reports. One product and a description of how accounting works today are enough.
Book a demo