Management Accounting

Your financial accounts tells you about the overall performance of your business. However, to get a better understanding of how parts of your business is doing you should use management accounting.

Your company has to subscribe to the management accounting package to be able to use allocation classes.

What are Allocation Classes

Allocation classes allows you to subdivide your transaction to specific classes. There are two types of high-level classes:

Departments
Other Classes, for instance Income/Cost Units

Departments are used to create department or sector accounting. For instance, if you are selling Consumer Electronics and Music CDs, you can create two departments, one for Consumer Electronics and one for Music CDs. To produce a income statement for the two departments you allocate all sales and expenses associated with consumer electronics to the Consumer Electronics department.

Other classes are more general and can be used for a wide variaty of purposes, depending on what you want to track. See below for a few examples on how to use general allocation classes.

How is Income and Expenses Allocated

When entering a transaction (i.e. invoice, journal entry) you select the department and allocation classes you want to use. The corresping income/expense will be allocated to the selected class. You may allocate the same income/expense to several allocation classes to create different types of financial information.

Why Use Management Accounting

If you want to improve your business performance management accounting is extremely helpful. Different parts of a business performs differently. Management accounting allows you to determine where your business is performing well, and where it is performing poorly.

With this information it is much easier to make adjustments that improves overall business performance and profitablity.

Starting With Management Accounting

Before you start with management accounting you need to analyse what type of information you need. Then set up the appropriate allocation classes. You should take care that the transactions are recorded on the appropriate classes for the information to be valuable.

Examples on Using Allocation Classes

A Tourism Business - Are My Tour Groups Profitble?

Graham is running a small tourism business focusing on organising tours for tourists. It is, however, difficult to know if a particular tour is profitable. To be able to track the profitability of each tour, he creates an allocation class for every tour. Then all the income and expenses related to that particular tour is allocated to this class. This includes all the expenses such as car maintenance and petrol use caused by that particular tour.

After a tour has been completed, Graham can analyse how much he earned on the tour and compare it with other tours.

A Retail Business - Does My Advertising Pay Off?

Belinda runs a business that sells jewellery. She advertises in different media and wants to determine if her advertising is profitable. Her business is located in a local shopping centre, so she also wants to know if the location is paying off. To monitor this Belinda sets up an allocation class for each of the media she is advertising in. In addition she creates an allocation class for shop location and one for brand, to measure the value of her location and her brand name.

To enable her to get good information, she asks her customers how they heard about her business. If the customers refer to an advertisement she allocates the sale to that advertisment. If the customer says they just dropped in, the sale is allocated to shop location. If the customer just knows about her business or is a repeat customer, the sale is allocated to the brand.

The advertising expenses are allocated to the applicable media, while she allocates a major part of the rent for the shop to shop location and some of the rent to brand.

Belinda can now run reports on her different allocation classes and see if her advertising is working. She can also make an educated decision on whether the shop location pays off, as well as see how much business she gets simply by customers knowing about her. The brand allocation tells her a lot about how customer perceive her business and if they are pleased with her service.

Using management accounting enables Belinda to change her advertising if necessary.

A Distribution Business - Which Vehicles Are Most Cost Efficient?

John runs a distribution company. The business has a fleet of five cars, some of different brands. John wants to know which cars are most cost efficient. To track this, John sets up an allocation class for each vehicle. All the expenses related to a vehicle is allocated to the appropriate allocation class.

John can now run reports on each vehicle. These reports tell him which vehicles are most cost efficient when he compares the expenses with the mileage for each vehicle. This enables John to invest in cost efficient vehicles, improving profitability.

John also has two vehicles of the same make and model. These vehicles are used by different drivers. He pays particular attention to the expenses of these two vehicles, because he can determine which driver is most careful. Assuming that the cost structure should be almost equal for the same make and model, John can analyse whether a driver is more reckless than the other.