Monitor

Let's start by having you think about the controlling your car (aka "driving")! Your steering, acceleration, and braking are not the random things to be done; they are careful corrective responses to the constant monitoring of number of variables -- other traffic, road conditions, destination, and so forth. Clearly, each and every action on your part is in response to you having monitored conditions and adopted the adjusting response. Similarly, business managers should rely on systematic monitoring tools to maintain the awareness of where the business is headed. Managerial accounting provides these monitoring tools, establishes a logical basis for making the adjustments to the business operations.

Standard Costs -- To aid in monitoring productive efficiency and the cost control, managerial accountants can develop "standards." These standards represent the benchmark against which the actual productive activity is compared. Importantly, the standards can be developed for labour costs and efficiency, utilization and materials cost, and more general assessments of the overall deployment of facilities and the equipment.

Variances -- Managers will centre on standards, keeping a particularly sharp eye out for important deviations from the rules. These deviations, or "variances," can provide warning signs of situations requiring corrective work by the managers. Accountants help the managers focus on the exceptions by providing the results of the variance analysis. This process of focusing on the variances is also known as "management by exception."

Flexible tools -- Great care must be taken in monitoring the variances. For example, a business may have a large rise in the customer demand. To meet demand, a manager can prudently authorize considerable overtime. This overtime might result in higher than expected wage rates and the hours. As a result, a variance analysis could result in number of unfavourable variances. Though, this is added cost was incurred because of the large customer demand and was perhaps the good business decision. Consequently, it would be unfortunate to interpret the variances in negative light. To compensate for this type of potential misinterpretation of the data, management accountants have explored number of flexible budgeting and analysis tools. These evaluative tools/devices "flex" or compensate for operating environment in an attempt to sort out confusing signals. As a business manager, you would want to familiarize yourself with the more robust flexible tools, and they are covered in depth in the successive chapters.