Managerial Accounting - Explained
What is Managerial Accounting?
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Table of ContentsWhat is Managerial Accounting?How does Managerial Accounting Work?Techniques in Managerial AccountingAcademic Research on Managerial Accounting
What is Managerial Accounting?
Managerial accounting, variously known as management accounting and cost accounting, is a branch of accounting that involves the creation of reports and other necessary documents that aid a manager in the decision-making processes of running his/her company and taking steps to improve its operations. Managerial accounting typically consists of various processes involved in the identification, measurement, analysis, interpretation and communication of information that aids the management of a company in its managerial functions. This is in contrast to financial accounting that typically provides similar information to external parties.
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How does Managerial Accounting Work?
Managerial accounting involves the step by step analysis of various events and operational metrics by managerial accountants in order to facilitate the translation of the data into serviceable information. The management of the company then leverages this information in their decision-making process. Managerial accountants typically analyze the company's individual line of products, operating activities, facilities, and other similar parameters. These accountants especially focus on the costs of products or services purchased by the company as well as its actual results vis--vis its various budgets, in order to quantify the company's plan of operation. Other topics for analysis during the managerial accounting process include ratio analysis, cost behavior and cost-volume-profit analysis, job order costing, process costing, and standard costing and variance analysis. Although managerial accounting is akin to financial accounting in that both procedures report the performance of the company's financial transactions, there is one principal attribute that essentially differentiates the two while financial accounting is concerned with reporting the company's financial performance to external parties such as investors and lenders, etc., managerial accounting utilizes the same (or similar) data internally in order to aid in management decision-making processes.
According to the Association of International Certified Professional Accountants (AICPA), management accounting explicitly serves the following three domains:
- Strategic management, i.e. fostering the role of the managerial accountant as a strategic partner within the company.
- Performance management, i.e. advancing the process of business decision-making and managing the performance of the company.
- Risk management, i.e. formulating a workable framework for the identification, measurement, management and reporting of risks in such a way as to achieve the objectives of the company.
Techniques in Managerial Accounting
Managerial accounting utilizes various standard techniques in order to achieve the goals of the organization. These are:
- Margin Analysis: Margin analysis helps accountants assess increased profits as an outcome of increased production. The margin analysis technique forms the basic backbone of managerial accounting and is used as a tool to pitch profits against costs incurred. The data thus obtained from the comparison is used to perform a break-even analysis that assists accountants in determining the unit volume at which the company's gross sales equal its total expenditures. Finally, the break-even analysis aids accountants in determining price points for products and/or services offered by the company.
- Constraint Analysis: Constraint analysis involves the scrutiny of the production lines or sales processes of a company in order to identify the principal bottlenecks or constraints, pinpoint the area of occurrence of such constraints, identify various inefficiencies created by the constraints, and calculate the impact of the constraints on revenue, profit, and cash flow of the business.
- Capital Budgeting: Capital budgeting is concerned with the analysis of information required to make the necessary decisions pertaining to capital expenditures of the business. During the capital budgeting process, managerial accountants utilize standard capital budgeting metrics, such as the net present value (NPV)and the internal rate of return(IRR), in order to assist the company management in making new capital budgeting decisions.
- Inventory Valuation and Product Costing: Inventory valuation is a process that allows managerial accountants to identify and analyze the actual costs associated with the company's products and inventory. This procedure involves calculating and allocating the overhead charges associated with the products and inventory and assessing the direct costs related to the cost of goods sold (COGS) as well as the inventory in various stages of production. Usually, overhead charges are allocated based on the total quantity of goods produced, in addition to various other production-related factors.
- Trend Analysis and Forecasting: Trend analysis and forecasting is a procedure that is primarily involved with the identification of the patterns and trends of product costs. The procedure also includes the investigation and identification of abnormal variances from the estimated values as well as the reasons for such variances. Trend analysis and forecasting often utilizes metrics such as historical pricing, sales volumes, geographical locations, customer behavior and financial information in order to calculate and project future financial information.
Academic Research on Managerial Accounting