Managerial Accounting
Type of accounting focused on providing internal decision-makers with insights into a business's past performance and current financial status to facilitate informed decisions.
What Is Managerial Accounting?
Managerial accounting focuses on providing internal decision-makers with insights into a business's past performance and current financial status to facilitate informed decisions.
It provides deep insights into a firm's finances and resources to make timely decisions based on original data that benefit the firm.
There are three primary branches of accounting: cost accounting, financial accounting, and managerial accounting. We will discuss managerial accounting, also known as management accounting.
Management accounting involves systematic recording, reporting, and analyzing financial and non-financial information within a business to support internal decision-making.
Accuracy and cost-effectiveness are critical. It is used to meet a company's long-term and short-term goals.
In simple terms, management accounting involves measuring, analyzing, interpreting, and providing information to support management's decision-making process in a user-friendly format. Data is based on historical and projected information and is used as a planning and controlling tool.
Key Takeaways
- Managerial Accounting provides internal decision-makers with insights into a business's financial status, focusing on past performance and current operations to aid informed decisions.
- Internal users, including managers, shareholders, and employees, rely on managerial accounting information for decision-making, planning, and performance evaluation.
- It aims to support internal decision-making by providing accurate and timely information in various formats, helping maximize profits, minimize losses, and achieve strategic objectives.
- Managerial accounting information is utilized for decision-making, planning, coordination, control, communication, motivation, and evaluation within the organization.
- Managerial accounting focuses on internal financial processes and short-term decision-making, while financial accounting deals with external financial operations and long-term planning.
Users of Managerial Accounting Information
Managerial accounting information is primarily used by internal users, including shareholders, managers, and company employees, but external parties like creditors and regulatory agencies may also access it.
The use of managerial accounting information for the managers, shareholders, and company departments is as follows:
1. Managers
Managerial accounting assists managers in making operational and long-term investment decisions to improve the firm's financial performance.
A company's management needs accounting data to monitor corporate performance by comparing it to previous performance, competitor analysis, key performance indicators, and industry benchmarks.
Note
Managers use accounting information to make business choices such as investing, financing, and pricing.
2. Shareholders
Stakeholders receive financial data, primarily from financial accounting, to make day-to-day decisions that benefit the company.
The information provided in the reports helps the shareholders understand a company's profitability, liquidity, etc., through various methods and analyses of its performance.
These reports also help calculate their wealth and identify a company's risk areas and profit maximization areas.
3. Employees & department
Management accounting assists management in establishing objectives for the firm, department, or project at hand. Target setting frequently entails adjusting to ensure profitability and drive employees to achieve these targets.
Managerial accounting information adds value to the organization by providing user-friendly and statistical data that aids departments in making informed decisions and setting future objectives to improve the firm's performance.
Purpose of Managerial Accounting
Managerial accounting aims to offer information that may be used within a company. Internal users, such as departmental managers, will need a variety of data to keep their departments working well.
Managerial accounting information is generated as needed and can be presented in various formats relevant to the end user, including spreadsheets, memorandums, reports, presentations, dashboards, and software-generated reports.
One of the fundamental goals of managerial accounting is to support decision-making by providing information that helps maximize profits, minimize losses, improve operational efficiency, and achieve strategic objectives.
It is focused on displaying data to foresee financial discrepancies and assist managers in making critical decisions. It encompasses a variety of corporate functions.
It serves the three main purposes of a manager: planning, controlling, and evaluating, which also includes making sustainable and environmentally friendly decisions for the company.
Managerial accounting helps assess the efficacy and efficiency of management policies, contributing to regular evaluations aimed at improving decision-making and achieving optimal operational efficiency.
Note
Managerial accounting offers management information such as what type of business to enter or diversify and how to run that business efficiently.
Uses of Managerial Accounting
The primary uses of information from managerial accounting include aiding decision-making, forecasting, and supporting various managerial functions. Data recorded from it is used for:
- Decision-making: Managerial accountants use management data to create well-informed future decisions
- Planning: Management accountants supply data for the development of short, medium, and long-term strategies
- Coordinating: Different departments within an organization can be coordinated to work together by creating plans
- Controlling: Management can identify areas of inefficiency or efficiency by comparing actual results to projected results. New plans are then established to monitor the organization's actions
- Communicating: The creation of plans allows the business's goals and objectives to be communicated to various departments
- Motivating: Goals should be included in the plans to inspire personnel. Goals should be created to encourage effective working techniques, but they must be attainable in the workplace
- Evaluating: Evaluation in managerial accounting encompasses analyzing products, determining target markets, setting prices based on industry competitors, evaluating financial performance, and conducting comparisons to inform decision-making
Managerial Accounting Vs. Financial Accounting
Financial accounting produces a company's financial statements, which are presented to users and authorities.
Financial accounting assists in understanding a company's external financial operations, whereas managerial accounting helps understand the business's internal financial processes.
Managerial accountants focus on short-term growth plans for economic stability and survival, while financial accountants contribute to both short-term and long-term financial planning for business expansion.
Let's take a look at the table below to understand the difference clearly:
| Basis | Managerial Accounting | Financial Accounting |
|---|---|---|
| Nature | General purpose, useful for a broad audience | Specific purpose, particular manager |
| Level of detail | A broad overview, some detail lost | More detailed decision-making. |
| Regulations | Standard content and format comply with accounting standards. | Internal use only, confidential, no regulations, prepared according to firm requirements. |
| Reporting Interval | Typically produced quarterly or annually, with regulatory requirements dictating the frequency and timing of reporting. | Monthly, weekly, etc, can be made at your convenience |
| Time orientation | Reflect previous performance | For future purposes. |
| Range and quality information | Data that can be quantified in monetary terms. Errors have serious consequences. | Report with non-financial data. The data might be less objective and verifiable, but it may be correct for internal use. |
The reports made in managerial accounting are financial. Therefore, to make these reports, one needs to professionalize financial statements using Microsoft Excel, which most accountants use.
Tools of Managerial Accounting
The vast part of cost accounting is used in management accounting. The most frequently used tools in management accounting by the accountants are as follows:
1. Cost-Volume-Profit Analysis
In this analysis, fixed costs do not change, and all other variables are constant. In cost-volume-profit analysis, fixed costs remain constant, but variable costs and selling prices may change with the output level.
This analysis can be applied only over the relevant range.
With benefits such as costs accurately divided into their fixed and variable elements, this analysis's major limitations are that expected levels of productivity and efficiency will remain unchanged, and the number of units sold will be equal to the number of units produced.
For calculation, we need to calculate the contribution.
Contribution = Sales Revenue - All Variable Costs
Both fixed and variable costs influence profit per unit. Cost volume estimation formula:
Factory Costs = Fixed Cost + Cost per unit
2. Break-even Point
It is the volume of sales at which there is neither Profit nor Loss for the business, i.e., Profit = Loss. The formula for calculating the break-even point for units and revenue is as follows -
Break-Even Point (Units) = Fixed Cost / Contribution per Unit
Break-Even Point (Revenue) = Fixed Costs/Contribution * Selling Price per Unit
Note
This is a vital tool for a business's success. It can also be termed when total fixed costs are equal to total contribution.
3. Absorption & Marginal Costing
All manufacturing costs are traced to products in absorption costing, while non-manufacturing overheads are treated as a period cost. This type of system does not disregard fixed overheads when making a pricing decision.
All variable expenses are traced to products in marginal costing (also known as direct or variable costing), and fixed manufacturing and non-manufacturing overheads are treated as a period cost.
The amount that aggregate costs change if the production volume is increased (or decreased) by one unit is referred to as marginal cost. Therefore, marginal cost is the cost per unit of a product and can be avoided when the product is not produced.
The primary distinction between the two costing methods is whether or not fixed manufacturing overheads are considered product costs. External reporting requires stock to be valued using absorption costing.
Note
Management can choose which costing method delivers the most reliable data for internal decision-making. However, Marginal costing is considered to provide accurate results.
4. Working Capital Analysis
A working capital analysis is a financial metric used to assess the liquidity and adequacy of current assets versus current liabilities. The size and composition of working capital can vary between industries. It is calculated by a formula as follows:
Net Working Capital = Current Assets - Current Liabilities
Working capital is a financial statistic that helps companies prepare for the future and ensure they have enough cash and cash equivalents to pay short-term obligations like unpaid taxes and bills.
Working capital is utilized to fund operations and pay off short-term debt. Even if it runs into cash flow problems, a company with sufficient working capital can continue to pay its employees and suppliers and satisfy other commitments such as interest payments and taxes.
5. Quantity Variance
A quantity variance is the difference between how much something is used and how much it is expected to be used. It can be formulated as follows:
Quantity Variance = Standard Price * (Standard Quantity - Actual Quantity)
Note
Quantity variance can be of various types depending on the material, such as direct materials usage, price, usage, mix, and yield.
6. Product markup
The difference between a product's selling price and its cost expressed as a percentage of the cost is known as markup. Markup is an essential part of a business and is calculated by a formula as follows:
Markup = (Target Profit + Fixed Costs) / Annual Volume * Unit Variable Cost
Free Resources
To continue learning and advancing your career, check out these additional helpful WSO resources:
or Want to Sign up with your social account?