Managerial Accounting – Definition and Techniques
Managerial accounting, also known as cost accounting, is the process of identifying, measuring, analyzing, interpreting, and communicating information to managers for the pursuit of an organization’s goals.
The key difference between managerial and financial accounting is accounting information is aimed at helping managers within the organization make decisions, while financial accounting is aimed at providing information to parties outside the organization.
BREAKING DOWN Managerial Accounting
accounting encompasses all fields of accounting aimed at informing management of business operation metrics. Managerial accountants use information relating to the costs of products or services purchased by the company. Budgets are also extensively used as a quantitative expression of the business’s plan of operation. Individuals in accounting utilize performance reports to note deviations of actual results from budgets.
What Is Managerial Accounting?
Managerial accounting handles margin analysis to assess profits when weighed against varying types of costs. Margin analysis flows into break-even analysis, which involves calculating the contribution margin on the sales mix to determine the unit volume at which the business’s gross sales equal total expenditures. This information calculated by accountants is useful for determining price points for products and services.
Managerial Accounting Vs Financial Accounting
A common question is to explain the differences between financial accounting and managerial accounting, since each one involves a distinctly different career path. In general, financial accounting refers to the aggregation of accounting information into financial statements, while accounting refers to the internal processes used to account for business transactions. There are a number of differences between financial and accounting, which fall into the following categories:
- Aggregation. Financial accounting reports on the results of an entire business. accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.
- Efficiency. Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.
- Proven information. Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. accounting frequently deals with estimates, rather than proven and verifiable facts.
- Reporting focus. Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. accounting is more concerned with operational reports, which are only distributed within a company.
- Standards. Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.
- Systems. Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.
- Time period. Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.
- Timing. Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away.
- Valuation. Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. accounting is not concerned with the value of these items, only their productivity.
There is also a difference in the accounting certifications typically found in each of these areas. People with the Certified Public Accountant designation have been trained in financial accounting, while those with the Certified Management Accountant designation have been trained in accounting.
Pay levels tend to be higher in the area of financial accounting and somewhat lower for accounting, perhaps because there is a perception that more training is required to be fully conversant in financial accounting.
Managerial accounting also manages constraints within a production line or sales process. accountants determine where principle bottlenecks occur and calculate the impact of these constraints on revenue, profit, and cash flow.
Managerial accounting involves utilizing information related to capital expendituredecisions. Managerial accountants utilize standard capital budgeting metrics, such as net present value and internal rate of return, to assist decision makers on whether to embark on capital-intensive projects or purchases. accounting involves examining proposals, deciding if the products or services are needed, and finding the appropriate way to finance the purchase. It also outlines payback periods so management is able to anticipate future economic benefits.
accounting involves reviewing the trendline for certain costs and investigating unusual variances or deviations. This field of accounting also utilizes previous period information to calculate and project future financial information. This may include the use of historical pricing, sales volumes, geographical locations, customer tendencies, or financial information.
Managerial accounting deals with determining the actual costs of products or services. Managerial accountants calculate and allocate overhead charges to assess the true expenses related to the production of a product. The overhead expenses may be allocated based on the quantity of goods produced or other drivers related to the production, such as the square foot of the facility. In conjunction with overhead costs, accountants use direct costs to properly assess the cost of goods sold and inventory that may be in different stages of production.