In management accounting or managerial accounting, managers use the provisions of accounting information in order to better inform themselves before they decide matters within their organizations, which aids their management and performance of control functions.
What is ‘Managerial Accounting’
Managerial accounting is the process of identifying, measuring, analyzing, interpreting and communicating information for the pursuit of an organization’s goals. This branch of accounting is also known as cost accounting. The key difference between managerial and financial accounting is managerial 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.
Explaining ‘Managerial Accounting’
Managerial 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’ plan of operation. Individuals in managerial accounting utilize performance reports to note deviations of actual results from budgets.
Managerial accounting handles margin analysis, the amount of profit or cash flow generated by the sale from a specific product, customer, store or region. Margin analysis involves analyzing the incremental benefit attained by increased production and flows into breakeven analysis. Breakeven analysis involves calculating the contribution margin on the sales mix to determine the unit volume at which the business’ gross sales equal total expenditures. This information calculated by managerial accountants is useful for determining price points for products and services.
Managerial accounting also manages constraints within a production line or sales process. Managerial 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 expenditure decisions. 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. Managerial 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 and when they will occur.
Managerial 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 property assess the true expenses related to the production of a product. The overhead expenses may be allocated based on quantity of goods produced or other drivers related to the production, such as square foot of the facility. In conjunction with overhead costs, managerial accountants use direct costs to properly assess the cost of goods sold and inventory that may be in different stages of production.
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