The Ultimate Guide to Managerial Accounting (Part I)
Managerial accounting, also known as Management accounting or cost accounting refers to a process of providing financial information to managers that helps in decision-making. It’s easy to understand that the concept of cost accounting revolves around the business administrators.
So, if you are a part of your organization’s managerial board then this blog will help you to-
- Make more effective business decisions
- Control your company’s activities more accurately
- Continue development faster than before.
The main objective of managerial accounting is to give valuable information to the managers. So that they can process those data and use them for further business advancement. You might be asking yourself-
- What kind of information do managers need
- Why do they need this information
- How this information is going to help them
Well, go through this fundamental guide to get all these questions answered. Today’s post will demonstrate the definition of managerial accounting, its functions, objectives, main principles, and many more.
Table of Content:
- Managerial Accounting Definition
- Managerial Accounting VS Financial Accounting
- Objectives & Purposes of Managerial Accounting
- Functions of Managerial Accounting
- Techniques of Managerial Accounting
So let’s get started with-
Getting Introduced to Managerial Accounting
According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is
The process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources.
They also add-
Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies, and tax authorities.
In simple words, it is a form of accounting coupled with special knowledge and ability that helps internal management in the formulation of policies, planning, and taking accurate decisions.
Financial accounting, costing, business analysis, economics, etc are some tools and techniques to operate managerial accounting. There is no fixed formula or structure for it. The main objective is only to assist the manager in their tasks of maximizing profits or minimizing losses.
A Simple Example
Let’s think you have a company of chemical manufacturing. You possibly have many divisions inside your business. Now pick a situation a customer offers you $100 for 1kg particular type of chemical and he wants to buy 500 kgs.
Now you must fix the selling price considering the production cost- that is quite obvious. It may also include raw material costs, office & marketing expenses, and others. So you have to calculate all the expends and come up with some ideas on how much it costs to produce those chemicals and whether it’s beneficial for you to accept his offer etc. However, you can make all these decisions effectively with managerial accounting.
How Managerial Accounting is Different from Financial Accounting
The main difference between managerial accounting and financial accounting regards to the intended users of the information. Management accounting is used only by the internal team of the company to make better business decisions whereas financial accounting aimed at presenting financial information to the persons outside of the organization
In management accounting, the accounts department makes some financial reports like invoices, balance sheets, salary statements, and others. Then share them with the management team of the company. Later, managers use this statistical data to make more relevant decisions to efficiently control all the company’s activities.
On the other hand, financial accounting manages the recording and providing the information to deal with the various stakeholders of an organization.
Managerial Accounting VS Financial Accounting
|Basis||Managerial Accounting||Financial Accounting|
|Users||Internal managers who control and plan for an organization||External persons who make financial decisions|
|Purpose||Decision making||Communicate financial position to outsiders|
|Time Focus||Future emphasis||Past-oriented|
|Time Span||Ultra current to very long time horizons||Historical monthly, quarterly reports|
|Verifiability VS |
|Emphasis on relevance||Emphasis on objectivity & verifiability|
|Precision VS Timeliness||Emphasis on timeliness||Emphasis on precision|
|Rules||Not bound by GAAP/IFRS or any other format||Must follow GAAP/IFRS and predefined formats|
|Designed to influence employee behavior||Indirect effects on employee behavior|
Managerial accounting does not deal with the company’s external monitoring exchange. So, there is no chance of merging financial accounting with managerial accounting as it is an internal matter of the organization.
Objectives & Purposes of Managerial Accounting
Managerial accounting accelerates the development of a business. Its main purpose is to make important business decisions in the right way that brings expected yet positive results.
If the elemental objectives of managerial accounting are described individually, it will be easier to understand.
Planning is the fundamental purpose of cost accounting. It represents all the financial information in a form. So admin can use them in setting goals and developing future policies. It’s also helpful in fixing workers’ requirements and bring out their best productivity. End of the day only a well-designed strategy can make you unique in the crowd.
2. Decision Making
Management accounting is introduced to make managerial jobs easier. So that they can identify all the alternatives and pick the right one that aligns with the business goal better than others. In this form of accounting, managers get various analytical data that will make the decision-making process simpler and more justified.
When you can identify your employees’ needs then you can realize how to encourage them to act in a particular manner. Delegation can be a great tool to increase your employee satisfaction rate.
4. Controlling Business Operations
The employer can direct the employees well through managerial accounting. Undoubtedly, it ties the upper management and fellow employees with responsibility and ownership. Monitoring usually helps to build responsible employees and lead them in the proper direction.
5. Identifying Business Problem Areas
Managerial accounting will help you to figure out some cause that may create losses inside your business. Such as some products don’t perform well, few departments fail to raise their productivity, some employees were unable to upgrade their skills, etc. These reports related to certain issues are beneficial to make more realistic decisions in terms of business advancement.
It means if the management can get the reports timely then they will be able to overcome the obstacles easily.
Ultimately the report is the final objective of managerial accounting. From planning to data analysis, the whole events come in a statement that helps the management to reschedule the focus point. Through the report, the organization understands its strength, weakness, and opportunity. As an outcome, they can set their target and investment requirements.
Functions of Managerial Accounting
The five primary functions of the managers are planning, organizing, leading, staffing, and controlling. Cost accounting, however, is developed in terms of aiding managers to perform their functions accordingly.
The following points elaborate top 6 functions of management accounting-
1. Forecasting & Policy Formulation
With the provided information and data, management accounting helps the admins to work on short-term and long-term forecasting and planning of the business. It helps you to formulate business policies by calculating and estimating future production, selling the inflow & outflow of cash.
In order to do this, management accounting uses several techniques of statistics. Such as probability, trend study of correlation and regression; standard costing; capital budgeting; marginal costing and cash funds flow statements, etc.
Management accounting also helps the managers in arranging human and non-human resources inside a business. It analyzes different functions and distributes the responsibilities among the fellow members of the company.
Locating specific cost centers admins can easily divide the resources and duties properly. Therefore a great interconnection will grow in your enterprise that accelerates the workflow significantly.
The management accountant maintains the work efficiency and maximizes the business profit by providing different tools of coordination. Such as financial reports, analysis, and interpretation, etc. It helps the management in synchronizing all the operations inside a business appropriately.
Firstly it prepares a functional budget and then integrates this estimation throughout the organization to set the standard costs. In this way, admins can interconnect with all parts of an organization.
4. Controlling Performance
As you will have all the information in your hand so you can use them to take some needed actions that increase your employees’ performance. You can use tools like standard costing, accounting ratios, cash and funds flow statements, etc. Moreover, you can also conduct cost reduction programs to maximize ROI.
5. Financial Analyses & Data Interpretation
The management accountant analyzes all the data elaborately and represents them in front of the top management with his/her personal comments. So that admins can easily understand them and make appropriate decisions considering all the relevant stats & facts. For this purpose data usually are presented in a comparative form like graphs, charts, ratio, or others.
6. Protection of Business Assets
The management accountant will be responsible for taking care of business assets. It’s his/her duty to help the management through a detailed report. This report includes statements about fund availability for repairs, maintenance, and protection of fixed assets. So that the production doesn’t get hampered by sort of backdrop at the last moment. Also, he has to assure that all the business assets are insured.
7. Tax Policies
Managerial accounting helps the higher authority to ensure all tax payments in time. Also, it assists them in making a proper guideline of tax policies and procedures for the enterprise. So that they can take required actions for avoiding penal interest costs on delayed payment of tax. However, a proper provision for taxation is vital so that the company can pay the quarterly payments of taxes in time.
Well, let’s move to the next part and explore the top 10 managerial accounting techniques-
Tools or Techniques of Managerial Accounting
This part of accounting focuses on the information that is useful to the management. It uses many financial and cost accounting techniques to assist managers in decision making.
In order to achieve its goal, managerial accounting depends on a number of tools and methods, including the following-
1. Financial Planning
Every business needs a well-designed financial plan. This plan is concerned about the company’s both short-term and long-term investment objectives. Also, an organization should have a clear idea about the sources of raising funds. So that they can operate all the financial activities that fit their goals completely.
Moreover, your financial policies should be conducted in the way to decide the amount of capital required, type of capital, how to distribute the income, the use of debt, equity share capital, or preference share capital. Furthermore, admins are also responsible to determine how much your company should invest in a particular project.
However, managers should take all these decisions carefully as these are important to make your financial plan workable.
2. Analysis of Financial Statements
The techniques of this financial analysis are comparative to financial statements, trend analysis, fund flow statements, cash flow statements, and ratio analysis. A deep analysis is essential so that you can understand your financial statement and predict how to act in the upcoming days. It means you will get an idea about future income, interest-paying ability, debt status, and possible profit margin.
The result of this analysis will help the investors, business executives, and creditors to decide over their next actions.
3. Budgetary Control
This accounting tool is used for planning and managing different types of activities inside a business. Budgetary control helps the management to fix a direction to achieve a particular goal like earn the desired return on investment. It gives the managers the overall power to control all the tasks related to the productions and distribution of goods and services. And also allows coordination between all essential parts of an organization.
4. Marginal Costing
The management accountant uses this technique to figure out the profitability of different production systems. It helps to find out the type of cost, way of cost control, and procedure of profit maximization. This financial technique is concerned with the impact on cost resulting from changes in the quantity of production.
5. Historical Cost Accounting
The historical cost accounting provides past data of the company to the management. It includes the information of previous transactions, cost of each task, project, and procedures. So that top management can measure their productivity and compare with their standard cost. This comparison will govern them for cost control and future planning.
6. Standard Costing
The management accountant uses this tool for cost control. Standard costing is important to determine the actual expense of an organization. It is a process of measuring the cost under the most convenient working environment and control the cost following some effective rules.
By comparing the real cost with the standard cost, admins can apprehend the difference and find out the reasons behind it. This technique will help them to locate the problem areas and take required actions so that they can minimize the unnecessary costs.
7. Revaluation Accounting
Revaluation accounting is also known as replacement accounting. With this financial technique, the management accountant takes care of the company’s fixed assets. So that the capital can be represented with its asset value. This method is actually used to avoid the problems related to fixed asset replacement in terms of rising prices.
It helps the managers to come out with some fair decisions on capital usages. Also ensures the maintenance and preservation of the capital inside the business.
8. Capital Budgeting
Capital accounting is concerned with the data processing technique that is required to make a judgment related to capital expenditure. It helps the management to determine whether an asset purchase proposal should accept or decline. This accounting tool is used to represent the quantitative view of each proposed fixed asset investment. So that higher authority can get a rational reason for decision making.
With this managerial technique, it’s easy to calculate the net present value (NPV) and the internal rate of return (IRR). It assists the managers to prepare their new estimates for income and expenditure.
9. Constraint Analysis
Constrain analysis helps to find out the possible causes that resist the company to move forward. Also, it assists the managers in coming up with the required improvements to achieve the goals.
For example, an organization sets the goal of about 200% growth in the next budget year. Constrain analysis will figure out the obstacles to acquiring this target. The issues can be like- the sales force being too small, experienced employees do not stay for a long time, need to expand the marketing territory, etc.
From these findings, management can make proper decisions on how to overcome these bottlenecks and reach the end-point successfully. In this situation, the probable solution could be- recruit a more and experienced sales force, offer better benefits and career progression to the employee, and invest in expanding the market. Everything together can easily achieve the goal which may sound impossible at the initial stage.
Perfect constraint analysis and an effective overcome plan can make any unreal goal achievable.
10. Trend Analysis & Forecasting
Trend analysis is used to predict upcoming changes, sales growth, product cost, inventory levels, and interest rates. With this technique, top management can establish plans to figure out the unusual variances from the forecasted values. After getting the reasons behind these discrepancies it will be quite easier to develop a business growth strategy.
In short, managers use these accounting tools to identify cost involvement, measure the cost, and analyze data. Then they prepare a detailed strategy and execute them to achieve the company’s goals.
After a long discussion now, hopefully, it’s clear on everyone’s part that cost accounting helps the management to prepare a proper guideline that may ensure business growth. It provides cost-effective and fiscal data to a higher authority. Using these data they can easily analyze SWAT and operate accordingly to achieve the final goal.
The concept of managerial accounting is quite different than financial accounting. Managerial accounting involves the presentation of financial reports to the managers inside the organization in making effective business decisions.
Whereas financial accounting is concerned with providing information to stakeholders, creditors, and others from outside the organization.
For the company’s personal growth its important to conduct managerial accounting. So that the management can identify the problem areas inside a business and get the direction to get ahead of these issues. It’s an effective way to maximize the profits and minimize the scopes of losses.
If you still have some questions or ideas to share about managerial accounting, then let us know using the comment section below!
Awesome and self explanatory.
Sabirah Islam Editorial Staff
It’s a pleasure to hear from you! You can also check our other blogs on this topic, hopefully you will like them too.
Thank you for the explanation
Pingback: What Is Managerial Accounting? | Chatter Cat