Managerial Accounting
Danijela Jerkovi?
Ba.Sci., CA Certified Accountant, CIA Certified Internal Auditor | Managing Director at Danijela Jerkovic's Services
Meaning, Pillars, and Types...
What Is Managerial Accounting?
Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization's goals.
Managerial accounting differs from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions.
How Managerial Accounting Works
Managerial accounting aims to improve the quality of information delivered to management about business operation metrics. Managerial accountants use information relating to the cost and sales revenue of goods and services generated by the company.
Cost accounting is a large subset of managerial accounting that specifically focuses on capturing a company's total costs of production by assessing the variable costs of each step of production, as well as fixed costs. It allows businesses to identify and reduce unnecessary spending and maximize profits.
The pillars of managerial accounting are
1: planning,
2: decision-making, and
3: controlling.
In addition, forecasting and performance tracking are key components. Through this focus, managerial accountants provide information that aims to help companies and departments in these key areas.
Managerial Accounting vs. Financial Accounting
The key difference between managerial accounting and financial accounting relates to the intended users of the information. Managerial accounting information is aimed at helping managers within the organization make well-informed business decisions, while financial accounting is aimed at providing financial information to parties outside the organization.
Because managerial accounting is not for external users, it can be modified to meet the needs of its intended users.
This may vary considerably by company or even by department within a company.
Note
Managerial accounting does not need to follow GAAP standards because it is used for internal purposes and not for external reports.
Types of Managerial Accounting
1: Product Costing and Valuation
2: Cash Flow Analysis
3: Inventory Turnover Analysis
4: Constraint Analysis
5: Financial Leverage Metrics
6: Accounts Receivable (AR) Management
7: Budgeting, Trend Analysis, and Forecasting
Product Costing and Valuation
Product costing deals with determining the total costs involved in the production of a good or service.
Costs may be broken down into subcategories, such as variable, fixed, direct, or indirect costs.
Cost accounting is used to measure and identify those costs, in addition to assigning overhead to each type of product created by the company.
Marginal costing (sometimes called?cost-volume-profit analysis ) is the impact on the cost of a product by adding one additional unit into production.?
It is useful for short-term economic decisions.
The contribution margin of a specific product is its impact on the overall profit of the company.
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 equals total expenses.
Break-even point analysis is useful for determining price points for products and services.
Cash Flow Analysis
Managerial accountants perform cash flow analysis in order to determine the cash impact of business decisions.
Most companies record their financial information on the accrual basis of accounting.
Although accrual accounting provides a more accurate picture of a company's true financial position, it also makes it harder to see the true cash impact of a single financial transaction.
A managerial accountant may implement working capital management strategies in order to optimize cash flow and ensure the company has enough liquid assets to cover short-term obligations.
When a managerial accountant performs cash flow analysis, she/he will consider the cash inflow or outflow generated as a result of a specific business decision.
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Inventory Turnover Analysis
Inventory turnover is a calculation of how many times a company has sold and replaced inventory in a given time period.
Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory.
A managerial accountant may identify the carrying cost of inventory, which is the amount of expense a company incurs to store unsold items.
If the company is carrying an excessive amount of inventory, there could be efficiency improvements made to reduce storage costs and free up cash flow for other business purposes.
Constraint Analysis
Managerial accounting also involves reviewing the constraints within a production line or sales process.
Managerial accountants help determine where bottlenecks occur and calculate the impact of these constraints on revenue, profit, and cash flow. Managers then can use this information to implement changes and improve efficiencies in the production or sales process.
Financial Leverage Metrics
Financial leverage refers to a company's use of borrowed capital in order to acquire assets and increase its return on investments. Through balance sheet analysis, managerial accountants can provide management with the tools they need to study the company's debt and equity mix in order to put leverage to its most optimal use.
Performance measures such as?return on equity, debt to equity, and?return on invested capital help management identify key information about borrowed capital, prior to relaying these statistics to outside sources. It is important for management to review ratios and statistics regularly to be able to appropriately answer questions from its board of directors, investors, and creditors.
Accounts Receivable (AR) Management
Appropriately managing accounts receivable (AR) can have positive effects on a company's bottom line. An accounts receivable aging report categorizes AR invoices by the length of time they have been outstanding. For example, an AR aging report may list all outstanding receivables less than 30 days, 30 to 60 days, 60 to 90 days, and 90+ days.
Through a review of outstanding receivables, managerial accountants can indicate to appropriate department managers if certain customers are becoming credit?risks. If a customer routinely pays late, management may reconsider doing any future business on credit with that customer.
Budgeting, Trend Analysis, and Forecasting
Budgets are extensively used as a quantitative expression of the company's plan of operation. Managerial accountants utilize performance reports to note deviations of actual results from budgets. The positive or negative deviations from a budget also referred to as budget-to-actual variances, are analyzed in order to make appropriate changes going forward.
Managerial accountants analyze and relay information related to capital expenditure decisions. This includes the use of 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.
Managerial accounting also involves reviewing the trendline for certain expenses and investigating unusual variances or deviations. It is important to review this information regularly because expenses that vary considerably from what is typically expected are commonly questioned during external financial audits. 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.
What Types of Information Does Managerial Accounting Compute?
Managerial accounting is useful for companies to track and craft spending budgets, reduce costs, project sales figures, and manage cash flows, among other tasks.
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CONCLUSION:
Is Financial Accounting the Same As Managerial Accounting?
While they often perform similar tasks, financial accounting?is the process of preparing and presenting official quarterly or annual financial information for external use.
Managerial accounting, in contrast, uses pro forma measures that describe and measure the financial information tracked internally by corporate managers.
Managerial accounting is important for drafting accurate and complete financial statements for internal use and crafting a company's long-term strategy. Without good managerial accounting, corporate leadership can struggle to make appropriate choices or misunderstand the firm's true financial picture. Because managerial accounting documents are not official, they do not have to conform to GAAP and can be used internally for a variety of purposes.
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