What is Managerial Accounting?

Managerial accounting, also known as management accounting, refers to the process of collecting, measuring, analyzing, and presenting financial information to managers. The purpose of managerial accounting is to help managers control and optimize business operations.

Since managerial accounting is used for internal purposes only, it is not required to conform with accounting standards, such as GAAP.

How Managerial Accounting Works:

Accounting information for internal management.

The purpose of managerial accounting is to provide a business's internal management with relevant information to help managers with the formulation of policies, budgeting, controlling, and performance and risk management. This information is comprised of both financial and non-financial data pertaining to the business's operations and its economic context.

Role of the managerial accountant.

The managerial accountant is responsible for sourcing, analyzing, and reporting financial and non-financial information relevant to business decisions and the business's capability to generate revenue and maintain profitability.

The managerial accountant will collect relevant financial and non-financial information and use different accounting methods and techniques to process it. Beyond crunching numbers, managerial accountants also seek to identify and understand the reasons for and influences on profits and losses. To do so, they may use a variety of different accounting methods and techniques, including cost accounting, inventory analysis, constraint analysis, trend analysis, and forecasting.

Managerial accounting and decision-making.

While managerial accountants are not the decision-makers, they help drive business decisions based on data and insights. Management uses the information presented in the managerial accounting reports to set targets, manage performance, identify efficient and inefficient areas of the business operations, develop and implement corrective measures and controls, create budgets, and more.

Types of Managerial Accounting Methods:

A variety of different accounting methods and techniques are used in the managerial accounting process. Read on to learn about the most common methods.

1. Cost Accounting:

Cost accounting is used to measure and analyze all fixed and variable costs associated with the production of products or performance of services. There are several different types of cost accounting.

2. Inventory Turnover Analysis:

Inventory turnover is the measure of the inventory a business sold or used within a given time period. Calculating the turnover ratio of inventory reveals how fast inventory is turned into revenue and helps businesses manage their inventory more efficiently, ensuring that inventory levels are neither too high or too low to meet demand.

How to calculate the inventory turnover:

Inventory Turnover = Cost of Goods Sold / Average Inventory

3. Constraint analysis:

Constraint analysis is concerned with identifying limiting factors in a system and working to eliminate them. These constraints, also called bottlenecks, can be internal or external factors that limit the business's profitability. For example, if the availability of raw materials needed for production is very limited, this is a constraint that limits the business's production output.

Once a business has identified constraints or bottlenecks, it can evaluate them, investigate what is causing them, and determine whether steps can be taken to eliminate them.

4. Budgeting:

There are two main types of budgeting used in managerial accounting, namely capital and operational budgeting.

Capital Budgeting refers to the process of evaluating potential investments and projects, such as real estate, new equipment, or repairs to determine whether they are worth pursuing. Accountants use a variety of calculations to assess the value and return on investment the proposed capital investment offers.

Operating budgets are typically created on an annual basis and are concerned with estimating the expenses of maintaining daily operations at optimum levels as well as the expected revenue generated by the operations within a given budget period.

An operating budget provides a comprehensive overview of the business's operations and contains supporting documents that detail the budgets of the various business departments and functions, such as sales, production, and administrative support.

Operational budgeting helps businesses set specific financial goals and develop plans to achieve those goals. It also serves as a tool for overall performance analysis.

5. Trend Analysis and Forecasting:

Managerial accountants identify patterns and trends in historical data, investigate data fluctuations and variances, derive actionable insights, and make projections about future trends.

Trend analysis is also referred to as horizontal analysis and denotes the process of analyzing a business's financial statements over a given time period to map out trends and patterns of revenue and cost information.

Any fluctuations or inconsistencies that a trend analysis may reveal can be evaluated as to the possible causes and the impact on the business's profitability. This information, in turn, helps management with strategic decision-making and supports budgeting activities and the development of contingency plans.

Forecasting is used to make budget projections based on a comprehensive selection of information, including historical financial and sales data, the economic context and outlook, and customer trends. The information used to create a forecast can include both financial and non-financial data, giving consideration to contextual influences on a business's financial performance.