What Is Managerial Accounting? - Investopedia

Managerial accounting involves the presentation of financial information for internal purposes to be used by management in making key business decisions. TableofContents Expand TableofContents WhatIsManagerialAccounting? HowItWorks Managerialvs.FinancialAccounting TypesofManagerialAccounting ManagerialAccountingFAQs TheBottomLine CorporateFinance Accounting Investopedia/JessicaOlah WhatIsManagerialAccounting? Managerialaccountingisthepracticeofidentifying,measuring,analyzing,interpreting,andcommunicatingfinancialinformationtomanagersforthepursuitofanorganization'sgoals. Managerialaccountingdiffersfromfinancialaccountingbecausetheintendedpurposeofmanagerialaccountingistoassistusersinternaltothecompanyinmakingwell-informedbusinessdecisions. KeyTakeaways Managerialaccountinginvolvesthepresentationoffinancialinformationforinternalpurposestobeusedbymanagementinmakingkeybusinessdecisions.Techniquesusedbymanagerialaccountantsarenotdictatedbyaccountingstandards,unlikefinancialaccounting.Thepresentationofmanagerialaccountingdatacanbemodifiedtomeetthespecificneedsofitsend-user.Managerialaccountingencompassesmanyfacetsofaccounting,includingproductcosting,budgeting,forecasting,andvariousfinancialanalysis.Thisdiffersfromfinancialaccounting,whichproducesanddisseminatesofficialfinancialstatementsforpublicconsumptionthatconformtoprevailingaccountingstandards. 1:45 ManagerialAccounting HowManagerialAccountingWorks Managerialaccountingencompassesmanyfacetsofaccountingaimedatimprovingthequalityofinformationdeliveredtomanagementaboutbusinessoperationmetrics.Managerialaccountantsuseinformationrelatingtothecostandsalesrevenueofgoodsandservicesgeneratedbythecompany.Costaccountingisalargesubsetofmanagerialaccountingthatspecificallyfocusesoncapturingacompany'stotalcostsofproductionbyassessingthevariablecostsofeachstepofproduction,aswellasfixedcosts.Itallowsbusinessestoidentifyandreduceunnecessaryspendingandmaximizeprofits. ManagerialAccountingvs.FinancialAccounting Thekeydifferencebetweenmanagerialaccountingandfinancialaccountingrelatestotheintendedusersoftheinformation.Managerialaccountinginformationisaimedathelpingmanagerswithintheorganizationmakewell-informedbusinessdecisions,whilefinancialaccountingisaimedatprovidingfinancialinformationtopartiesoutsidetheorganization. Financialaccountingmustconformtocertainstandards,suchasgenerallyacceptedaccountingprinciples (GAAP).AllpubliclyheldcompaniesarerequiredtocompletetheirfinancialstatementsinaccordancewithGAAPasarequisiteformaintainingtheirpubliclytradedstatus.MostothercompaniesintheU.S.conformtoGAAPinordertomeetdebtcovenantsoftenrequiredbyfinancialinstitutionsofferinglinesofcredit. Becausemanagerialaccountingisnotforexternalusers,itcanbemodifiedtomeettheneedsofitsintendedusers.Thismayvaryconsiderablybycompanyorevenbydepartmentwithinacompany.Forexample,managersintheproductiondepartmentmaywanttoseetheirfinancialinformationdisplayedasapercentageofunitsproducedintheperiod.TheHRdepartmentmanagermaybeinterestedinseeingagraphofsalariesbyemployeeoveraperiodoftime.Managerialaccountingisabletomeettheneedsofbothdepartmentsbyofferinginformationinwhateverformatismostbeneficialtothatspecificneed. TypesofManagerialAccounting ProductCostingandValuation Productcostingdealswithdeterminingthetotalcostsinvolvedintheproductionofagoodorservice.Costsmaybebrokendownintosubcategories,suchasvariable,fixed,direct,orindirectcosts.Costaccountingisusedtomeasureandidentifythosecosts,inadditiontoassigningoverheadtoeachtypeofproductcreatedbythecompany. Managerialaccountantscalculateandallocateoverheadchargestoassessthefullexpenserelatedtotheproductionofagood.Theoverheadexpensesmaybeallocatedbasedonthenumberofgoodsproducedorotheractivitydriversrelatedtoproduction,suchasthesquarefootageofthefacility.Inconjunctionwithoverheadcosts,managerialaccountantsusedirectcoststoproperlyvaluethecostofgoodssoldandinventorythatmaybeindifferentstagesofproduction. Marginalcosting(sometimescalled cost-volume-profitanalysis)istheimpactonthecostofaproductbyaddingoneadditionalunitintoproduction. Itisusefulforshort-termeconomicdecisions.Thecontributionmarginofaspecificproductisitsimpactontheoverallprofitofthecompany.Marginanalysisflowsintobreak-evenanalysis,whichinvolvescalculatingthecontributionmarginonthesalesmixtodeterminetheunitvolumeatwhichthebusiness’sgrosssalesequaltotalexpenses.Break-evenpointanalysisisusefulfordeterminingpricepointsforproductsandservices. CashFlowAnalysis Managerialaccountantsperformcashflowanalysisinordertodeterminethecashimpactofbusinessdecisions.Mostcompaniesrecordtheirfinancialinformationontheaccrualbasisofaccounting.Althoughaccrualaccountingprovidesamoreaccuratepictureofacompany'struefinancialposition,italsomakesithardertoseethetruecashimpactofasinglefinancialtransaction.Amanagerialaccountantmayimplementworkingcapitalmanagementstrategiesinordertooptimizecashflowandensurethecompanyhasenoughliquidassetstocovershort-termobligations. Whenamanagerialaccountantperformscashflowanalysis,hewillconsiderthecashinfloworoutflowgeneratedasaresultofaspecificbusinessdecision.Forexample,ifadepartmentmanagerisconsideringpurchasingacompanyvehicle,hemayhavetheoptiontoeitherbuythevehicleoutrightorgetaloan.Amanagerialaccountantmayrundifferentscenariosbythedepartmentmanagerdepictingthecashoutlayrequiredtopurchaseoutrightupfrontversusthecashoutlayovertimewithaloanatvariousinterestrates. InventoryTurnoverAnalysis Inventoryturnoverisacalculationofhowmanytimesacompanyhassoldandreplacedinventoryinagiventimeperiod.Calculatinginventoryturnovercanhelpbusinessesmakebetterdecisionsonpricing,manufacturing,marketing,andpurchasingnewinventory.Amanagerialaccountantmayidentifythecarryingcostofinventory,whichistheamountofexpenseacompanyincurstostoreunsolditems. Ifthecompanyiscarryinganexcessiveamountofinventory,therecouldbeefficiencyimprovementsmadetoreducestoragecostsandfreeupcashflowforotherbusinesspurposes. ConstraintAnalysis Managerialaccountingalsoinvolvesreviewingtheconstraintswithinaproductionlineorsalesprocess.Managerialaccountantshelpdeterminewherebottlenecksoccurandcalculatetheimpactoftheseconstraintsonrevenue,profit,andcashflow.Managerscanthenusethisinformationtoimplementchangesandimproveefficienciesintheproductionorsalesprocess. FinancialLeverageMetrics Financialleveragereferstoacompany'suseofborrowedcapitalinordertoacquireassetsandincreaseitsreturnoninvestments.Throughbalancesheetanalysis,managerialaccountantscanprovidemanagementwiththetoolstheyneedtostudythecompany'sdebtandequitymixinordertoputleveragetoitsmostoptimaluse. Performancemeasuressuchas returnonequity,debttoequity,and returnoninvestedcapitalhelpmanagementidentifykeyinformationaboutborrowedcapital,priortorelayingthesestatisticstooutsidesources.Itisimportantformanagementtoreviewratiosandstatisticsregularlytobeabletoappropriatelyanswerquestionsfromitsboardofdirectors,investors,andcreditors. AccountsReceivable(AR)Management Appropriatelymanagingaccountsreceivable(AR)canhavepositiveeffectsonacompany'sbottomline.AnaccountsreceivableagingreportcategorizesARinvoicesbythelengthoftimetheyhavebeenoutstanding.Forexample,anARagingreportmaylistalloutstandingreceivableslessthan30days,30to60days,60to90days,and90+days. Throughareviewofoutstandingreceivables,managerialaccountantscanindicatetoappropriatedepartmentmanagersifcertaincustomersarebecomingcredit risks.Ifacustomerroutinelypayslate,managementmayreconsiderdoinganyfuturebusinessoncreditwiththatcustomer. Budgeting,TrendAnalysis,andForecasting Budgetsareextensivelyusedasaquantitativeexpressionofthecompany'splanofoperation.Managerialaccountantsutilizeperformancereportstonotedeviationsofactualresultsfrombudgets.Thepositiveornegativedeviationsfromabudgetalsoreferredtoasbudget-to-actualvariances,areanalyzedinordertomakeappropriatechangesgoingforward. Managerialaccountantsanalyzeandrelayinformationrelatedtocapitalexpendituredecisions.Thisincludestheuseofstandardcapitalbudgetingmetrics,suchasnetpresentvalueandinternalrateofreturn,toassistdecision-makersonwhethertoembarkoncapital-intensiveprojectsorpurchases.Managerialaccountinginvolvesexaminingproposals,decidingiftheproductsorservicesareneeded,andfindingtheappropriatewaytofinancethepurchase.Italsooutlinespaybackperiodssomanagementisabletoanticipatefutureeconomicbenefits. Managerialaccountingalsoinvolvesreviewingthetrendlineforcertainexpensesandinvestigatingunusualvariancesordeviations.Itisimportanttoreviewthisinformationregularlybecauseexpensesthatvaryconsiderablyfromwhatistypicallyexpectedarecommonlyquestionedduringexternalfinancialaudits.Thisfieldofaccountingalsoutilizespreviousperiodinformationtocalculateandprojectfuturefinancialinformation.Thismayincludetheuseofhistoricalpricing,salesvolumes,geographicallocations,customertendencies,orfinancialinformation. IsFinancialAccountingtheSameasManagerialAccounting? Whiletheyoftenperformsimilartasks,financialaccounting istheprocessofpreparingandpresentingofficialquarterlyorannualfinancialinformationforexternaluse.Suchreportsmayincludeauditedfinancialstatementsthathelpinvestorsandanalystsdecidewhethertobuyorsellsharesofthecompany.BecauseofthismanagerialaccountingintheU.S.mustadheretoGAAPstandards.Managerialaccounting,incontrast,usesproformameasuresthatdescribeandmeasurethefinancialinformationtrackedinternallybycorporatemanagers. DoManagerialAccountantsNeedtoFollowGAAP? No,managerialaccountantsarenotlegallyobligatedtofollowGAAPbecausethedocumentstheyproducearenotregulatedbyGAAP.Thesedocumentsfocusoninternalcompanymetricsthatfocusoncompanyperformance. WhatTypesofInformationDoesManagerialAccountingCompute? Managerialaccountingisusefulforcompaniestotrackandcraftspendingbudgets,reducecosts,projectsalesfigures,andmanagecashflows,amongothertasks. WhatArethe3PillarsofManagerialAccounting? Managerialaccountingisusedforplanning,decision-making,andcontrolling.Thesearethethreepillarsofthefield.Inaddition,forecastingandperformancetrackingarekeycomponents. TheBottomLine Managerialaccountingisimportantfordraftingaccurateandcompletefinancialstatementsforinternaluseandcraftingacompany'slong-termstrategy.Withoutgoodmanagerialaccounting,corporateleadershipcanstruggletomakeappropriatechoicesormisunderstandthefirm'struefinancialpicture.Becausemanagerialaccountingdocumentsarenotofficial,theydonothavetoconformtoGAAPandcanbeusedinternallyforavarietyofpurposes. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. FinancialAccountingFoundation."GAAPandPublicCompanies." UniversityofNevada,Reno."FinancialAccountingvs.ManagerialAccounting:What’stheDifference?" RelatedTerms AccountingExplainedWithBriefHistoryandModernJobRequirements Accountingistheprocessofrecording,summarizing,andreportingfinancialtransactionstooversightagencies,regulators,andtheIRS. more WhatIsCostAccounting? Costaccountingisaformofmanagerialaccountingthataimstocaptureacompany'stotalcostofproductionbyassessingitsvariableandfixedcosts. more CashFlowDefinition Cashflowisthenetamountofcashandcashequivalentsbeingtransferredintoandoutofabusiness. more WhatIsaCashBudget? Acashbudgetisanestimationofthecashinflowsandoutflowsforabusinessorindividualforaspecificperiodoftime. more WorkingCapital:Formula,Components,andLimitations Workingcapital,ornetworkingcapital(NWC),isameasureofacompany’sliquidity,operationalefficiency,andshort-termfinancialhealth. more HowGeneralLedgersWork Ageneralledgerisarecord-keepingsystemforacompany’sfinancialdata,withdebitandcreditaccountrecordsvalidatedbyatrialbalance. more PartnerLinks RelatedArticles Careers WhatManagementAccountantsDo FinancialStatements HowFinancialAccountingDiffersFromManagerialAccounting FinancialStatements WhyDoShareholdersNeedFinancialStatements? FinancialAnalysis CashConversionCycle Accounting Whenismanagerialaccountingappropriate? Accounting TheCommonConceptsandTechniquesofManagerialAccountingDefined