Managerial accounting goes beyond operational accounting and is the application of financial reporting, assumptions, frameworks, and methodologies to complement the management team's decision making.
This article focuses on:
- Managerial Accounting
- Its core meaning and application
- Types of managerial accounting
- How it helps the managers and the business to keep up in the strife.
What is Managerial Accounting?
Managerial accounting is also known as management accounting and is concerned with information collection that enables managers to decide and plan on business needs for the future. It focuses mainly on the future and the present financial situations.
Managerial accounting is used and applied only for internal purposes. It lays importance on internal performance, such as departments, projects, and processes. It also helps managers improve business processes just as financial reporting helps investors make decisions about investment.
In managerial accounting, the accountants strive to review reports and calculations on performance like turnarounds of inventory reports, summaries of accounts receivable aging, or performance efficiency reports. All these reports and calculations help managers identify elements the company needs to change to improve specific processes and departments. Job Costing, Process Costing, Operational Budgeting, Capital budgeting, and Ratio analysis are some of the topics that are usually included under Managerial accounting.
Essence and Scope of Managerial Accounting
While management accounting is the latest branch in accounting, it has taken over some points from other branches of learning like Science and Art. It can be called the science of 'measurement' and the art of 'interpretation.'
While the decisions are made based on the information, managerial accounting also involves human judgment and presumptions that could affect the overall information. There could be subjectivity in the derivation of the meaning of information. This is to say that the importance of a well-learned managerial accountant is pivotal in the process.
Scope: Management accounting primarily aims to use accounting information to resolve business problems and make scientific decisions. However, the scope of managerial accounting is very broad. The exact scope is therefore very difficult to determine. Yet, the management accounting scope can be summed up through these elements.
- Revaluation accounting
- Cost Control
- Inventory Control
- Statistical Methods
- Budgeting and Forecasting
Importance of Managerial Accounting
Managerial accounting’s primary objective is to assist a company's management in the effective performance of its functions: plan, organize, lead and control. It’s importance lies in these functions:
Generates Data: Managerial accounting captures historical financial information which is not only useful for planning and growth of the business but also assists in forecasting. It helps in chalking out more competent plans through the detailed data.
Assess Data: Managerial accounting helps in analyzing the information and assists in decision-making. Companies often address the "what if" scenarios in management accounting. Managerial accounting paves way for presenting meaningful data by clear calculations and assessment of trends. For example, an organization can classify its purchasing trends through the quarters in supplier-wise and region-wise format.
Planning and Decision making: By presenting financial and non-financial information at regular intervals, managerial accounting assists in planning activities for the future. Its statements include important insights such as budgets, in-depth analysis, and forecasts. Based on these essentials, the management can then arrive at resourceful decisions.
Measures Performances: It utilizes tools like variance analysis for measuring the performance of the company with pre-established standards of finding out discrepancies. Owing to this information, the managers can then take a restorative measure in case there is a fluctuation in the performance of a particular department.
Promotes efficiency: This branch of accounting sets its eyes on gauging productivity and enhances the overall efficacy of the team. Managerial accounting enables managers to set targets for the teams in each department and lets out a set of data about their efficiency. This makes it easy to help them work on their shortcomings and improve efficiency.
Serves customers better: Through cost-controlling tools, managerial accounting ensures products are priced just aptly and maintain high standards of quality. This also takes into account the customer inclination towards a particular price range of the product. In all, it facilitates better service to customers.
Reliability and Profitability: As the reports generated from managerial accounting are thoroughly researched, these become an extremely reliable source for the company to move ahead with its decisions. Such meticulous and well-planned information enables a smooth functioning and almost ensures a positive outcome in terms of revenue and profits.
How Does Managerial Accounting Help Managers and Business?
Managerial accountants constantly work in an environment of intense competition which needs quick and effective business decisions. A lot of high-level skills and clear vision are required to make decisions on sales, budgetary, or cash flow management. Managerial accountants and the reports generated by them assist the managers and accountants to drive decisions with a goal-oriented approach.
Here are some points that discuss how managerial accounting helps managers.
- Improve Profits: Capital budgeting and also budgetary control can be decisive aides to pinpoint and overcome the unusual and unexpected expenditure. The unnecessary expenditure gradually crumbles the financial potential of the business. These statements are, therefore, important to help recognize the areas where this kind of spending could be controlled.
- Improve Performance and Productivity: Managerial accounting is a great tool to assess the performance of employees and how a particular department is contributing to the growth of the company. Through various techniques, a managerial accounting report can ably present this data and assist managers to inspect the underperformers and the achievers effectively.
- Assessments based on the future: In a fast-paced industry such as finance, wouldn’t it be great if the managers could see the future and organize things right at the beginning? Managerial accounting comes in handy and this problem can be resolved to a large extent. The holistic information presented by this type of accounting certainly gives the managers an edge over the times to come. Identifying the loopholes and taking timely corrective measures are the factors the managers can get help with, through managerial accounting.
- Precision tools: Managerial accounting utilizes tools such as marginal costing and budget controlling among others to present crystal clear information concerning the various departments and time-period. These tools empower the managers to take firm decisions.
These are some of the ways the managers and the business can look forward to reaping the benefits from the process of managerial accounting.
What Do Managerial Accountants Do?
Managerial Accountant’s position commands power along with several responsibilities. They are in charge of keeping a close watch on the expenditure and revenue of the company. This section will take you through the role of a managerial accountant, their tasks, skills, and their importance in the company framework.
Managerial accountants could be associated with private businesses, public companies, or may even work with the government. They supervise data for use by the people within the organization. They are also called industrial accountants or private accountants.
Here’s a circumstantial detail of a managerial accountant’s role.
- Recording and scrutinizing numbers: The accountants work meticulously with the numbers and the information to strategize and plan for a better financial future for the company. They carry out a review to help the organization’s budget and enhance the overall profit. Fundamentally, they work to present comprehensive data to the managers and other decision-makers.
- Supervise lower-level accountants, bookkeepers, or interns: Basic tasks revolving around accounting such as tracking tax liabilities or tracking incomes or expenditures are all handled by the lower-level accountants. Eventually, this data assists in the preparation of reports and income statements. While most large organizations have this segregation of senior accountants and interns, the smaller firms usually have only a senior managerial accountant to oversee all the tasks.
- Analyze, Forecast and Budgeting: A managerial accountant’s job also involves him in analyzing the reports to present a competent and effective forecast. Their analysis also aids the process of measuring the performance and plans of the various departments within the company. They also prepare the budget per the set target.
- Recognize trends and Opportunities: Managerial accountants are entrusted with the authority to study and recognize the trends. They must help align the company’s goals and direct the team toward better prospects. The trends also give away the possibilities of growth and new opportunities. An expert accountant should be able to recognize them and utilize them for upward growth.
- Enforce Compliance: Many significant rules may have to be followed in the process of accounting. A managerial accountant may also be required to overlook the funding of operations and monitor compliance.
Skills Required to Become Managerial Accountant
With a brief introduction to the role a managerial accountant plays, we are here to know the skills required to become a successful accountant. Apart from the sense of accountability and great organizational skills, there are some academic prerequisites for becoming a managerial accountant. Let’s look through those in the following section.
Academic Qualification Required for Managerial Accountancy
Meritorious fulfilling of a managerial accountants’ role requires extensive study, knowledge, and experience to handle matters that could have dire consequences for a business. It is of utmost importance to be academically qualified and technically prudent to get into the shoes of an accountant.
Here are the details of the academic steps you may take to become a managerial accountant.
Bachelor’s Degree in Accounting, Finance, or related stream: This is the most common and basic requirement if you aspire to become an accountant, followed by a specialization in auditing, finance, or business.
Master’s Degree strengthens prospects: If you opt for a Master’s degree, your chances to land a great job increase manifold owing to the enriching skills you learn through the course. A Master’s degree or an MBA in accounting empowers the aspiring candidates to get into an accountant’s position.
Certifications: These are excellent aides and can expedite the process of achieving a position in your favorite organization. While CPA (Certified Public Accountant) is the most preferred choice, you may also opt for other certifications such as CMA (Certified Management Accountant) or QIAL (Qualification in Internal Audit Leadership).
Work Experience counts: If you yearn to work at the top of the management level positions, then consider getting work experience. Organizations usually hire someone qualified and experienced enough for such roles.
Types of Managerial Accounting
Having acquainted ourselves with the concept, let’s also see what are the various types of managerial accounting that could add value to your growing business.
Product Costing and Valuation: The cost of a product is the calculation of the total costs involved in the good’s production. These costs may be divided into variable, fixed, direct, or indirect costs. In addition to the overhead allocation of each type of product that the company manufactures, cost accounting is also helpful to measure and identify those costs.
It is the responsibility of the managerial accountants to calculate the overhead charges to assess the end-to-end cost of producing a good. The company may allocate the overhead costs based on the number of products manufactured to other production-related activities.
Cash Flow Analysis: This factor determines the cash impact of the decisions the management takes. While most companies choose to go with accrual accounting to record financial data, it makes it a bit difficult to gauge the exact cash impact of a single transaction. The managerial accountant strategizes to ensure cash flow and enough liquidity for other short-term procedures.
While conducting cash flow analysis, the accountant takes into account the inflow and the outflow of cash which are a result of previous decisions.
Inventory Turnover Analysis: The amount of inventory sold and ordered by a company in a given time duration is termed inventory turnover analysis. A managerial accountant may recognize the storage cost of stock, which is the measure of cost an organization incurs to store unsold things. Stock turnover can help organizations settle on better choices on pricing, assembling, advertising, and buying new stock. If the organization is experiencing an exorbitant measure of stock, it could make efforts to increase proficiency for decreasing stockpiling expenses. This money can be channeled to other significant operations.
Financial Leverage Metrics: This term refers to the use of the borrowed money by a company. Organizations borrow capital to acquire new assets and enhance the value of their business. Managerial accountants can review the balance sheets and gauge if the capital has been optimally used. They can then suggest ways to improve the optimization and leverage the company’s performance. With thorough research and well-directed study of the company’s debt and equity mix, the accountants can measure performance based on factors like return on invested capital, debt to equity, and return on equity.
Accounts Receivable (AR) Management: This is a report that indicates the age of outstanding amounts of a company. These are the receivables that are reported in the AR management. A report based on the time span of 30 days or 60 days can be prepared for all the outstanding receivables. This is important as it lets the company know if any of its customers are becoming a credit risk. In such a case, the company can devise ways and strategies that could avoid such risks.
Trend Analysis: Managerial accountants need to study and analyze the trends based on past decisions and how these decisions have been affecting the company’s growth. The review of trendlines for expenditure and examining the unexpected variance is important. The varying expenditure is sometimes questioned in the external final audits. Trend analysis also includes the previous and past years’ performance as a parameter to inspect the growth or deflection from the target.
Budgeting and Forecasting: Accountants utilize the standard capital budgeting metrics to help the management make well-informed decisions. Budgets are required to maintain a measurable expression of the company’s future goals. Performance reports help assist the managers to observe any deviations in results from the expected. These are called budget-to-actual variances and are extensively studied to undertake corrective measures if they are needed.
Let’s move on to another important topic which is the difference between Managerial Accounting and Financial Accounting.
Managerial Accounting Vs. Financial Accounting
While we discuss accounting, another important type of accounting - Financial accounting needs a mention here. There are times when the two terminologies are confused with each other and are used synonymously for each other. However, there are some huge differences when it comes to the usage of the reports generated by the two accounting procedures.
The dissimilarities are presented in the following table:
Based on the learning from this article, we have the key takeaways as mentioned:
- Managerial Accounting assists managers with decision-making by providing detailed financial as well as non-financial information.
- Though an optional process, managerial accounting offers valuable status information about the company’s growth, sales, revenue, and performance in various departments.
- Managerial accounting facilitates the optimization of financial resources, thereby leading to profits for the business.
- Managerial accounting has some obvious and key differences from financial accounting, which includes points like GAAP regulations which need to be followed in the case of financial accounting but are not mandatory for managerial accounting.
We wrap it up here with the hope that the article has enlightened you through the topic of Managerial accounting and the myriad aspects related to it.