What is Managerial Accounting:

Managerial accounting is concerned with providing information to managers - that is,

people inside an organization who direct and control its operation. Managerial accounting
provides the essential data with which the organizations are actually run. Managerial
accounting is also termed as management accounting or cost accounting.

Managerial accountants prepare a variety of reports. Some reports focus on how well
managers or business units have performed-comparing actual results to plans and to
benchmarks. Some reports provide timely, frequent updates on key indicators such as
orders received, order backlog, capacity utilization, and sales. Other analytical reports are
prepared as needed to investigate specific problems such as a decline in the profitability of a
product line.

Managerial accounting is concerned with providing information to managers- that is, to those who are
inside an organization and who direct and control its operations. Managerial accounting can be
contrasted with financial accounting, which is concerned with providing information to stockholders,
creditors and others who are outside an organization.

Managerial accounting information include:

 Information on the costs of an organization’s products and services.

For Example, managers can use product costs to guide the setting of selling prices. In addition,
these product costs are used for inventory valuation and income determination (Horngren and
Foster, pp. 2).
 Budgets.
A budget is a quantitave expression of a plan.
 Performance reports:
These reports often consist of comparisons of budgets with actual results. The deviations of
actual results from budget are called variances (Horngren and Foster, pp. 3)
 Other information which assist managers in their planning and control activities.
Examples are information on revenues of an organization’s products and services, sales back
logs, unit quantities and demands on capacity resources (Kaplan and Atkinson, pp. 1).
Managerial Accounting Practices
Traditional managerial accounting systems are mainly designed to measure the efficiency of
internal processes. In the 1980’s, traditional managerial accounting practitioners were heavily
critized on the grounds that their practices had changed little over the preceding 60 years, despite
radical changes in the business environment. For more information on traditional managerial
accounting practices see the Traditional Managerial Accounting page.

The last decades new managerial accounting practices such as activity-based-costing and the
balanced scorecard were developped:

Unlike traditional managerial accounting, activity-based-costing deemphasizes direct labor or

raw material as cost drivers and concentrates instead on activities (e.g. the number of production
runs per month) that drive costs. Activity-based costing gives the management of an organization
a clear picture of the cost drivers and the opportunities to reduce costs (Kaplan and Norton, 2001,
pp. 378). For more information on activity based costing, see the Activity Based Costing page.

Traditionally, management accountants’ principal performance report was variance analysis,

which is a systematic approach to the comparison of the actual and budgeted costs and revenues
during a production period. While some form of variance analysis is still used by most
manufacturing firms, it nowadays tends to be used in conjunction with other performance reports
such as the balanced scorecard. A balanced scorecard is a set of financial measures, operational
measures on customer satisfaction, internal processes and the organization's innovation and
improvement activities (Kaplan and Norton, 1992). Kaplan and Norton also argue that the
balanced scorecard can be used as a strategic management system which identifies the value
drivers of an organization's strategy and a management system to align the organization to the
strategy (Kaplan and Norton, 2001, pp. 378). For more information on the balanced scorecard,
see the Balanced Scorecard page.

Managerial accounting, sometimes called cost accounting, is the study and analysis of financial
data as it applies to operational issues within a company. Accountants are not always managers,
but good managers should be aware of how the accounting in their company is being handled.
Managerial accounting formulas help managers assess the financial health of different areas in
their business. This information will help managers make informed business decisions.

Companies use two types of accounting mechanisms --- financial accounting and managerial
accounting. Companies are required to prepare financial accounts once a year and furnish them
to the company's stakeholders and the public. Managerial accounting is used to collect, classify
and record all the costs that incurred during the accounting period. Managerial accounts are
prepared for a shorter duration of time and are used only internally within the company. These
accounts are used by managers to analyze their production processes and the costs associated
with them.
Analyzing Present Conditions
Managerial accounts use statistical methods to make deductions. Managerial accounting
reports show the volume of sales transactions that the company made during the month or
the quarter, the accounts it owes, the accounts receivable, the levels of inventory it is
presently holding and the work in progress. This way, the management is able to analyze
whether all operations are running optimally. It is able to evaluate whether it needs to
increase its stock levels. Also, if the company is holding too much cash in hand,
management devises strategies to invest the cash properly.

Future Planning
Based on the managerial accounting reports, a company's management is able to plan
ahead for the future. When the reports show that the company is not producing to its
fullest capacities, its is able to take necessary steps to do so. The management orders
extra supplies of raw materials, engages more laborers and buys additional machinery for
producing the extra quantities. Also, management is able to budget for its future
initiatives.

Departmental Accounting
Managerial accounting prepares reports for all individual functions and departments of
the organization. Each individual department contrasts its outflows and inflows of cash
during a set period. It also analyzes all its present and future expenditures. Each
department has different needs. The production department needs raw materials for
production; the marketing department would need to hire the services of advertising
agencies to design a campaign for the product; and the information technology
department may need an additional mainframe computer. Managerial accounting
documents the costs for each department and then collates it to show the expenditures of
the organization as a whole.

Trend Analysis
Managerial accounting helps management devise plans and strategies for staying alive in
the market. The management studies and scrutinizes the moves of its competitors and
then formulates tactics to beat its competitors. If the management discovers that a
competitor is offering a buy-one-get-one-free scheme, it devises a different and more
lucrative scheme to lure even more customers. Also, management analyzes the prevailing
trends in the market, allowing it to best utilize its resources
About Ethics in Managerial Accounting
Ethics is an attitude on how we behave toward other human beings, whether our action is right or
wrong, and how our conduct should be judged to be good or bad. In general, ethics is about how
we should live and cope with our surroundings. In the context of managerial accounting, ethics
refers to the moral values studied and good ethical values practiced within the accounting
profession under the principles of transparency, competency, integrity and confidentiality. As
such, it helps prevent accountants from producing inaccurate financial reports for the business.

Role of Ethics
Ethics and professional conduct play important role to ensure public trust in financial
reporting and business practices. An accountant should act diligently and honestly
according to the required professional standard when providing his services. The Enron
scandal, which was revealed in October 2001, showed how mismanagement activities
had been practiced by the company for years -- and aided by accountants -- to deceive its
investors, which eventually led to its bankruptcy. The company was formed in 1985 as an
American energy supply company. Its chief executive officer was responsible for
manipulating the company's financial reports to hide billions of debts from failed deals
and projects, and declared that the company had made large profit from other investments
such as gas, electricty and water supplies to hide the actual fact that it were incurring
massive losses and moving toward bankruptcy. The investors were led to believe that the
company was making large profit through these investments. Arthur Anderson, one of the
Big Five accounting firms, had been pressured to assist them by providing fictitious audit
reports.

Impact on the Public Confidence

It is an accountant's role to provide reliable and truthful information on the financial
report, because the investors are relying on the report before making an investment
decision. Thus, investors are facing the risk by investing their money in the company.
Failure to provide reliable reports will adversely affect the investor's trust and confidence
in the company. As a consequence, the company loses its investor and business
opportunity while the accountant's reputation is at stake. Accountants must be transparent
and honest to gain credibility from the public.
 Dealing With Threats
In some cases, accountants may face threats when providing financial reports for their
clients. Threats such as having to provide fictitious figures in the financial statement to
avoid paying taxes or to obtain bank loan or government grant are examples of the ethical
dilemmas faced by accountants. It is imperative for an accountant to maintain high
standards of integrity and professional behavior when dealing with the threats. In the real
world, accountants may neglect their professionalism and honesty because of the risk that
they may lose business with their client.

Code of Ethics
The Ethics Committee of International Federation of Accountants has prepared a Code of
Ethics for Professional Accountants to combat unethical practices and promote adherence
to high-quality professional standards, as well as to strengthen the economy with the
guidance of accountants. The components of Code of Ethics introduced are Integrity,
Objectivity, Professional Competence and Due Care, Professional Behavior and
Confidentiality. The Sarbanes--Oxley Act of 2002 was enacted by the United States to
eliminate the possibility of more fraudulent practices by the accountants and enhance
public confidence. This Act was also enacted in reaction to the scandals involving Enron
and other companies.

How to Understand Managerial Accounting

Managerial accounting provides information to managers who direct and control internal
processes. It is different from financial accounting, which is the presentation of company
financial statements on a quarterly or annual basis for shareholders. Real-time data about the
impact of sales and pricing on a company's profitability are required for timely managerial
decisions. Business units and managers are evaluated based on management accounting
information. Understanding managerial accounting involves figuring out the nature and
application of the financial information used for decision making.
Instructions

Differentiate between financial and managerial accounting. Financial accounting is for

external consumption; it is mandatory for public companies and it must be precise.
Managerial accounting is for internal decision making; it must be timely, and it is not
mandatory.

Understand the impact of changes in sales and costs on profits. Managerial accounting
allows decision makers to determine how changes in sales volumes and costs affect
profitability. Costs include variable costs for labor and raw materials and fixed overhead
costs.

Assess the impact of a change in sales mix or unit sales price on profits. For example,
managers must be able to determine how a particular pricing strategy, including
promotional pricing or discounting, impacts sales and profitability. Managers must be
able to decide on product mix to maximize profits. They must also be able to evaluate the
impact of marketing campaigns on sales and profits, and adjust advertising strategies and
budgets accordingly.

Manage limited resources. Managerial accounting information allows managers to plan

and budget for resources and utilize existing resources efficiently. For example, managers
can use a product's contribution margin--revenue minus variable cost on a per unit basis--
to decide on a product mix for maximizing profits. Information on costs, sales trends and
profit margins may also help senior management decide whether it's more cost effective
to outsource the development and production of certain products or build them in-house.

Evaluate the financial performance of a department or business unit. Certain financial

accounting ratios such as contribution margin and return on investment--profit on
invested capital--can be used to determine the profitability of business units and the
effectiveness of managers. Managerial accounting can also help establish guidelines for
internal transfer pricing--prices for products and services transferred between internal
operating units--that maximizes enterprise profitability without penalizing a particular
division or manager.

Facilitate acquisition and divestiture decisions. Sales, profitability and efficiency data that
are part of managerial accounting can help managers decide whether to shutter or divest
unprofitable business units or make acquisitions. For example, to gain market share or
build market share in a new geographic area, a company can start from scratch or it can
acquire an existing business and build on their market share.
Managerial & Management Accounting
In modern economies, companies put into place adequate procedures to rein in inefficiencies in
manufacturing mechanisms, especially the way factory foremen manage production processes.
Strategic and financial considerations affect the procedures and methodologies that department
heads rely on to run efficient businesses. Managerial accounting and management accounting are
identical terms.

Definition
Management accounting, also called managerial or cost accounting, is the training ground for
professionals seeking to understand corporate activities, operationally speaking. This financial
discipline enables a company to identify areas with dysfunctional processes, helping segment
chiefs prevent cost overruns. Put more simply, cost accounting allows the firm to monitor its
operating charges and prevent excessive spending. Managerial accounting also provides
department heads the basis to make informed, sound business decisions.

Personnel Involvement
In the corporate setting, various professionals contribute their intellectual wealth to make
managerial accounting initiatives a success. These personnel include cost accountants,
accounting supervisors and budget analysts. Manufacturing foremen and production managers
also pitch in, ensuring that the firm steers clear of unprofitable processes. Avoiding unprofitable
mechanisms enable companies to enjoy fat margins and buoyant cash flow, a mark of financial
soundness in the business environment. Department heads and corporate leadership have the
final say in managerialaccounting initiatives.

Significance
Sound managerial accounting procedures tell investors and the public whether a company is
serious about tackling sluggish manufacturing operations. An indication of top leadership's
managerial dexterity is how senior executives handle day-to-day operating challenges. Another
vigil of senior executives' business acumen is the way they adapt corporate short-term
strategies to long-term goals. Cost-accounting efforts ease a firm's route to financial zenith,
making sure the company generates sufficient revenues to remain solvent in the long term.
 Tools
To monitor manufacturing expenses adeptly, companies rely on a wide variety of tools and
equipment. These include computer mainframes, warehouse management software and
process re-engineering applications. Other tools for tracking operating activities include
personnel scheduling software, defect-tracking software, enterprise resource planning programs
and computer-aided manufacturing software. Corporate production supervisors also use bar-
coding software, which tracks the number of manufacturing items and automatically triggers the
replenishment of supplies.

Strategic Importance
To improve a company's market share, top leadership often accepts to trade a decrease in
corporate profits for greater customer loyalty. In essence, reducing prices lowers the firm's net
income, but it lures clients from rivals. Lower prices, when coupled with top product quality,
don't go unnoticed in the marketplace. In fact, clients usually reward firms with affordable, high-
quality products by purchasing the goods and remaining loyal to the sellers. Managerial
accounting initiatives provide the occupational mindset that helps production supervisors rein in
waste and manufacture low-cost items.

The Principles of Managerial Accounting

Managerial accounting is management based around quantitative business
information.Managerial accounting refers to the use of accounting information to enable
managers of organizations to make good decisions. Managerial accounting is distinguished from
financial accounting because managerial accounting is intended primarily for people inside an
organization, whereas financial accounting is intended for use by people outside the
organization.

Control
The key principle of managerial accounting is control. Managers need objective information
about the enterprise they are managing in order to control it effectively. Managerial accounting
provides this information in the form of money spent, units produced, goods processed, or
changes in the number of customers. A fundamental principle of managerial accounting is the
feedback cycle between planning and control. Once a particular plan is implemented,
managerial accounting monitors the extent to which the plan achieves its stated targets and
goals. Managers have responsibility for adjusting the plan if it is not achieving its stated goals.
 Planning
Managers use managerial accounting to make decisions. To do this managers create many
different potential action plans that detail the costs and benefits of each future scenario. The
plans take shape in budgets. Managers select a particular plan, and hence a particular budget,
on the basis of which budget will most readily achieve the goals of their enterprise. So for
example, if your company has a goal of maximizing profit over a three-year period, then the
budget that projects the largest profit levels over the next three years will be chosen.

Motivation
A key principle of managerial accounting is motivation. By creating fixed and objective targets
for people within the enterprise, managerial accounting methods provide people with a clear
goal. Effective management is necessary to ensure that the incentives of employees align with
these enterprise-wide goals. Examples of these goals include reductions in the number of
accidents, reductions in the number of manufacturing flaws, increased reported customer
satisfaction, or lower product unit cost.

Cost Accounting
Cost accounting lies at the heart of managerial accounting and involves identifying a business'
cost of production. Managers need to know how much a particular product costs to produce to
determine whether it is worth producing more of it in the future. Cost accounting can also
identify areas where costs can be cut, thus saving money and increasing efficiency and
profitability.

The Use of Managerial Accounting

In modern economies, managerial accounting provides strategic ammunition to manufacturers,
enabling them to produce goods at low costs and gain market share. Also known as cost
accounting, this financial practice focuses on cost-control and budgeting methodologies that
companies rely on to stay competitive. Corporate leadership keeps a close eye on cost accounting
processes and procedures because they affect a company's long-term solvency.
Production Efficiency
Production efficiency consists of strategies, methodologies and techniques that a manufacturer
engineers to improve the rate at which it produces goods. Efficiency also enables manufacturing
companies to check products for defects, ensuring that semi-finished and completely finished
items conform to factory specifications and regulatory guidelines. Establishing an operating
environment that fosters factory efficiency is cardinal for manufacturing foremen, as it helps
companies gain market share and improve customer loyalty. Top leadership weighs in on
production efficiency discussions, ensuring plant supervisors' priorities align with the interests of
corporate directors and shareholders.

Cost Control
Cost control helps a manufacturer evaluate its existing cost structure and implement changes
necessary to spur profitability. These changes allow the manufacturer to set spending
thresholds in areas ranging from labor costs and manufacturing systems expenses to factory
safety charges. The order of the day is no longer to engage in mass-scale production, but to
ensure that product costs are low and consistent with market demand. In the corporate setting,
time and economics are on the side of cost-control supporters. Monitoring production costs has
a positive long-term impact because it sets efficiently managed manufacturing processes apart
from lethargic, unprofitable production mechanisms.

Budgeting Process
Budgeting goes hand-in-hand with cost control and production efficiency. This discipline
provides the appropriate operating framework to foster cost awareness, instilling in
manufacturing foremen and department heads the mindset necessary for long-term
profitability. Simply put, budgeting allows segment chiefs to set spending limits, which are
cardinal for long-term economic success. A typical budgeting process begins with top leadership
setting spending limits for the year and directing department heads to implement the limits in
business units. Segment chiefs then ensure employees perform tasks in accordance with senior
executives' recommendations. At the end of the year, corporate executives compare budget
amounts with actual expenses, determining how well middle-level management administered
corporate operations.

Personnel Involvement
In the global marketplace, various employees help companies run successful business, ensuring
that managerial accounting procedures are adequate and effective. Personnel include cost
accountants, financial reporting managers, budget controllers and directors of operations. To
execute duties satisfactorily, employees involved in management accounting rely on the tools of
the trade. These include financial analysis software, project management applications,
enterprise resource planning software and customer relationship management programs.
Managerial Accounting Checklist

Managerial accounting is about determining historical trends for a particular company and
projecting that information forward.

Managerial accounting is the way in which the people within a company view that company's
overall financial health. Financial accounting refers to reports sent to the media, investors and
other outsiders, while managerial accountants provide information used in-house as a way to
assess where the company is and what changes make sense going forward. Because managerial
accounting is internal only, the standards for reporting are not as stringent as for financial
accounting.

Future-Oriented
One of the key differences between financial and managerial accounting, the two primary types
of corporate accounting, is that managerial account statements and reports are future-focused.
These reports tend to use trending to determine what may happen with a company going
forward and what others should expect to see based on current circumstances.

Cost Classifications
A primary part of the job of managerial accounting is determining how various costs are
classified. Sometimes it makes sense to classify based on the relevance of each cost to the
future of the company. Other times determining the fixed or variable nature of the cost makes
more sense as an organizing tool. The role of managerial accounting is making these
classification determinations.

Departmental Information
Managerial accounting reports should include information about specific departments within a
company. While an external accounting report will include only summary or overview data, the
managerial report should have this information broken down by department to help make
decisions within the company.
Careers in Managerial Accounting
Managerial accountants work internally at most companies, assisting management in the
decision-making process. Management accountants provide reports for managers to evaluate
alternative courses of action and make recommendations regarding the financial impact of each
action. Management accountants work in a variety of capacities within an organization.

Cost Accountant
Cost accountants work closely with the production department, the purchasing department, the
payroll department and the general ledger accounting department. Working with the
production department, the cost accountant determines the quantity of raw materials necessary
for the production of one unit and the time needed per employee to produce each unit. Payroll
accounting supplies the cost accountant with wage rates for production employees. The cost
accountant works with the purchasing department to determine the cost for each raw material
purchased. Using information from the general ledger reports, the cost accountant identifies
overhead costs for the production facility. Using the raw material costs and quantities, the labor
time and rates and the production facility overhead costs, the cost accountant determines the
cost of each product.

Cost Analyst
Cost analysts review the product cost determined by the cost accountant and compare these
costs to the actual product costs. The cost analyst compares direct materials, direct labor and
overhead costs individually to identify large variances. The cost analyst investigates each
variance to determine the reason for the variance.

Budget Analyst
Budget analysts consult with department leaders to review historical budget amounts, discuss
current economic trends and determine dollar amounts to use in the next budget. After
completing the budget, the budget analyst creates monthly reports comparing actual expenses
to budgeted amounts. Variances between budget numbers and actual numbers are discussed
with the department leaders to explain the variance and revise the budget numbers if needed.

Fixed Asset Accountant

Fixed asset accountants manage the company's fixed assets and depreciation schedules. The
fixed asset accountant identifies every fixed asset in use throughout the company, decides
which depreciation method to use and records the monthly depreciation entries. The fixed asset
accountant also records the acquisition and disposal of additional assets.
Using Managerial Accounting Formulas
Managerial accounting, sometimes called cost accounting, is the study and analysis of financial
data as it applies to operational issues within a company. Accountants are not always managers,
but good managers should be aware of how the accounting in their company is being handled.
Managerial accounting formulas help managers assess the financial health of different areas in
their business. This information will help managers make informed business decisions.

Instructions
Things You'll Need:
 Financial statements Up-to-date financial information

Find a qualified finance person. Managers cannot do everything, and it is important to

have a qualified person to compile data for you. Although you can do your own
calculations, those formulas and results are useless if the beginning data is incomplete or
inaccurate.

Ask for regular financial summaries. If you are a small-business owner, you may need to
create these yourself, but it is important to review them on a set basis. Even small
businesses should review their financial status on a weekly basis. Review expenses,
revenue and any outstanding client payments. At the end of each fiscal month, ask for
traditional financial statements such as a balance sheet, income statement and statement
of cash flows as well as unbilled receivables and outstanding receivables. Larger
companies may have more reports that show profit and loss, backlog of work and revenue
and expenses by project or job.

Research your industry. Study the financial statements and calculations of publicly traded
companies in your industry. Look at what formulas they are using. Success in business is
often judged in comparison to other companies in the same industry.

Decide which formulas will help you the most. There are dozens of accounting formulas.
You do not need to use all of them, and what works in one type of business may not work
for another type of business.

Calculate return on equity (ROE). No matter what other formulas you use, ROE is
considered the most accurate measure of a company's bottom line. ROE = net income /
average stockholders or owner's equity. Average equity can be calculated as (beginning
equity + ending equity) divided by 2. High ROE signifies that a company is increasing in
value. The only way to know if your ROE is high is to compare it to other businesses in
your industry. ROE percentage will vary greatly between different industries.
 Calculate accounts receivable turnover, which is sometimes called days sales outstanding
or DSO. No matter how many sales you make, if clients are not paying, your business
will not thrive. This calculation is a two-step process. Average sales per day = total sales
divided by 365. Then take the average collection period = accounts receivable divided by
average sales per day. Again, compare your numbers with other companies in your
industry. An airplane manufacturer is going to have a much higher DSO than a pencil
maker.

Do a SWOT analysis based on your formulas. SWOT = Strengths, Weaknesses,

Opportunities and Threats. Look at where your company is doing well and where it needs
to improve. Make short-term and long-term action plans to fix the problems and maintain
the systems that work.

Managerial Uses of Accounting Information

Accounting is the language of business. It is used for all sorts of managerial purposes.
Businesses exist to generate revenue and net profit. Therefore, accounting is one of the single
most important functions that happen in the offices of a company or organization.

Profit or Loss
Accounting information provides a company with the financial details of its operations.
The data will show whether a company is making a profit or losing money.

Expand or Not
Accounting data can be used to determine whether to expand a department or division.
If several divisions are present and one is doing twice as well as the others, the
accounting will demonstrate this.

Make or Buy
A make/buy evaluation is one that is calculated to determine whether it is better to
purchase a part or raw material from an outside vendor or to make it in house.

Sell or Aquire
 Management teams use accounting information to determine when an outside offer to
buy their business is equitable. The same data can be analyzed to determine when it
would be wise to acquire a company within its supply chain or a direct competitor.

Ratio Analysis
Accounting data can be used to determine whether a company is liquid or cash poor.
Financial ratios use the financial statement figures to calculate the firm's ability to pay
short- and long-term debt.

What Type of Businesses Use Managerial Accounting?

Managerial accounting is a type of accounting that analyzes financial information of a business
and makes decisions based on the information. Most types of businesses use managerial
accounting to some extent.

Manufacturing Companies
Manufacturing businesses are among the most common types of businesses using
managerial accounting. Manufacturing companies use managerial accounting to
calculate cost of goods produced, calculate costs per piece, costs of overhead and
variable costs. Through the use of this type of accounting, manufacturers can establish
budgets, forecasts and plans.

Insurance Offices
Insurance companies often use managerial accounting to verify costs and find ways of
improving profitability. Much of the work done by these accountants is estimating
liabilities of the company and finding ways to reduce them. They also set up budgets for
future profitability.

Government Offices
Managerial accounting is used often in government offices for budget analysis.
Accountants examine and study financial information of all types of government offices
and determine ways to improve the budgets. They establish procedures to achieve the
budgets they make.
 Construction Companies
Managerial accounting is used in all forms of construction businesses and is often
referred to as cost accounting. Cost accountants analyze job details to determine the
revenue, expenses and overall profit from each job. This includes examining raw
materials, time and labor. Cost accountants working for construction companies look for
ways to improve profitability for jobs. They also work on budgets for upcoming jobs.

Financial Institutions
All forms of financial institutions hire workers to perform managerial accounting duties.
For financial institutions, managerial accountants study financial records of banks to find
ways to increase overall revenue. Managerial accountants analyze revenues from loans
and determine ways to increase them. They also work on budgets and forecasting and
plan ways to decrease risk of loans and increase interest revenue.

What Are the Benefits of Managerial Accounting?

Companies use managerial accounting for planning their day-to-day operations. This form of
accounting is very different from financial accounting, which prepares reports annually.
Management accounting is always for the internal use of the company. It prepares reports for
departmental managers. Generally, these reports show the amount of sales of the company, the
profits it realized, its customer orders and levels of inventories, work in progress and accounts
payable and receivable.

Managerial accounting makes extensive use of graphs, charts and statistical tools.

Measuring Performance Levels

Managerial accounting enables managers to contrast their actual levels of productivity with the
planned levels. Here, the manager first sets targets for the department and his subordinates to
be achieved in the coming days and weeks. At the end of the target period, the manager
evaluates whether the set targets were attained. In case, the targets were underachieved, the
manager then comes up with a plan to make necessary changes. Sometimes, the resources may
not be employed in the most productive manner, and this could have caused the aberration.
Sometimes, the mangers may have set unattainable and unrealistic targets. By reviewing
management accounts, the manager then sets realistic goals and targets.
 Analyzing Costs
Management accounting enables accountants to take stock of all the costs involved in the
production processes. Companies have to incur costs of raw materials, labor, rent of the
premises, electricity costs, transportation costs and costs for various supplies before they come
up with the finished product. With management accounting, the accountant analyzes the costs
involved at every step and its relative proportion to the total costs. Also, the management is
able to plan ahead for the future and budget its expenses accordingly. The company may want
to diversify its product range and hence would need additional resources. With management
accounting, the company budgets for the expansion.

Inefficiencies Rectified
Management accounting highlights the highs and lows in the company's performance. Only the
inefficiencies in performance immediately get highlighted. The company is able to promptly take
corrective action. If the management finds out that its laborers are not being utilized to their
fullest capacities and potential, it takes remedial measures. The company may either increase its
levels of production or lay off the unrequited laborers. This way the company is able to curb its
expenditure on unnecessary wages.

Market Analysis
With management accounting, the company scrutinizes the market opportunities well. If it finds
that a competitor is grabbing all the customers by cutting his prices, it takes measures to win
back its customers. It may also offer further price cuts or a new feature in the product that
makes it superlative to the competitor's offering.

About Managerial Accounting

About Managerial Accounting

Managerial accounting is a branch of accounting designed to structure the financial obligations

of managing a business. Managerial accounting identifies the financial information of a business,
and processes it for the success of the company. Through measurement, analysis, communication
and interpretation of its financial status, managerial accounting keeps a business on track and in
focus of its financial goals.
History
Managerial accounting went through a transformation in the late 1980s, to reflect the ever-
changing business environment. Managerial accounting procedures were traditionally variance
analysis, which contrasted the amount of money budgeted to the actual amount of product
sold. This excluded the other factors that new and dynamic cost accounting method addressed.
Cost accounting actually plans a budget for the company, analyzing the use of its funds on
different levels, taking into account methods of increasing the company's profitability while
decreasing expenses.

Features
Managerial Accounting

Managerial accounting performs several tasks that aid in managing the finances of a business. It
provides and tracks the costs of a business's services and production outcomes. This information
is useful in determining the selling value of a product, in comparison to the company's overall
financial needs.
Managerial accounting also sets budgets for businesses, as well as provide reports of the
company's performance. These reports compare budget amounts to actual outcomes, providing
the company with valuable variance results for future budgets and planning. Managerial
accounting also focuses on inventory data, such as capacity logs, sales back logs and revenue
from all of the company's services and products.

Function
Managerial accounting is an accounting field that covers a very broad spectrum of managerial
services. It provides analysis of cost and cost benefit, rate and volume, variance, cost-volume-
profit, client profitability, buy versus lease and life cycle cost. Managerial accounting also
functions as a source for business metrics development and capital budgeting.
It also provides comparisons between geographic and industry or client segment reporting, as
well as forecasts of sales and overall finances. Product profitability and price modeling are
valuable insights offered by managerial accounting, which affords companies the foresight to
venture into new business.
Capital and annual budgeting, cost and resource allocation and utilization, and sales
management scorecards are other ways that managerial accounting works to manage the
finances of a company. Managerial accounting additionally offers strategic management advice
and planning, as well as internal financial communication and presentation, to provide a
comprehensive way of maintaining the accounting requirements of businesses, companies and
corporations.
 Considerations
The branch of managerial accounting was specifically designed to provide insider resources and
support in managing a company's financial assets and decision-making process. It caters to the
needs of management, as they examine the financial structure of their company, to aim for
consistent positive outcomes in production and profit.
This sets managerial accounting apart from financial accounting, as its own field, because it is
designed for the management needs within a company, and it provides the tools and resources
for that capability. Financial accounting, on the other hand, is designed for the financial matters
that are external to a company. This is usually the information that is valuable to a company's
creditors or stockholders.

Effects
As a dynamic approach to accounting procedures for business management, managerial
accounting aims to manage the financial assets and outcomes of a business. It further processes
this information to provide management with the ability to make financially informed decisions
in managing the overall business. It helps to plan and develop business activities, and formulate
strategies for the future success of the business.
Managerial accounting safeguards the assets of the business by keeping the eyes of the business
on its acquisitions through financial reporting. It optimizes its resources, and is an industry
standard for any business seeking long-term success in the marketplace.

MANAGERIAL ACCOUNTING THEORY

Professionals within an organization who perform the managerial accounting function generally
support two primary purposes. First of all, they generate routine reports containing information
regarding cost control and the planning and controlling of operations. Second, managerial
accountants produce special reports for managers that are used for strategic and tactical decisions
on matters such as pricing products or services, choosing which products to emphasize or de-
emphasize, investing in equipment, and formulating overall policies and long-range planning.

Managerial accounting activities include some or all of the following: recognizing and evaluating
transactions and economic events; quantifying and estimating the value of those events;
recording and classifying appropriate transactions and events; and analyzing the reasons for, and
relationships between, the transactions and events. Managerial accountants also assist decision
makers who use the information they generate, and evaluate the implications of past and future
events on proposed plans or decisions. They also work to ensure the integrity of the information
that they produce and strive to implement a system of reporting that contributes to the effective
measurement of management's performance.
MANAGERIAL ACCOUNTING
APPLICATION
The practical role of managerial accounting is to increase knowledge within an organization and
therefore reduce the risk associated with making decisions. Accountants prepare reports on the
cost of producing goods, expenditures related to employee training programs, and the cost of
marketing programs, among other activities. These reports are used by managers to measure the
difference, or "variance," between what they planned and what they actually accomplished, or to
compare performance to other benchmarks.

For example, an assembly line supervisor might be interested in finding out how efficient his/her
line is in comparison to those of fellow supervisors, or compared to productivity in a previous
time period. An accounting report showing inventory waste, average hourly labor costs, and
overall per-unit costs, among other statistics, might help the supervisor and superiors to identify
and correct inefficiencies. A detailed report might evaluate the assembly line data and estimate
trends and the long-term effects of those trends on the overall profitability of the organization.

As another example, a product manager for a line of hair care products at a corporation that
manufactured beauty aids would probably want to know how much overhead each of the
products is consuming. A report that breaks down the amount of overhead attributable to each
product might help the manager better determine the profitability of each item in the line of
goods and to find out if the sales and profit goals for each item are being met. For instance, a
certain type of shampoo may be selling very well and generating large amounts of cash flow.
However, a close accounting of that product's actual costs within the organization may reveal
that its contribution to overall profits significantly lags that of other offerings in the hair care
line. Armed with that information, the product manager might elect to adjust marketing
expenditures to emphasize more profitable items, or to concentrate on reducing expenses related
to the shampoo.

Because of the need for detailed information about specific operations within a company,
management accounting reports are typically much more in-depth than traditional financial
accounting reports, such as balance sheet ratios and net income calculations. Most managerial
reports also differ from financial reports in their frequency. Many internal reports, in fact, are
generated monthly, weekly, or even daily in the case of information such as cash receipts and
disbursements. Despite their emphasis on detail, a critical characteristic of most managerial
accounting reports is that they are presented in summary format. Managers can read the
summaries, efficiently identify possible problem areas, and then examine the details within those
areas to determine a course of action.
PLANNING AND CONTROLLING
In the examples described previously, just as in most managerial accounting applications,
information produced for managers is used to make decisions about the future and to judge the
effectiveness of past decisions and actions. In managerial accounting, the process of setting
goals, determining resource requirements, and devising a means of achieving goals is referred to
as "planning." Monitoring financial results and measuring the outcome of planning processes
within the enterprise is called "controlling." The person in charge of an entity's accounting
department is usually called the "controller." The controller generally plays a key role in both
planning and controlling endeavors throughout the organization.

The plans of management are formally communicated as budgets, and the term "budgeting"
typically refers to management planning. The controller oversees the development of budgets by
the accounting department, usually on annual basis. Budgets are commonly prepared not only for
the overall organization, but also for divisions and departments within a company or institution.
Budgets are important to the goal-setting function of an organization because they express the
wishes and objectives of management in specific, tangible, quantitative terms.

Once a company's plans, or budgets, have been established, managerial accountants begin
gathering information generated by the organization that indicates whether or not the company is
achieving its goals. The accounting department presents its findings in the form of performance
reports tailored for individual executives or departments. The detailed performance reports
essentially compare budgets with actual results for a given time period, allowing managers to
identify problem areas. For instance, a company's store managers may utilize data such as
inventory levels and sales volumes to direct advertising and promotional programs.

Besides producing routine reports, management accountants also create special reports for other
managers that help them to make decisions about proposed projects or problems that arise.
Special reports are often created to analyze the relationship between costs and benefits related to
different alternatives in the decision-making process. For instance, if a company's competitor
drops its prices, management may ask the accounting department to produce a report comparing
possible competitive responses, such as lowering prices, increasing advertising, or even changing
its product or service. Such reports often involve forecasting as well as the collection of outside
information.

COST INFORMATION
Information gathered by cost accounting methods within an organization make up most of the
detailed data used to create managerial accounting reports (and financial accounting reports).
Understanding the costs associated with producing goods and services is vital to the decision-
making process because that comprehension can help place a measurable value on the results of
a company's individual decisions.
Four basic cost accounting activities that support the managerial accounting function are

1. cost determination, which involves determining the actual cost of a product or an activity,
such as marketing;
2. cost recording, whereby costs are recorded in journals and ledgers;
3. cost analyzing, which refers to accountants and managers analyzing the data to help solve
problems and make plans; and
4. cost reporting, which entails showing the costs in detail, including showing how the costs
were measured, what characteristics the costs have, and what the costs actually mean and
how they should be interpreted.

NEW ROLES
Significant advances in automating routine transaction-related accounting tasks, combined with a
strong corporate emphasis on value creation, have signaled new directions for managerial
accounting. This trend had been building since the 1980s and accelerated in the mid-1990s. The
thrust of the changes have been to make management accountants strategic partners and analysts
in management decision making, rather than simply suppliers of data. Many companies now
expect their managerial accounting staff to assist in developing strategies to enhance shareholder
wealth and to participate on cross-functional teams with managers from operating departments
throughout the organization, among other things. If the old analogy was supplying endless data
for management to sift through, the new analogy has been providing value-added information
that is directly to the point and suggests options that management might not otherwise have
considered. Indeed, at some companies the work of management accountants has increasingly
been labeled "finance" rather than "accounting" to suggest a broader set of skills and
expectations.

To facilitate this increasingly interactive role, some observers of the profession believe that
management accountants will need broader business underpinnings in their academic and
professional background. This means studying a wider array of management topics in school, but
also gaining handson knowledge of their companies' operating units and competitive climate in
order to tailor accounting information to narrowly defined needs.

A related trend has been redesigning finance and accounting departments themselves to reduce
costs and make all of their operations more efficient and timely. Accountants are expected to
take the lead in demonstrating the practices of lean management and continuous improvement.

PROFESSIONAL GROUPS AND

DESIGNATIONS
Numerous professional groups and designations exist for accountants. Chief among the
professional designations for management accounts is the Certified Management Accountant
designation, offered by the Institute of Management Accountants (formerly the National
Association of Accountants). The CMA is the management accounting equivalent of the
Certified Public Accountant (CPA) designation. Accountants earn the certificate after passing a
two-and-one-half-day, five-part examination, and by meeting certain accounting experience
requirements. CM As early in their careers often hold staff and supervisory positions, while more
experienced CMAs serve as controllers, chief financial officers, or in other executive financial
positions.

One of former NAA's objectives in establishing the CMA designation was to increase the
recognition of management accounting as a professional discipline with an identifiable,
underlying body of knowledge, and to outline a course of study by which that knowledge could
be attained. Among other goals, the designation helps employers, educators, and students by
establishing objective measurements of an individual's knowledge and competence in the
management accounting field. The NAA has also promulgated complementary ethical standards
related to competence, confidentiality, integrity, and objectivity in the management accounting
process.