Managerial Accounting Definition - Investopedia

Managerial accounting is the practice of analyzing and communicating financial data to managers, who use the information to make business decisions. CorporateFinance&Accounting Accounting WhatIsManagerialAccounting? Managerialaccountingisthepracticeofidentifying,measuring,analyzing,interpreting,andcommunicatingfinancialinformationtomanagersforthepursuitofanorganization'sgoals.Itvariesfromfinancialaccountingbecausetheintendedpurposeofmanagerialaccountingistoassistusersinternaltothecompanyinmakingwell-informedbusinessdecisions. 1:45 ManagerialAccounting HowManagerialAccountingWorks Managerialaccountingencompassesmanyfacetsofaccountingaimedatimprovingthequalityofinformationdeliveredtomanagementaboutbusinessoperationmetrics.Managerialaccountantsuseinformationrelatingtothecostandsalesrevenueofgoodsandservicesgeneratedbythecompany.Costaccountingisalargesubsetofmanagerialaccountingthatspecificallyfocusesoncapturingacompany'stotalcostsofproductionbyassessingthevariablecostsofeachstepofproduction,aswellasfixedcosts.Itallowsbusinessestoidentifyandreduceunnecessaryspendingandmaximizeprofits. Readmoreaboutthecommonconceptsandtechniquesofmanagerialaccounting. ManagerialAccountingvs.FinancialAccounting Thekeydifferencebetweenmanagerialaccountingandfinancialaccountingrelatestotheintendedusersoftheinformation.Managerialaccountinginformationisaimedathelpingmanagerswithintheorganizationmakewell-informedbusinessdecisions,whilefinancialaccountingisaimedatprovidingfinancialinformationtopartiesoutsidetheorganization. Financialaccountingmustconformtocertainstandards,suchasgenerallyacceptedaccountingprinciples (GAAP).AllpubliclyheldcompaniesarerequiredtocompletetheirfinancialstatementsinaccordancewithGAAPasarequisiteformaintainingtheirpubliclytradedstatus.MostothercompaniesintheU.S.conformtoGAAPinordertomeetdebtcovenantsoftenrequiredbyfinancialinstitutionsofferinglinesofcredit. Becausemanagerialaccountingisnotforexternalusers,itcanbemodifiedtomeettheneedsofitsintendedusers.Thismayvaryconsiderablybycompanyorevenbydepartmentwithinacompany.Forexample,managersintheproductiondepartmentmaywanttoseetheirfinancialinformationdisplayedasapercentageofunitsproducedintheperiod.TheHRdepartmentmanagermaybeinterestedinseeingagraphofsalariesbyemployeeoveraperiodoftime.Managerialaccountingisabletomeettheneedsofbothdepartmentsbyofferinginformationinwhateverformatismostbeneficialtothatspecificneed. KeyTakeaways Managerialaccountinginvolvesthepresentationoffinancialinformationforinternalpurposestobeusedbymanagementinmakingkeybusinessdecisions.Techniquesusedbymanagerialaccountantsarenotdictatedbyaccountingstandards,unlikefinancialaccounting.Thepresentationofmanagerialaccountingdatacanbemodifiedtomeetthespecificneedsofitsend-user.Managerialaccountingencompassesmanyfacetsofaccounting,includingproductcosting,budgeting,forecasting,andvariousfinancialanalysis. 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. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. FinancialAccountingFoundation."GAAPandPublicCompanies."AccessedAug.16,2021. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms WhatIsCostAccounting? Costaccountingisaformofmanagerialaccountingthataimstocaptureacompany'stotalcostofproductionbyassessingitsvariableandfixedcosts. more AccountingDefinition Accountingistheprocessofrecording,summarizing,analyzing,andreportingfinancialtransactionsofabusinesstooversightagencies,regulators,andtheIRS. more WhatIsCashFlow? Cashflowisthenetamountofcashandcashequivalentsbeingtransferredintoandoutofabusiness. more WhatIsWorkingCapitalManagement? Workingcapitalmanagementisastrategythatrequiresmonitoringacompany'scurrentassetsandliabilitiestoensureitsefficientoperation. more GeneralandAdministrativeExpense(G&A) Generalandadministrativeexpenses(G&A)areincurredintheday-to-dayoperationsofabusinessandmaynotbedirectlytiedtoaspecificfunction. more WhyYouShouldUseDaysSalesofInventory(DSI) Thedayssalesofinventory(DSI)givesinvestorsanideaofhowlongittakesacompanytoturnitsinventoryintosales. more PartnerLinks RelatedArticles FinancialStatements HowFinancialAccountingDiffersFromManagerialAccounting FinancialRatios HowtoCalculatetheInventoryTurnoverRatio FinancialStatements WhyDoShareholdersNeedFinancialStatements? Accounting Whenismanagerialaccountingappropriate? FinancialStatements TheThreeMajorFinancialStatements:HowThey'reInterconnected FundamentalAnalysis BalanceSheetvs.ProfitandLossStatement:What’stheDifference?