Managerial Accounting Meaning, Pillars, and Types

What Is Managerial Accounting?

Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization’s goals.

Managerial accounting differs from financial accounting because its purpose is to assist internal users in making well-informed business decisions.

Key Takeaways

• Managerial accounting presents financial information for internal purposes and is used by management in making key business decisions.
• Techniques used by managerial accountants are not dictated by accounting standards.
• Managerial accounting data can be modified to meet the specific needs of its end-users.
• Managerial accounting includes product costing, budgeting, forecasting, and financial analysis.
• This differs from financial accounting, which produces official financial statements for public consumption.

How Managerial Accounting Works

Managerial accounting aims to improve the quality of information delivered to management about business operation metrics. Managerial accountants use information regarding the cost and sales revenue of goods and services generated by the company. Cost accounting is a subset of managerial accounting that focuses on capturing a company’s total costs of production by assessing the variable and fixed costs of each step of production. It allows businesses to identify and reduce unnecessary spending and maximize profits.

The pillars of managerial accounting are planning, decision-making, and controlling. Additionally, forecasting and performance tracking are key components. Through these areas of focus, managerial accountants provide information to help companies and departments.

Managerial Accounting vs. Financial Accounting

The key difference between managerial accounting and financial accounting relates to the intended users of the information. Managerial accounting information assists managers within the organization in making well-informed business decisions, while financial accounting provides financial information to parties outside the organization.

Financial accounting must conform to certain standards, such as generally accepted accounting principles (GAAP). On the other hand, managerial accounting can be modified to meet the needs of its intended users. This flexibility allows for customization based on specific needs.

Note

Managerial accounting does not need to follow GAAP standards because it is used for internal purposes and not for external reports.

Types of Managerial Accounting

Product Costing and Valuation

Product costing determines the total costs involved in the production of a good or service. Cost accounting measures and identifies those costs, including variable, fixed, direct, or indirect costs. Managerial accountants calculate and allocate overhead charges to assess the full expense related to product production. Marginal costing analyzes the impact on product cost by adding one additional unit into production. These analyses help with short-term economic decisions.

Cash Flow Analysis

Managerial accountants perform cash flow analysis to determine the cash impact of business decisions. They implement strategies to optimize cash flow and ensure the company has enough liquid assets to cover short-term obligations.

Inventory Turnover Analysis

Inventory turnover calculates how many times a company has sold and replaced inventory within a given time period. This analysis assists businesses in making decisions on pricing, manufacturing, marketing, and purchasing new inventory.

Constraint Analysis

Managerial accounting involves reviewing constraints within a production line or sales process. Accountants help determine bottlenecks and calculate the impact on revenue, profit, and cash flow. This information allows managers to implement changes and improve efficiencies.

Financial Leverage Metrics

Through balance sheet analysis, managerial accountants provide management with tools to study a company’s debt and equity mix. Performance measures such as return on equity and return on invested capital help identify key information about borrowed capital.

Accounts Receivable (AR) Management

Managerial accountants review outstanding receivables to indicate credit risks and make appropriate credit decisions.

Budgeting, Trend Analysis, and Forecasting

Performance reports and budgets allow managers to make appropriate changes based on budget-to-actual variances. Capital expenditure decisions are evaluated using metrics such as net present value and internal rate of return. Trend analysis and forecasting help anticipate future financial information.

Is Financial Accounting the Same As Managerial Accounting?

Financial accounting prepares and presents official financial information for external use, while managerial accounting describes and measures internally tracked financial information.

Do Managerial Accountants Need to Follow GAAP?

No, managerial accountants are not legally obligated to follow GAAP because the documents they produce focus on internal company metrics.

What Types of Information Does Managerial Accounting Compute?

Managerial accounting tracks and crafts spending budgets, reduces costs, projects sales figures, and manages cash flows, among other tasks.

The Bottom Line

Managerial accounting is important for drafting accurate financial statements for internal use and crafting a company’s long-term strategy. Without good managerial accounting, corporate leadership can struggle to make appropriate choices or misunderstand the firm’s true financial picture. Managerial accounting documents are not official and do not have to conform to GAAP, allowing for a variety of internal uses.