Managerial Accounting Concepts and Techniques

Managerial Accounting Defined

Managerial accounting is the process of identifying, analyzing, recording, and presenting financial information so that internal management can make informed business decisions concerning the future. The accounts show a detailed picture of how a company is spending its resources, the state of cash flow, and the level of debt and assets.

Planning and Budgeting

For managerial accounting, weekly and monthly budgets are used to determine what products to sell, how much of a product to sell, and the price that will provide a sufficient margin to cover costs.

Managerial accounting often includes the creation of a capital budget, which outlines the expenses and investments that may take place in the future. These may include acquisitions, new equipment or facilities, or investing in a long-term project.

Project Decision Making

The second concept in managerial accounting is projected decision making. Managers use managerial accounting reports, such as job costing, to weigh the costs and benefits of undertaking a particular project. These reports are vital to longer-term decision making for many companies, particularly small businesses that may face business decisions daily.

Performance Measurement

Performance measurement is used to compare the actual results of operations with projections made in the planning and budgeting phase. Measuring performance is crucial for benchmarking whereby a company can compare its performance with competitors.

Standard costing is a good example of this technique. Manufacturing firms use this type of costing because expenses are composed of direct materials, labor, and overheads.

The Bottom Line

Accurate and relevant accounts are crucial to management accounting and wise decision making by company leaders. Using managerial accounting methods, decision-makers can use the accounting data to make assumptions on the state of operations. For example, whether selling a certain product is profitable or whether another more profitable product should be sold in its place.