Managerial accounting is the practice of using accounting information — from revenues to production inputs and outputs affecting the supply chain — internally, in support of organization-wide efficiency and for tracking the organization’s progress toward attaining its stated goals.
The basic function of managerial accounting is to help the management make decisions. There is no fixed structure or format for it.
What Is the Value Of Managerial Accounting?
While both managerial accountants and financial accountants may occasionally make use of the same data, the scope of managerial accounting is much wider. Managerial accounting supports a broad understanding of cost versus benefit. Managers faced with specific decisions may request information on any number of business operations to chart the best possible course of action.
Types of Managerial Accounting
- Product Costing and Valuation
Costs can be bifurcated into the variable, fixed, direct, or indirect costs. Cost accounting helps in measuring and identifying these costs as well as assigning overheads to each type of product or service. Product costing, thus, determines the total costs incurred in the production of a good or service.
Managerial accounting helps in calculating and allocating overhead charges to assess the expenses or costs related to the production of a good or service. The overhead expenses can be allocated on the basis of the number of goods produced, the number of hours run, the number of machine-hours, the square footage of the facility or any other activity drivers related to production. Managerial accounting also uses direct costs for the purpose of valuing the cost of goods sold and inventory. - Cash Flow Analysis
Cash flow analysis helps in determining the cash impact of business decisions. Most companies follow the accrual basis of accounting to record their financial information as it provides a more accurate picture of a company’s true financial position. However, it also makes it difficult to measure the true cash impact of a single financial transaction. By implementing working capital management strategies, one may optimize cash flow and ensure that the company has enough liquid assets to cover short-term obligations. While performing the cash flow analysis, one needs to consider the cash inflow or outflow generated as a result of a specific business decision. - Inventory Turnover Analysis
Inventory turnover involves a calculation of how many times the inventory has been sold and replaced in a given period of time. It helps businesses in making better decisions on pricing, manufacturing, marketing, and purchasing inventory. Inventory Turnover analysis also helps in identifying the carrying cost of inventory. The carrying cost of inventory is the amount of expense a company incurs to store unsold items. - Constraint Analysis
Reviewing the constraints within a production line or sales process is also a part of Managerial accounting. It involves determining where bottlenecks occur and calculating the impact of these constraints on revenue, profit, and cash flow. This information is useful to implement changes and improve efficiencies in the production or sales process. - Financial Leverage Metrics
Financial leverage refers to the use of borrowed funds in order to acquire assets and increase its return on investments. Through balance sheet analysis, the company’s debt and equity mix in order to put leverage to its most optimal use can be studied. Performance measures such as return on equity, debt to equity, and return on invested capital help the managers to identify key information about borrowed capital.