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What is 'Managerial Accounting'

Managerial accounting, also known as cost accounting, is the process of identifying, measuring, analyzing, interpreting, and communicating information to managers for the pursuit of an organization's goals. The key difference between managerial and financial accounting is managerial accounting information is aimed at helping managers within the organization make decisions, while financial accounting is aimed at providing information to parties outside the organization.

BREAKING DOWN 'Managerial Accounting'

Managerial accounting encompasses all fields of accounting aimed at informing management of business operation metrics. Managerial accountants use information relating to the costs of products or services purchased by the company. Budgets are also extensively used as a quantitative expression of the business’s plan of operation. Individuals in managerial accounting utilize performance reports to note deviations of actual results from budgets.

Margin Analysis

Managerial accounting handles margin analysis, which involves analyzing the incremental benefit attained by increased production.  Margin analysis flows into breakeven analysis, which involves calculating the contribution margin on the sales mix to determine the unit volume at which the business’s gross sales equal total expenditures. This information calculated by managerial accountants is useful for determining price points for products and services.

Constraint Analysis

Managerial accounting also manages constraints within a production line or sales process. Managerial accountants determine where principle bottlenecks occur and calculate the impact of these constraints on revenue, profit, and cash flow.

Capital Budgeting

Managerial accounting involves utilizing information related to capital expenditure decisions. Managerial accountants utilize standard capital budgeting metrics, such as net present value and internal rate of return, to assist decision makers on whether to embark on capital-intensive projects or purchases. Managerial accounting involves examining proposals, deciding if the products or services are needed, and finding the appropriate way to finance the purchase. It also outlines payback periods so management is able to anticipate future economic benefits.

Trend Analysis/Forecasting

Managerial accounting involves reviewing the trendline for certain costs and investigating unusual variances or deviations. This field of accounting also utilizes previous period information to calculate and project future financial information. This may include the use of historical pricing, sales volumes, geographical locations, customer tendencies, or financial information.

Product Costing/Valuation

Managerial accounting deals with determining the actual costs of products or services. Managerial accountants calculate and allocate overhead charges to assess the true expenses related to the production of a product. The overhead expenses may be allocated based on the quantity of goods produced or other drivers related to the production, such as the square foot of the facility. In conjunction with overhead costs, managerial accountants use direct costs to properly assess the cost of goods sold and inventory that may be in different stages of production.

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