Management Accounting 101

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In any business, it is the responsibility of management to make the right decisions. The accounting department manages the “books” by studying the money that comes in and out of the business. 

Managerial accounting helps managers to understand the cost of their products. It can also help to identify where the profits are coming in and how to plan for growth. What is management accounting? This tutorial will cover the basics. 

To learn more, visit accountingformanagement.org.  This site offers a free online course in management and financial accounting. 

Concept and Definition

Management accounting is also known as cost or managerial accounting. Accountants use the information to identify financial trends. The costs they consider include:

  • Direct cost: prices traced to a specific product
  • Indirect cost: not readily determined
  • Materials-what is needed to make products
  • Labor- work needed to make products

These cost trends can help managers identify the most efficient ways to meet profit goals. Financial accounting is done yearly, but management accounting delivers monthly or weekly reports. The more frequently reports are created, the more responsive businesses can be in resolving issues that may be slowing growth.

Characteristics

Management accounting is crucial to the internal decision-making process of a business. It is a future-oriented perspective. Accountants analyze both the qualitative and quantitative data central to the organization. There is no fixed format, and accountants make reports weekly, monthly, or quarterly. 

Methods

There are four main steps of Managerial Accounting:

  1. Identification of quantitative and qualitative data as related to costs, expenses, and revenue.
  2. Analysis of data to determine the organization’s financial status
  3. Development of a report- putting together accurate and valuable information.
  4. Presentation of findings. Trends, variance analysis, and other data can also be helpful for management.

Management Accounting Techniques

Managerial accountants identify, measure, and interpret information needed for effective decision making. They use a variety of techniques during the process. 

Historical Cost 

Accountants gather the historical data to determine the cost of each project or service. 

Funds Flow Statements

Funds flow statements show accountants the financial status of the company. They identify where funds are coming from and how the company is using them.

Cost Analysis

There are often situations when the estimated cost and the actual cost of a product differ. Cost accounting compares the actual expenditure with the estimated costs. Managers can then work to solve any cost difference issues that are not in their favor. 

Margin Analysis 

Through margin analysis, accountants determine the breaking point for the ideal sales mix. 

Budgeting

Accountants assist managers with new capital budgeting decisions. There should be data points that highlight areas that need addressing in the next budget. 

Presentation 

Once data is collected and studied, management accounting presents the findings. An array of presentation tools are used to deliver clear and concise results.

 Presentations usually incorporate the following information: 

  • the amount of available cash, 
  • orders in hand
  • the state of accounts (payable and receivable)
  • inventory
  • sales revenue generated. 

Key Points

  • Managerial Accounting helps companies to make effective decisions. 
  • Management accountants present financial data throughout the year (weekly, monthly, bi-monthly). These aid with short term internal planning. 

In Summary 

Managerial accountants help businesses come up with plans and policies to reach and set targets. This role is essential to the success of any business.

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