managerial accounting examples

managerial accounting examples

The Importance of Managerial Accounting: A Comprehensive Guide with Real-World Examples

1. Introduction to Managerial Accounting

Managerial accounting is traditionally thought of as a decision-making tool that helps gain comprehensive knowledge and understanding of a company’s historical financial information, its present financial health, its current and future operational status, as well as a potentially sustainable future. However, the purpose of this book is to accomplish more than just explaining the importance of managerial accounting in the business world. Although thorough coverage of traditional topics, such as product and service costing, cost-volume-profit analysis, operational budgeting, and capital budgeting, is necessary for the book and for the course to be complete, this publication strives to offer something that is not found in the traditional managerial accounting textbook.

It is important to remember that managerial accounting is used primarily by individuals within an organization or company. In contrast, financial accounting is meant as a tool for the company’s external stakeholders. While this information is important to the accounting curriculum, most students in a class for managerial accounting are likely to become internal users. It is imperative that anyone headed for a career within a business organization, especially those going into the field of finance and accounting, understand the importance, the information, and the impact of managerial accounting.

2. Key Concepts and Techniques in Managerial Accounting

Differences between Managerial and Financial Accounting: Managerial Accounting is focused on sub-enterprises or sole proprietorships analyzing financial and nonfinancial information to determine how to make financial decisions. This often includes long-term choices of projects – such as capital investments – that consider the impact of opportunity cost. Results are used internally to help stakeholders assess how well the firm’s performance is and includes offering strategies and plans for improvement. In contrast, Financial Accounting involves examining past results to external stakeholders; this function also involves evaluating historical decisions and providing evidence for assessing future opportunities. Managerial Accounting differs from Financial Accounting in its focus and design of its reports, and unlike Financial Accounting, it is not subject to external audits and regulations from third parties. This means Managerial Accounting has more flexibility. The three primary roles of the Managerial Accounting functions are: Measure costs of production, products, and other processes; Analyze the information to solve daily and routine problems; and present this information to the people who can benefit from it: a firm’s decision makers (these leaders may be responsible for performance, evaluating opportunities, setting priorities, and setting strategies).

In this section, we will examine the differences between financial and managerial accounting, as well as the tools and methods used for making managerial decisions. These roles and systems are especially critical in a business’s early phase because with limited history and data, future business trends are less obvious and may only be observable using predictive analytics like managerial accounting.

3. Real-World Examples of Managerial Accounting in Action

First, the fleet’s youth froze resources previously spent on repairs and cancellations due to age. Replacements went from the oldest to the youngest planes. Older planes became less of a consideration because Southwest’s youthful fleet became more reliable day by day. Second, the company’s coherent positioning became, in terms of assets—aircraft, gates, and people—a deep and unique focus in operational resource allocation that niche and route segmentation by utilization of its mid-sized 737-500 and small 737-700 created. Finally, the cost priority of repairs declined due to Southwest’s core value of schedule reliability. When planes need repairs, all mechanical conditions become important as the failure becomes emergent. Easy replaceability mattered for the carrier, not many of the complex options available on larger 737 versions. Southwest concentrated staff, space in the hangars, and its great stockpiles of valuable 737 spares on a single plane available for outsized suffering in that little niche.

Southwest took the industry lead during the late 1900s by deploying the Boeing 737 exclusively as a way to save on capital costs of spares, maintenance personnel, and training. This strategy was a natural extension of the company’s “friendly costs” attitude. Over time, after halving the “less than two hour” turnaround time of its closest competitors with the “five planes, one-way” fixed schedule alone, these practices combined to permit simpler and more regular flight scheduling. So the company further mastered flexible scheduling, raised the convenience of its services to business-grade frequencies, and differentiated itself from its low-cost competitors with sophisticated and profitable business travel services. How did Southwest know it could expect maintenance on its planes to be so low that it could afford to concentrate all those staff, spares, and training on only one type of aircraft? Because the company had an excellent managerial accounting system. Squadrons A and B had the following data—aircraft deployment: Captive, Unique Configuration; aircraft size: Big, Small.

In this section, we discuss a selection of specific real-world situations in which managerial accounting is essential. We highlight companies such as Southwest Airlines, which use managerial accounting to make customers happy and earn profits. Often the flexibility they have to work with money from customers is just as important as money provided by investors. Another day, another bunch of accounting scandals. We read and hear about what went wrong, but the real question is how managers using high-quality accounting data can make sure things go right. Don’t just manage; manage with the help of management accounting professionals and management accounting data. All of these points emphasize a simple fact: with plenty of information at the fingertips of managers from the highest levels to the front line, the job of getting the right things done will be easier—and our bottom lines and stock prices will be better.

4. The Role of Managerial Accounting in Decision-Making

Making decisions in a firm is a daily occurrence. An architect may decide to reduce staff to lower costs or to use overtime to improve the quality of design. A supermarket owner may decide to invest in new check-out scanners to improve the waiting line or to switch to merchandising inventory. Or an unlimited number of decisions will have material and other companies each day. Many of these decisions involve internal information – the kind of detailed information that managers and other employees need to make the best decision. This is where managerial accounting comes into play. Managerial accounting provides tools and information for decision-making and control. By studying managerial accounting, you will be able to construct and understand the information used in decisions by firms – both large and small, profit-making and not-for-profit. With the information from this chapter and subsequent chapters in managerial accounting, you will be able to make informed choices that improve your own decisions and the decisions of others. You will also have some of the key knowledge needed to start and run your own successful business.

In this chapter, we will take a closer look at the role of managerial accounting in planning, decision-making, and control. By the end of this chapter, you will be able to explain the differences between managerial and financial accounting. You will understand the term cost behavior, and we will judge the impact of different management structures on the preparation of managerial accounting reports.

5. Advanced Topics and Emerging Trends in Managerial Accounting

Regardless of the nature of the employer or the reason a managerial accountant is available for the consultative/coaching role should be taken seriously. Mismanagement adversely affects everyone associated with the organization, and a willingness to guide management in solving problems can improve the level of management skill. Ethical accounting professionals are needed to both play this role and provide some kind of oversight in the way the management handles various business problems. As business events and business management practices evolve, managerial accounting is an evolving profession with numerous current trends and future opportunities. For example, advanced computer systems allow companies to collect tremendous amounts of data about any aspect of the business and to process these data, to perform intricate analyses and simulations using rapid, sophisticated computer systems.

The theme of ethics is extremely significant in any business field, including managerial accounting. There are different types of individuals with whom a managerial accountant may have an ethical responsibility – employees, other managers, top management, the board, customers, vendors, investors, other stakeholders, government agencies, auditors, and competitors. Confidentiality should be maintained with information obtained in the normal course of business, personnel issues, and negative facts about the company’s future prospects. Here are a few examples of actions to be taken in order to fulfill these responsibilities: (1) If information is the company’s accurate and complete official records, it is generally acceptable to disclose it to any individual who needs this information to do his or her work. For example, staff employees should be able to see production costs and sales staff should be able to see available stock in the warehouse. (2) It is not acceptable to create unauthorized points of access to accounting information systems. (3) Employees’ privacy should be protected.