what is managerial accounting

what is managerial accounting

Understanding Managerial Accounting: A Comprehensive Guide

1. Introduction to Managerial Accounting

Efficient and effective managers must both organize and increase the output of operations. Some managers, particularly those involved in control and coordination activities, increase output by building economic and political barriers between the managers and the people working for or managing that operation while other managers prefer to improve the organization and its members. Remove these barriers and trust their employees to make good decisions that will make the organization more competitive. This book discussed a number of management control systems that range from the traditional hierarchical organizations of centralized decision making and control to flatter organizations that encourage more decentralized securities agency, stewardship, and related arguments in favor of corporate compensation plans to think and act like owners have generated lively debates about the costs and benefits of stock options compared to other forms of executive compensation. This book does cover an overview of managerial accounting and the cost accounting archives but it does focus more on information about managerial accounting.

The primary purpose of this chapter is to introduce managerial accounting in the context of solving real-world problems. Managers must make decisions and solve problems for their organizations. The managerial accounting tools and techniques described in this chapter are applied to help managers make better decisions on behalf of their organizations. The development and use of these tools are unique to the business field. Most of the finance and marketing tools used in this book have equivalent measures used in other fields such as economics, mathematics, and psychology. Accounting, like organizational behavior and organizational development, contains specialized tool kits that are used to improve organizational efficiency and effectiveness.

2. Key Concepts and Principles in Managerial Accounting

The Accounting Cycle is the process used to organize and analyze business transactions in order to make financial decisions. It can be broken down into steps: collecting and verifying source documents, analyzing each transaction, journalizing each transaction, posting the transaction to the accounts, preparing a trial balance, recording adjusting entries, preparing an adjusted trial balance, preparing financial statements, recording closing entries, and preparing a post-closing trial balance. Managerial accounting information is not useful to those who are unable to read or interpret managerial accounting reports. To determine if any reports should be changed, non-accounting managers often work with accountants to ensure that all accounting data is properly presented to external accounting parties.

In order to be successful, managerial accountants need to be able to differentiate between financial and managerial accounting. Managerial accounting information needs to be relevant and delivered in a timely, accurate, and useful manner. Managerial accountants must know how to compute product and period costs, differentiate between direct and indirect costs, establish entity goals, prepare and use budgets, and present and analyze managerial accounting information. In managerial accounting, decisions must be made by considering both financial and non-financial information. Managers will base decisions on the “total cost” of business activities and the benefits that are expected to be derived. The total cost includes not only financial benefits but non-financial benefits as well. Therefore, profitability, ethics, ethical decision making, and social responsibility must also be considered by managerial accountants. Accounting looks at the numbers, evaluation considers financial and non-financial.

3. Tools and Techniques Used in Managerial Accounting

Managerial accounting information is presented in both reports and figures. Reports, which are the final result of the terminal process of accounting, offer management different scenarios and options. The process of accounting shows the cost, revenues, and profit, which are associated with the responsibility of management. There may be cases in a company where staff members might get chances to pick the right responsibility estimates. These accounting data are used by specialists such as industrial engineers to adjust the rates accordingly.

Managerial accounting is based on the principles of cost accounting. This process involves gathering, organizing, and interpreting all totals of information in order to prepare the reports of the company. These tools and techniques of accounting provide important information to the management team regarding the ability of the company to meet its current and future obligations. When a company uses proper managerial accounting customs and methods, it can view its various segments, as well as the total company, in a far superior manner that is not possible with financial accounting.

Part 3 Tools and Techniques Used in Managerial Accounting

4. Role and Importance of Managerial Accounting in Decision-Making

In contrast, managerial accounting reports are prepared as per the needs of the business owners, which may include boards, management, lenders, regulatory authorities, etc. Managerial accounting reports are prepared as and when required. Consequently, the usefulness of managerial accounting reports can be quite varied. All managerial accounting reports may not be relevant to all users.

Financial accounting is oriented towards the preparation of general-purpose reports for a variety of external stakeholders, and the reporting period is usually a quarter or a year. While financial accounting provides reports to these external stakeholders, managerial accounting provides continuous information to the management. In the business sector, financial accounting statements are prepared strictly as per prescribed formats of accounting standards. Every listed firm prepares and publishes general-purpose financial statements on an annual basis.

Managers run the business and need desired information at regular intervals for effective decision-making. To operate well, managers should have good knowledge of the principles and practices of accounting, which will help them to interpret financial statements, judge the business performance, and take sound decisions. All these require the requisite accounting information like profit and loss account, the balance sheet, cash flows, fund flows, etc. As the business grows, managerial decisions become more complex and complicated. In several decision-making situations, the information and practices from financial accounting for external reporting purposes do not serve the desired objectives.

5. Ethical Considerations in Managerial Accounting

Accountants in managerial accounting face a variety of ethical considerations in their day-to-day activities. These considerations are not simple and can require accountants to know how to navigate conflicting interests of different clients and their employers. Although some of the considerations are similar between the professional accounting standards of the AICPA and IMA in business, not all the ethical guidelines from the professional world can be carried into the business accounting framework. However, accountants working in managerial accounting have some specialized tools such as standard setting and the COSO framework designed to protect well-being and help evaluate decisions that can lead to the long-term success of an organization.

When business decisions are based on inaccurate accounting information, there are serious financial repercussions for a business and its employees. These decisions can lead to bankruptcy, layoffs, or even criminal charges. The accountant’s role in the accounting system is crucial, and accountants must have well-developed ethical standards as a backing for their work. This chapter introduces some situations accountants in managerial accounting might face and ethical concepts from both the business and professional accounting fields. After reading this chapter, you will be able to understand the principles that guide accountants in business, know both the professional and business ethical considerations relevant to accounting, comprehend the differences between the two, and know how to apply concepts of sustainability and corporate social responsibility to business accounting.