Managerial Accounting: Key Techniques and Decision-Making Tools

What is Managerial Accounting?

Managerial accounting (also known as cost accounting or management accounting) is a branch of accounting concerned with the identification, measurement, analysis, and interpretation of accounting information. Managerial accounting helps company management make informed operational and business decisions.

What is the Main Focus of Managerial Accounting?

Managerial accounting focuses on internal reporting to aid decision-making. Managerial accountants need to analyze various events and business operations to translate data into useful information that can be leveraged by the company’s management in its decision-making process. Managerial accountants aim to provide detailed information regarding the company’s operations by analyzing areas like product lines, cost accounting, operating activities, and facilities.

Financial accounting and managerial accounting are not the same. Whereas managerial accountants focus on internal decision-making, financial accountants prepare the company’s financial statements and financial reports according to Generally Accepted Accounting Principles (GAAP) for external stakeholders, such as investors and lenders. Since managerial accounting is used internally, GAAP does not apply.

What are the Three Main Functions of Managerial Accounting?

The three main functions of managerial accounting are:

1. Planning: Managerial accounting supports the planning process by providing financial and non-financial information that helps management set objectives, develop strategies, and create budgets. This function involves forecasting future financial performance, setting targets, and allocating resources to achieve organizational goals.
2. Controlling: Managerial accounting plays a key role in the control function by monitoring and analyzing the organization’s performance against the established plans and budgets. This includes identifying variances between actual results and budgeted figures, analyzing the reasons for these variances, and taking corrective actions to ensure that the organization stays on track to meet its goals.
3. Decision Making: Managerial accounting aids in decision-making by providing relevant financial data and analysis to support management in making informed choices. Managerial accounts can perform trend analysis and forecasting, evaluating different business scenarios, assessing the profitability of products or services, determining the cost-effectiveness of various options, and supporting strategic decisions such as pricing, investment, and production planning.

Managerial Accounting Techniques

In order to achieve its goals, managerial accounting relies on a variety of different techniques, including the following:

1. Margin Analysis

Margin analysis is primarily concerned with the incremental benefits of optimizing production. Margin analysis is one of the most fundamental and essential techniques in managerial accounting. It includes the calculation of the breakeven point that determines the optimal sales mix for the company’s products.

2. Constraint Analysis

The analysis of the production lines of a business identifies principal bottlenecks, the inefficiencies created by these bottlenecks, and their impact on the company’s ability to generate revenues and profits.

3. Capital Budgeting

Capital budgeting is concerned with the analysis of information required to make the necessary decisions related to capital expenditures. In capital budgeting analysis, managerial accountants may calculate the net present value (NPV) and the internal rate of return (IRR) to help managers decide on new capital budgeting decisions.

4. Inventory Valuation and Product Costing

Inventory valuation involves the identification and analysis of the actual costs associated with the company’s products and inventory. The process generally implies the calculation and allocation of overhead charges, as well as the assessment of the direct costs related to the cost of goods sold (COGS).

As part of its role in costs, the managerial accounting team may use a technique known as activity-based costing to properly assign costs to a product. Activity-based costing is a way of specifically allocating costs based on different “activities” that actually contribute to overhead costs.

5. Trend Analysis and Forecasting

Trend analysis and forecasting is primarily concerned with the identification of patterns and trends of product costs, as well as with the recognition of unusual variances from the forecasted values and the reasons for such variances.

Managerial Accounting vs Financial Planning & Analysis (FP&A)

There is usually a bit of overlap between managerial accounting functions and FP&A functions, especially depending on the company. However, at a high level, the FP&A team is generally more focused on aligning the budgeting and forecasting process with a company’s overall business strategy. In contrast, managerial accounting tends to be more backwards looking and focused on historical data, as well as analyzing costs.

Below are some differences between the two functions, but this can vary by company:

Decision Making

• The managerial accounting team generates detailed reports on costs, product profitability, and operational efficiency. These internal reports are crucial for day-to-day operational decisions.
• The FP&A uses insights from these internal reports to recommend strategic actions, primarily around financial planning and resource allocation. This helps in setting realistic budgets and forecasts that align with operational capabilities, business objectives, and overall company strategy.

Performance Evaluation

• Managerial accounting involves the analysis of business performance through various key metrics, which are often developed using cost accounting information and calculations.
• FP&A professionals use this analysis to assess whether strategic and operational goals are being met within the budgetary confines. This can lead to revisions in financial forecasts and adjustments in resource allocation.

Integration with Strategic Objectives

• Both management accounting and FP&A are critically important for the strategic objectives of an organization. Again, depending on the organization, management accounting primarily focuses on operational alignment with strategic goals, while FP&A primarily focuses on the financial alignment.
• Effective management accounting ensures that every business unit operates efficiently, while the FP&A team monitors the budget impact and support of the company’s strategic plan.

Additional Resources

• Accounting Cycle
• Accounting for Inventory
• Capital Expenditures
• Three Financial Statements
• See all accounting resources