Managerial accounting (also known as cost accounting or management accounting) is a branch of accounting that is concerned with the identification, measurement, analysis, and interpretation of accounting information so that it can be used to help managers make informed operational decisions.
Unlike financial accounting, which is primarily concentrated on the coordination and reporting of the company’s financial transactions to outsiders (e.g., investors, lenders), managerial accounting is focused on internal reporting to aid decision-making.
Managerial accountants need to analyze various events and operational metrics in order to translate data into useful information that can be leveraged by the company’s management in their decision-making process. They aim to provide detailed information regarding the company’s operations by analyzing each individual line of products, operating activity, facility, etc.
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 calculate the net present value (NPV) and the internal rate of return (IRR) to help managers to 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).
5. Trend analysis and forecasting
Trend analysis and forecasting are 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.