What Is Managerial Accounting?

Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and

communicating financial information to managers for the pursuit of an organization's goals. It
varies from financial accounting because the intended purpose of managerial accounting is to
assist users internal to the company in making well-informed business decisions.

How Managerial Accounting Works

Managerial accounting encompasses many facets of accounting aimed at improving the quality
of information delivered to management about business operation metrics. Managerial
accountants use information relating to the cost and sales revenue of goods and services
generated by the company. Cost accounting is a large subset of managerial accounting that
specifically focuses on capturing a company's total costs of production by assessing the variable
costs of each step of production, as well as fixed costs. It allows businesses to identify and
reduce unnecessary spending and maximize profits.

Managerial Accounting vs. Financial Accounting

The key difference between managerial accounting and financial accounting relates to the
intended users of the information. Managerial accounting information is aimed at helping
managers within the organization make well-informed business decisions, while financial
accounting is aimed at providing financial information to parties outside the organization.

Financial accounting must conform to certain standards, such as generally accepted accounting
principles (GAAP). All publicly held companies are required to complete their financial
statements in accordance with GAAP as a requisite for maintaining their publicly traded status.
Most other companies in the U.S. conform to GAAP in order to meet debt covenants often
required by financial institutions offering lines of credit.

Because managerial accounting is not for external users, it can be modified to meet the needs of
its intended users. This may vary considerably by company or even by department within a
company. For example, managers in the production department may want to see their financial
information displayed as a percentage of units produced in the period. The HR department
manager may be interested in seeing a graph of salaries by employee over a period of time.
Managerial accounting is able to meet the needs of both departments by offering information in
whatever format is most beneficial to that specific need.

Types of Managerial Accounting

Product Costing and Valuation

Product costing deals with determining the total costs involved in the production of a good or
service. Costs may be broken down into subcategories, such as variable, fixed, direct, or indirect
costs. Cost accounting is used to measure and identify those costs, in addition to assigning
overhead to each type of product created by the company.
Managerial accountants calculate and allocate overhead charges to assess the full expense related
to the production of a good. The overhead expenses may be allocated based on the number of
goods produced or other activity drivers related to production, such as the square footage of the
facility. In conjunction with overhead costs, managerial accountants use direct costs to properly
value the cost of goods sold and inventory that may be in different stages of production.

Marginal costing (sometimes called cost-volume-profit analysis) is the impact on the cost of a

product by adding one additional unit into production. It is useful for short-term economic
decisions. The contribution margin of a specific product is its impact on the overall profit of the
company. Margin analysis flows into break-even analysis, which involves calculating the
contribution margin on the sales mix to determine the unit volume at which the business’s gross
sales equal total expenses. Break-even point analysis is useful for determining price points for
products and services.

Cash Flow Analysis

Managerial accountants perform cash flow analysis in order to determine the cash impact of
business decisions. Most companies record their financial information on the accrual basis of
accounting. Although accrual accounting provides a more accurate picture of a company's true
financial position, it also makes it harder to see the true cash impact of a single financial
transaction. A managerial accountant may implement working capital management strategies in
order to optimize cash flow and ensure the company has enough liquid assets to cover short-term
obligations.

When a managerial accountant performs cash flow analysis, he will consider the cash inflow or
outflow generated as a result of a specific business decision. For example, if a department
manager is considering purchasing a company vehicle, he may have the option to either buy the
vehicle outright or get a loan. A managerial accountant may run different scenarios by the
department manager depicting the cash outlay required to purchase outright upfront versus the
cash outlay over time with a loan at various interest rates.

Inventory Turnover Analysis

Inventory turnover is a calculation of how many times a company has sold and replaced
inventory in a given time period. Calculating inventory turnover can help businesses make better
decisions on pricing, manufacturing, marketing, and purchasing new inventory. A managerial
accountant may identify the carrying cost of inventory, which is the amount of expense a
company incurs to store unsold items. If the company is carrying an excessive amount of
inventory, there could be efficiency improvements made to reduce storage costs and free up cash
flow for other business purposes.

Constraint Analysis

Managerial accounting also involves reviewing the constraints within a production line or sales
process. Managerial accountants help determine where bottlenecks occur and calculate the
impact of these constraints on revenue, profit, and cash flow. Managers can then use this
information to implement changes and improve efficiencies in the production or sales process.
Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order to acquire assets and
increase its return on investments. Through balance sheet analysis, managerial accountants can
provide management with the tools they need to study the company's debt and equity mix in
order to put leverage to its most optimal use. Performance measures such as return on equity,
debt to equity, and return on invested capital help management identify key information about
borrowed capital, prior to relaying these statistics to outside sources. It is important for
management to review ratios and statistics regularly to be able to appropriately answer questions
from its board of directors, investors, and creditors.

Accounts Receivable (AR) Management

Appropriately managing accounts receivable (AR) can have positive effects on a company's
bottom line. An accounts receivable aging report categorizes AR invoices by the length of time
they have been outstanding. For example, an AR aging report may list all outstanding receivables
less than 30 days, 30 to 60 days, 60 to 90 days, and 90+ days. Through a review of outstanding
receivables, managerial accountants can indicate to appropriate department managers if certain
customers are becoming credit risks. If a customer routinely pays late, management may
reconsider doing any future business on credit with that customer.

Budgeting, Trend Analysis, and Forecasting

Budgets are extensively used as a quantitative expression of the company's plan of operation.
Managerial accountants utilize performance reports to note deviations of actual results from
budgets. The positive or negative deviations from a budget also referred to as budget-to-actual
variances, are analyzed in order to make appropriate changes going forward.

Managerial accountants analyze and relay information related to capital expenditure decisions.
This includes the use of standard capital budgeting metrics, such as net present value and internal
rate of return, to assist decision-makers on whether to embark on capital-intensive projects or
purchases. Managerial accounting involves examining proposals, deciding if the products or
services are needed, and finding the appropriate way to finance the purchase. It also outlines
payback periods so management is able to anticipate future economic benefits.

Managerial accounting also involves reviewing the trendline for certain expenses and
investigating unusual variances or deviations. It is important to review this information regularly
because expenses that vary considerably from what is typically expected are commonly
questioned during external financial audits. This field of accounting also utilizes previous period
information to calculate and project future financial information. This may include the use of
historical pricing, sales volumes, geographical locations, customer tendencies, or financial
information.
Management accounting skills refer to the ability of an individual to provide all required
information for improving decision-making processes in the form of documents and reports.
Management accounting skills enable managers to assess progress by evaluating the success or
failure of the efforts of a business in achieving its goals.

Unlike financial accounting skills, management accounting skills are required merely for internal
use and are focused on improving business processes, for instance, by way of regulating the
performance of a particular project, process, or department etc. The reports and documents
generated through utilization of these skills are never issued to any external parties and help in
identifying the changes that are required to be made in the company.

Why are management accounting skills important

Management accounting skills are commonly appreciated for their help in the future planning of
a business. The detailed reports produced as a result not only help managers in setting objectives
and planning for their achievement but also enables them to have a better sense of control over
the progress and success of an organization.

However, very few people understand the important role that management accounting skills can
play in the innumerable business decisions made on a daily basis. Whether you are required to
assess the need for an additional product line, consider the discontinuation of operations,
determine the optimum advertising efforts depending upon the profitability of customers, or
conduct a make or buy analysis, management accounting skills are the ultimate source of
sufficient data-driven input to all such critical decisions.

How to improve management accounting skills

Although the competencies and traits required for management accounting may vary depending
on the industry or company, following are some of the traits that generally require attention in
order to improve one’s management accounting skills:

 Be a team player. Collaboration is the key towards truly improving your management
accounting skills. You must be able to demonstrate your ability to work as an effective
team player, whether the team is a cross-functional one or within the same department.
This trait in individuals ensures that they earn the trust and respect of their colleagues,
and has access to multiple perspectives.
 Must have commercial awareness. Having the accounting knowledge is not enough.
For better management accounting skills you must acquire the general business skills as
well as the knowledge and understanding of the company as well as the industry it
operates in. knowing how a business is run and how it is influenced by the external
environment is very important for anyone who wishes to improve their management
accounting skills.
 Effective communication. As important as it is to gather data and use one’s skills and
knowledge to gain insights, the entire effort is meaningless if all that insightful
 information is not effectively conveyed to the intended audience. So the key data must be
clearly summarized to deliver information in an effective manner.

What Do Management Accountants Do?

If you like keeping track of a company's income and expenses but also want to hold a position
with significant responsibility and authority, management accounting could be the job for you.
This article teaches you about the profession of management accounting, touching on everything
from a management accountant's job responsibilities, skill set, and formal educational
requirements right down to the professional designations that can help you get ahead.

Management accountants work for public companies, private businesses, and government
agencies. These professionals may also be called cost accountants, managerial accountants,
industrial accountants, private accountants, or corporate accountants. Preparing data for use
within a company is one of the features that distinguishes a management accountant from other
types of accounting jobs such as public accounting.

You'll be recording and crunching numbers for internal review to help companies budget and
perform better. You may help the company choose and manage its investments along with other
company managers. Management accountants are risk managers, budgeters, planners, strategists,
and decision-makers. They do the work that helps the company's owner, manager, or board of
directors make decisions.

Management accountants often supervise lower-level accountants who handle basic accounting
tasks, such as recording income and expenses, tracking tax liabilities. This information is used to
prepare income statements, cash flow statements, and balance sheets, In smaller firms, you may
end up performing these tasks yourself. A management accountant performs analysis to forecast,
budget, and measure performance and plans, then presents them to senior management to assist
in operational decision making.

A management accountant may also identify trends and opportunities for improvement, analyze
and manage risk, arrange the funding and financing of operations, and monitor and enforce
compliance. They might also create and maintain a company's financial system and supervise its
bookkeepers and data processors. Management accountants may also have an area of expertise,
such as taxes or budgeting.

Skill Set

The most fundamental skills you need to be successful as a management accountant are an
aptitude for and interest in numbers, math, business and production processes, and helping to
manage a business, according to Steve Kuchen, executive vice president and chief financial
officer (CFO) of PacificHealth Laboratories.

Management accountants need a solid foundation in hard accounting skills, including knowledge
of basic accounting, generally accepted accounting principles (GAAP), and basic tax principles,
according to William F. Knese, former vice president of finance and administration and CFO of
Angus-Palm.

"Management accountants expand this base of skills to include knowledge of cost accounting
and, my favorite, finance tools such as discounted cash flow," Knese says. "Since management
accountants function inside a business, they need a good grounding in economics and the softer
skills such as communication and presentation skills, writing, persuasion, and interpersonal
relations skills."

You also need to be able to see your organization's big picture, says Ben Mulling, CFO of
TENTE Casters. "Management accounting is all about helping your users and the company make
the best decision possible given the information available to them," he says. "This includes
making decisions such as capital investment, operational structuring, and foundational risk
assessments."

Finally, you'll need leadership and management skills. You need to be persuasive and convincing
and be educated in both human capital management and financial capital management, according
to Lon Searle, former CFO of YESCO Franchising LLC.

"Presentation, education technology, and information technology skills are also critical. Less
critical but also important is a knowledge of social media, marketing, and sales," he says.

Formal Education

All four of the management accountants interviewed say that the minimum requirement for
becoming a management accountant is a bachelor's degree. Knese says a good undergraduate
education is important to develop the critical thinking skills you need in the field.

Mulling adds that while the typical management accountant possesses a bachelor's degree in
accounting or finance, your degree doesn't have to be in one of these subjects to obtain a
Certified Management Accountant (CMA) certification.