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Managerial Accounting - An Overview

Updated on January 24, 2012

LIBRARY

Just imagine a big room where books are being staked as and when received. If you need a book say “Managerial Accounting” by Ronald W. Hilton, you would have to check each and every book till you find it. Imagine the same room is converted into a proper library. To find the required book, you would consult the library catalog and note its Identification number. In a minute you would be able to locate the book. Further suppose, you need a statement showing your company’s expenditure on training including books during the past five years.

The big room resembles “Financial Accounting” which provides information in aggregate like books purchased and their costs during 2008. The library is like “Cost Accounting” whereby it would be possible to find out any book by name, subject, author or publishers. The statement is an example of Managerial Accounting as it combined data from various sources..

DEFINITIONS

Briefly speaking, financial accounting is the process of collecting, summarizing and reporting financial information of an entity according to established standards and principles.

Cost accounting classifies and accumulates cost data in term of products and processes in any form.

Managerial accounting gathers and reports information that helps the managers in decision making.

This article relates to Managerial Accounting as an introduction to the subject.

A formal definition of Managerial Accounting

The application of accounting techniques to provide information designed to assist all levels of management in planning and controlling the activities of the firm and in decision making. It involves compiling and interpreting accounting and statistical information in order to assist the management in its functions of maximizing efficiency, and achieving corporate goal.

Difference between Financial & Managerial Accounting

FINANCIAL ACCOUNTING 
MANAGERIAL ACCOUNTING
Must be accurate and timely 
Usually approximate but relevant and flexible
Is compulsory under the Company's Law 
Except for few specified industries, it is not mandatory 
Provides data for external users 
 Provides data for internal users
Is subject to GAAP
No rules & regulation to be followed
Relates to Past
Future Oriented 
Looks business as a whole
Focus on parts as well (Products, process, departments, personnel) 
Primarily stands by itself
Draws heavily from other disciplines such finance, economics and operations research 
Is an end in itself
Is a mean to en end 

Management Processes and contribution by Managerial Accounting

There are four fundamental processes for successfully carrying out day to day as well as long-term activities: (i) planning (ii) Directing, (iii) Controlling and (iv) decision making. The management accounting helps in the following way:

  • Providing information and guidelines to managers for preparation of the budgets of their departments.
  • Assisting in directing and controlling operational activities by providing timely feedback on the current operations as well as impact of past decisions.
  • Motivating managers and other employees towards organization goals.
  • Measuring performance of the sub-units, activities, managers and other personnel with the entity for rewards etc.
  • Helping managers to do SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) to know their standing now and in the long run.

BEHAVIORAL ASPECTS

In managerial accounting behavioral aspects are primary. It means that employees’ reaction must be considered before introducing any cost management system. If there is a strong reaction, the same may be done in phases. In any case, system should not be imposed upon the manager rather they may be persuaded to adopt the modern techniques so that their resulting action will yield a maximum benefit.

There are some behavioral issues which must be considered by those industries which are not required to maintain cost accounting system:

  • First is perception of the manager that their performance would be compared with the budget. So they would try to inflate budget to have cushions for uncertainty.
  • Secondly, they may postpone necessary repair and maintenance to remain within the budget.
  • Thirdly, they may not go for additional investment as the same would increase their asset-base and, other things remaining the same, would bring down ROI (Return on Investments), a measurement of success.

An integrated Cost Accounting System

A cost accounting system requires five parts that include: 1) an input measurement basis, 2) an inventory valuation method, 3) a cost accumulation method, 4) a cost flow assumption, and 5) a capability of recording inventory cost flows at certain intervals. These five parts and the alternatives under each part are summarized in a chart on the right hand side.

Please note that many possible cost accounting systems can be designed from the various combinations of the available alternatives, although not all of the alternatives are compatible. Selecting one part from each category provides a basis for developing an operational definition of a specific cost accounting system

PLAN AND CONTROL

CONCLUSION

  • Management Accountants have far advanced from their tradition role of preparation of financial and non-financial statements. The Management Accountants are now a members of management itself which take part in decisions making.
  • The managerial account information should be relevant, accurate, timely and cost effective.
  • Managerial accounting should adopt itself to the changing circumstances.

  • The management accounts are member of cross-functional teams which seeks ways and means for strengthening the position of its company or organization to boldly face the competitive environments and dynamic conditions in the industry.

 

Comments

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    • profile image

      Emmanuel Bropleh 

      6 years ago

      Thanks for making up tiime to preapre this great suff! Thumbs up!

    • hafeezrm profile imageAUTHOR

      hafeezrm 

      6 years ago from Pakistan

      Thanks for your comments.

    • profile image

      Ude Maryjoan 

      6 years ago

      Thanks a lot because your work actualy saved me heart ache

    • hafeezrm profile imageAUTHOR

      hafeezrm 

      8 years ago from Pakistan

      Managerial accounting provides information which form part of Management Information System (MIS).

      Management Accountant is a member of management team and is quite helpful when decisions are taken like (a) should we buy or lease, (ii) should we modernize or close down a factory or its division, (iii) should we drop a product or increase its sales promotion, (iv) should we expand or open up a plant at a new site. In human resource, the management accountant can help in setting up a reward system or golden handshake.

      It must be remembered that all major busines decisions are made after going through a lot of information about the factory, the industry and the country. Managerial Accounting makes its contribution towards providing necessary information either directly or through MIS.

      For detailed example, please go to:

      https://hubpages.com/education/Managerial-Accounti...

    • profile image

      Shaikha Al Suwaidi 

      8 years ago

      Thanks a lot its really useful information , but i have one question like what good examples of decisions where managerial accounting would help an organization ?

    • profile image

      Accounting firm 

      8 years ago

      More good informations thanks for helping me out. Always a pleasure to see information that is useful, thanks again

      http://www.kpmgaccountingfirm.info

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