Managerial Accounting - An Overview
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..
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
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
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.
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
TOPICS TO BE COVERED / COVERED
- overview - this hub
- Basic Cost Concepts
- Costing Systems - Job costing
- Costing Systems - Process costing
- Costing Systems- ABC
- Activity Analysis, cost behavior and cost prediction
- Cost Volume Profit Analysis
- Profit Planning
- Standard Costing
- Flexible Budgeting
- Responsibility Accounting
- Investment Centre and Transfer Prices
- Decision Making - Relevant Costs and Benefits
- Target Costing and Cost Analysis for decision making
- Capital Expenditure Decision
- Absorption Costing, Variable and Throughput Costing
- 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.