The functions of managerial accounting
/Managerial accounting involves collecting, analyzing, and reporting information about the operations and finances of a business. These reports are generally directed to the managers of a business, rather than to any external entities, such as shareholders or lenders. The functions of managerial accounting include the following:
Margin analysis. Determining the amount of profit or cash flow that a business generates from a specific product, product line, customer, store, or region.
Break even analysis. Calculating the mix of contribution margin and unit volume at which a business exactly breaks even, which is useful for determining price points for products and services.
Constraint analysis. Understanding where the primary bottlenecks are in a company, and how they impact the ability of the business to earn revenues and profits.
Target costing. Assisting in the design of new products by accumulating the costs of new designs, comparing them to target cost levels, and reporting this information to management.
Inventory valuation. Determining the direct costs of cost of goods sold and inventory items, as well as allocating overhead costs to these items.
Trend analysis. Reviewing the trend line of various costs incurred to see if there are any unusual variances from the long-term pattern, and reporting the reasons for these changes to management.
Transaction analysis. After spotting a variance through trend analysis, a person engaged in managerial accounting might dive deeper into the underlying information and examine individual transactions, in order to understand exactly what caused the variance. This information is then aggregated into a report to management.
Capital budgeting analysis. Examining proposals to acquire fixed assets, both to determine if they are needed, and what the appropriate form of financing may be with which to acquire them.
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Given the broad range of investigative and analysis activities noted above, we could state that managerial accountants act in an advisory role, to warn managers of impending issues and to direct their attention toward possibly profitable opportunities.
Managerial Accounting vs. Financial Accounting
The other type of accounting is financial accounting, which is concerned with the proper recordation and reporting of accounting transactions to be in compliance with the applicable accounting framework (such as Generally Accepted Accounting Principles or International Financial Reporting Standards). The primary output of financial accounting is the financial statements. There are several differences between managerial and financial accounting, which are as follows:
Intent of reports. Financial accounting reports are designed to report on the financial results, position, and cash flows of a business, while managerial accounting reports focus on spotting inefficiencies and highlighting opportunities for improvement.
Regulatory basis. There are many regulations pertaining to how financial accounting reports are supposed to be structured, while there are no such regulations governing managerial accounting reports.
Report distribution. Financial accounting reports are distributed both inside a business and to outside parties, while managerial accounting reports are intended solely for internal use.
Types of information used. Financial accounting is based entirely on historical accounting information, while managerial accounting uses historical information and also makes projections about future results.