What Is Managerial Accounting?

Broadly speaking, there exist two major types of accounting - financial and managerial. The financial statements and data pertaining to a company are understood and used by the outside world and managed very differently from each other. While outsiders like investors and creditors rely upon financial accounting statements for talking decisions related to investing in the company, insiders like the management use managerial accounting statements to forecast future developments of the company and base their decisions related to organizational management and control on such forecast. So, what is managerial accounting all about? Let's find out!

Definition of Managerial Accounting

Before we get down to discussing the major aspects of what is managerial accounting all about, let's look at the official definitions of managerial accounting and its scope. To quote the definition of managerial accounting as put down by Chartered Institute of Management Accountant, managerial accounting includes the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. As far as the scope and application of managerial accounting goes, CIMA states that a management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way, as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking. As such, to put it simply, the scope and extent of managerial accounting covers arriving at and providing all sorts of financial information that are required by the decision makers of the organization for its growth, development, expansion and other related aspects.

What is the Purpose of Managerial Accounting

As discussed above, managerial accounting is all about providing financial information to company management to assist them in taking decisions regarding growth, development, expansion and other strategic and financial decisions. The best way to get a clear and precise idea of this vague statement is to take a look at the tasks and duties performed by management accountants. What is the function or utility of managerial accounting? Well, the answer lies in the following major activities that management accountants undertake:-

• Allocation of various costs
• Analyzing rates and quantities (especially in case of manufacturing concerns)
• Preparing annual budgets and related reports
• Preparing business metrics, such as returns on investments, EBIT, etc.
• Forecasting sales, revenue and financial expenses and gains
• Price Modeling
• Strategic planning and management advise
• Various reporting based upon industrial, geographical and client based variables
• Analysis of cost, cost-volume and cost-volume-profit statements
• Capital Budgeting
• Calculating and analyzing profitability of product or venture
• Life cycle cost analysis
• Sales Managements Scorecards
• IT Cost transparency

Besides the above, a management accountant may also be responsible for performing analysis related to land/building/plant purchasing vs leasing, client profitability analysis and prepare reports and presentations for internal financial discussions, meetings and communications, etc.

Underlying Concepts at Work With Relation to Managerial Accounting

The financial and accounting concepts and disciplines that play a major role in various management accounting activities include the following:-

• Transfer Pricing
• Cost Accounting
• Throughput Accounting
• Lean Accounting
• GPK
• Resource Consumption/Usage Accounting

Managerial Accounting vs Financial Accounting

The various practical and conceptual differences vis--vis financial accounting vs managerial accounting are as follows:-

• Whereas financial accounting reports and statements are meant for use by outsiders to the organization, managerial accounting statements and reports are meant for use by inside management.
• Financial accounting in different countries follow their individual GAAPs - Generally Accepted Accounting Principles - which are standard procedures formed by official accounting bodies of each nation. There are no such official regulatory procedures for managerial accounting and individual organizations may, or may not, choose to set any such standardized procedures for managerial accounting.
• The nature of financial information provided by financial accounting are historical in nature as they depict the existing state of affairs whereas those provided by managerial accounting are mostly futuristic in nature as they are in the form of forecasts.
• Preparation and publishing of financial accounting statements and reports by public limited companies is a legal necessity whereas such a legal obligation is absent in case of managerial accounts.

I presume this gives you a general idea of what managerial accounting is. Vocational qualifications desired in candidates who wish to pursue managerial accounting jobs, as their career, may include certifications of CIMA, ICWAI, ICMA or CMA. Other certifications that are deemed useful for this profile are ACCA, CA, AIA, AICPA or CPA.