Guide to Management Accounting: Meaning, Types and Role of Managerial Accounting

What is management accounting?

Management accounting, also known as managerial accounting, is a type of accounting that focuses on providing financial analysis of a business’ performance and reporting to internal stakeholders in an organisation to help its leaders and managers better understand the business’ performance and make more informed decisions about the business. 

Types of managerial accounting

The information and reports provided by managerial accountants are usually financial in nature. Below are examples of management accounting techniques.

Budgeting

Budgeting involves creating a plan for the future financial performance of an organisation and allocating resources accordingly. 

Variance analysis

When conducting a variance analysis, managerial accountants compare actual performance versus the budgeted or forecasted performance and produce reports to determine positive and negative deviations from a budget, referred to as budget-to-actual variances. Variance analysis helps to identify reasons for the variances and helps managers make changes in the budget or operations for the future.

Forecasting

Forecasting involves using historical data, seasonal information, or data specific to certain events, to predict and create estimates about the future financial performance of the business.

Cost-benefit analysis

Cost-benefit analysis involves evaluating the costs and benefits of a proposed project or investment to determine whether it makes sense from a financial perspective. This often includes elements like return on investment (ROI) calculations, depreciation analysis, or calculations on the lifetime value of a prospective client.

Product costing and valuation

Product costing breaks down the variable, fixed, direct and indirect costs involved in the production of goods or services to determine the total costs involved. This process helps business leaders assign overhead costs to products and operations, and identifies areas where costs can be reduced and saved to improve efficiency.

Marginal costing

Marginal costing, also called cost-volume-profit analysis, calculates the impact of adding additional units into production on the cost of a product.

Cash flow analysis

Cash flow analysis looks at the cash that flows in and out of a company, determining incoming revenue streams and business expenses. Cash flow analysis is an important type of managerial accounting because it provides insights into a business’ financial health and helps inform the cash impact of business decisions.

Inventory turnover analysis

Inventory turnover calculates how many times inventory is sold and replenished within a time period. Inventory turnover analysis helps businesses understand which products are best sellers and in high demand. This allows businesses to make better decisions on pricing, manufacturing, marketing and ordering new stock, including order quantities, and helps them build better relationships with suppliers and manufacturers. 

Constraint analysis

Constraint analysis involves reviewing the constraints within a production or sales process to determine bottlenecks and calculate their impact on cash flow, revenue and profit, and equips managers with the necessary insights to implement changes which improve efficiency in production and sales processes. 

The role and scope of management accounting

Management accounting is an ongoing process because it involves measuring a business’s performance on a regular basis throughout the financial year. The role and scope of management accounting can be broken down into three key functions that contribute to the ongoing measurement of business performance: strategic management, performance management and risk management. 

• Strategic management: accounting management helps inform the implementation of strategies to increase efficiencies in business processes, procedures, operations and performance. Inventory turnover analysis is an example of a function that would be performed under the branch of strategic management.
• Performance management: managerial accounting provides performance data such as cash flow analysis to help business leaders and managers make more informed decisions about business strategies and operations to improve performance.
• Risk management: managerial accounting helps identify, measure and report on bottlenecks and risks to the achievement of business objectives and performance. An example of risk management in managerial accounting is constraint analysis.

Measuring performance with managerial accounting

When it comes to measuring business performance there are a number of steps to consider. For example, when measuring the performance of your accounting firm consider the following steps:

• Key performance indicators: determine the key performance indicators your accounting firm expected to achieve.
• Cash flow budget: prepare a cash flow budget that shows how your accounting firm is expected to perform over the next 12 months.
• Profit and loss statement: look at each item in the profit and loss statement and estimate how your accounting firm will perform on at least a monthly basis over the next financial year. The monthly cash-flow budget results for each income and expense item is then entered into the budget field of a profit and loss statement. 
• Report and compare results: create monthly cash flow analysis reports to understand how your accounting firm is performing each month, allowing you to compare the actual results against the expected results, and how the firm has performed in the previous year.

Management accounting versus financial accounting

From a technical point of view, there are two types of accounting. The first is financial accounting, which relates to the production of financial statements mainly on an annual basis including the balance sheet and the profit and loss statement which show the historical performance of a business. Financial accounting provides transparency for external stakeholders and investors while management accounting is mainly used to provide internal managers and stakeholders with information on strategic management, performance management and risk management. This enables them to make better informed decisions about the business.

Explore more differences between management accounting and financial accounting in the table below.

Streamline your management accounting with QuickBooks

As an accountant, it is essential to understand the value of management accounting in maximising profitability and reducing financial risk for your clients or your own business. Using management accounting techniques such as budgeting, variance analysis and forecasting, you can provide your clients with the tools and knowledge needed to make informed decisions and measure business performance on a regular basis. 

QuickBooks Online Accountant is a cloud based accounting software for accountants, designed with features to assist accountants in managing their accounting tasks and workflow, and managing their practice and clients with one login. With features that can help streamline your management accounting processes and make them more efficient, QuickBooks also offers a range of tools for financial accounting, taxes management, and payroll, making it an all-in-one solution for all your accounting needs. 

Improve your management accounting processes and serve your accounting clients better by signing up for free to QuickBooks Online Accountant today. 

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