Managerial accounting techniques: Tools for effective decision-making
To achieve the core functions laid out above, managerial accountants employ a range of trusted techniques. These techniques, honed over decades of accounting mastery, support smarter, faster decision-making. Combined with powerful accounting tools, like QuickBooks, these methods go beyond standard bookkeeping and offer transformative insights into operational efficiency and financial control.
Here’s an overview of just some of the main managerial accounting techniques used in Malaysia today:
- Variance analysis: Comparing actual performance against budgets. If there are discrepancies, businesses can pinpoint areas of overspending or underperformance and take corrective action. For instance, a retail chain in Kuala Lumpur might discover rising inventory costs through variance analysis. Then, they could revise their procurement strategy.
- Cost-benefit analysis: Evaluating whether the potential benefits of a decision outweigh the costs involved. This can have both financial and non-financial implications. Cost-benefit analysis is particularly useful for investment or expansion decisions.
- Product costing and marginal costing: These two are often mixed up. Product costing assigns all direct and indirect costs to a product, helping to price effectively. While, marginal costing focuses on the cost of producing one additional unit, which can help when scaling.
- Cash flow analysis: Profits aren’t everything. Cash flow is equally important. Without it, a business could struggle to stay afloat (even if they’re technically making a profit). Analysing inflows and outflows helps businesses:
- Plan for shortfalls
- Manage credit
- Avoid disruptions
To non-accountants, these processes may seem pretty similar. However, for management accountants, the subtle differences between these techniques have huge consequences. Each technique helps with a specific business strategy or problem.
Together, they help businesses make proactive decisions and gain a powerful upper-hand. Let’s explore each technique in more detail:
Variance analysis: Monitoring financial performance
With any luck, your actual end-of-period performance figures will match up exactly with your budgeted figures for that period. However, as all business owners know, that rarely happens. More often than not, some pesky costs get in the way, leaving you over budget.
That’s exactly what variance analysis is for. While it may not prevent the variance occurring, it can identify where and why it occurred and, perhaps, prevent it from happening again. Variance analysis provides deeper insights and points to corrective action.
Let’s be clear, identifying a variance is not a sign of failure. It’s extremely common. In fact, most accountants agree that a variance of 10% or less is generally tolerable. Why?
There are many moving parts at play. In Malaysia’s fast-moving and competitive business environment, companies have to face:
- Unexpected costs
- Supply chain fluctuations
- Market shifts
- Rises in material costs
- Inefficient processes
Variance analysis is there to paint a clearer picture of where things may be going off-course.
However, not all variance is bad. Variances can be favourable, when actual results are better than budgeted. Or, they can be unfavorable, when performance falls short of expectations.
Whatever type of variance issue a business is encountering, variance analysis enables business owners to take timely corrective action. That could be:
- Renegotiating supplier contracts
- Adjusting marketing spend
- Revising sales strategies
In the past, variance analysis could take many days, even weeks to do properly. Today, advanced tools like QuickBooks offer variance analysis features to generate reports quickly and easily.
Cost-benefit analysis: Evaluating financial viability
Unlike variance analysis, which looks at past data, cost-benefit analysis (CBA) is forward-looking. Essentially, it’s designed to help businesses evaluate whether or not a decision, like a project or investment, is worthwhile. To do this, managerial accountants weigh the expected costs against the anticipated benefits. It offers a structured way to make investment decisions rather than simply relying on gut feelings.
There are multiple reasons a Malaysian business may need CBA. Let’s say a business is interested in launching a new product line, investing in digital transformation, or opening a new location in a growing city like Johor Bahru or Kota Kinabalu, they need to know the project can pay off.
Typically, cost-benefit analysis starts with the identification of all direct and indirect costs. That includes capital investment, staff training, equipment, and regulatory compliance.
Then, these are compared against measurable benefits. Of course, those include tangible financial benefits like increased revenue or long-term cost savings. However, they can also include non-financial factors like brand reputation.
Imagine a Kuala Lumpur-based SME considering automation. The upfront cost is RM100,000, however, the annual savings are estimated at RM50,000 in labour and overhead. In just two years, the investment would pay off, making it a financially sound decision.
This type of analysis helps with making financial decisions, but it also helps to justify those decisions to stakeholders. And that makes CBA an extremely important technique for managerial accountants the world over.
Product costing: Determining accurate product costs
You might think you know how much it costs you to deliver your products or services. However, many business owners find themselves looking at large discrepancies when they examine their variance reports. For SMEs with tighter budgets, these can come as quite a shock.
Product costing is how managerial accountants figure out the true cost of producing goods or delivering services. They take into account more than materials and labour, they analyse multiple data sources to come up with the most accurate figure possible.
There are two commonly used product costing methods:
- Job order costing: This is mostly used when products or services are produced in smaller batches. Accountants will assign specific costs (think materials and labour) to individual jobs or projects (not en masse). Let’s say a furniture manufacturer in Penang creates custom pieces. They’d benefit from job order costing to track expenses more accurately.
- Process costing: In contrast, this is all about mass production of similar items (usually food items or textiles). This method averages costs across all units produced in a given process or time period. Then, accountants will assign a cost-per-bottle.
So, why go through all this trouble to come up with a specific price-per-unit? It’s partly about budgeting, but most importantly, it’s about pricing strategy.
Overpricing can drive customers away, while underpricing can erode profits. It’s crucial for businesses to figure out exactly how much they should charge in order to remain competitive while also making a profit.
Then, there are cost-saving opportunities. Managerial accountants may be able to spot weaknesses in your spending and point you towards strategies that help optimise sourcing and reduce waste.
In short, product costing is key to ensuring long-term profitability.
Marginal costing: Assessing impact of production changes
Sometimes, it’s necessary to narrow your field of vision and hone in on one particular factor. For example, a business might want to find out exactly how much each extra unit affects overall profitability. As product costing won’t cover this, accountants need a new technique.
This is where marginal costing comes in. Marginal costing is a managerial accounting technique that helps Malaysian businesses evaluate the financial impact of producing one additional unit of a product or service.
With that aim, it focuses only on variable costs, excluding fixed costs, like rent or salaries, which don’t change with production volume.
Here’s an example:
A client has offered a manufacturing company in Johor a discounted rate for a bulk order. The manufacturing firm wants to determine whether accepting the order, at a lower rate, still contributes positively to profit, even if it doesn’t fully cover fixed overheads. To do so the firm would use marginal costing.
But that’s not all marginal costing has to offer, it also helps with:
- Pricing strategy: To stay competitive, Malaysian businesses might want to offer special pricing for larger orders or seasonal promotions. Marginal costing helps them ensure that these offers remain profitable or, at the very least, break even in the short term, while building long-term value.
- Production planning: Considering increasing output? Discontinuing a product line? Shifting focus to new products? Marginal costing can help base the decision in forecasts.
Cash flow analysis: Ensuring financial liquidity
Cash flow is a constant struggle, almost a third of Malaysian SMEs report having less than two months’ worth of cash reserves. Despite a growing economy, it seems cash flow is plaguing small Malaysian businesses.
In part, that’s because managing and analysing cash flow is a complicated and specialised process. Luckily, specialists are out there. Management accounting firms can help SMEs manage their cash flow by tracking and reviewing the movement of cash in and out of their clients’ businesses.
In essence, cash flow reflects real-time financial health, not just overall profits. A business could be making a profit but still sink due to cash flow issues, especially in Malaysia’s SME sector.
Cash flow analysis typically involves reviewing:
- Operating cash flow: Day-to-day income and expenses.
- Investing cash flow: Purchase or sale of assets.
- Financing cash flow: Loans, dividends, or capital injections.
By looking at these three areas, accountants can give clients a heads-up on approaching problems and help prevent liquidity crises.
