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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 organization 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 involves creating a plan for the future financial performance of an organization and allocating resources accordingly.
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 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 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, 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 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.
CMA is preferred but not required
CPA is preferred but not required
Internal company metrics and KPIs
GAAP, IFRS, IAS
Type of report
Cash flow statement
Common Job Titles
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Management accounting is a type of accounting that focuses on analyzing and reporting on a business’ financial health and performance through accounting techniques such as budgeting, variance analysis, forecasting, cost-benefit analysis, product costing and valuation, marginal costing, cash flow analysis, inventory turnover analysis and constraint analysis.
The role of management accounting is to analyze and report on a business’ financial health and performance to help internal stakeholders make more informed decisions about strategic management, performance management and risk management
Management accounting is important for businesses because it provides detailed analysis of the business’ performance allowing internal managers and stakeholders to make better business decisions about strategic management, performance management and risk management. Management accounting impacts important business decisions including budgeting, expenses, setting business goals and KPIs for individual teams and specific employees, and determining the value of buying or selling business assets.
No, managerial accountants are not legally obligated to follow IFRS or GAAP because the financial reports they produce are not regulated by these standards. Instead, managerial accounting reports rely on internal business metrics that focus on company performance and are intended for internal stakeholders as opposed to external stakeholders and investors.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.