Managerial accounting is a standard course for most MBA programs and one that proves indispensable in the careers of many graduates. The course is part of the core curriculum in the University of Wisconsin-Parkside Master of Business Administration with a Concentration in General Management online. It delves into the role of accounting in the successful management of business enterprises, identification of relevant cost and revenue information for managerial decisions, and application of analytical reasoning and formal models to various business problems.
Accounting, in general, is about understanding scarce resource allocation, and management accounting is about increasing financial insights to decrease risk. But how is managerial accounting applied in the real world and how does it differ from financial accounting?
How Is Managerial Accounting Applied?
Business managers’ accounting roles typically involve demonstrating which activities hold the most promise and warrant funding. As examples, a manager may need to demonstrate that certain product lines deserve disproportionate ad spending or that products can be manufactured less expensively in another city. Or perhaps they want to justify the cost of a new hire. The process of managerial accounting is indispensable in such cases. It helps in identifying needs, analyzing scenarios, interpreting data and communicating findings.
Here are the general ways in which managerial accounting is applied:
- Capital Budgeting: For businesses to reliably determine which capital-intensive projects or purchases to pursue, managerial accountants apply metrics including net present value and internal rate of return to aid decision-making. Capital budgeting involves determining the products and services needed, reviewing proposals and evaluating sources of financing.
- Trend Analysis and Forecasting: Managerial accounting involves investigating the trend lines over time for various expenditures, understanding variances and accurately calculating and projecting what will occur in the future. This process includes reviewing sales volumes, customer tendencies, historical pricing and other financial information.
- Product Costing and Valuation: Managerial accounting requires calculating overhead charges like monthly rent and utilities in order to determine the true costs of production. Product costing also factors in direct costs attributed to the production of goods and services, such as machinery, in order to assess the costs of inventory and goods sold.
- Margin Analysis: In this application, managers seek to understand profits and cash flow generated from a specific product, service, customer, store or region. Margin analysis encompasses the examination of incremental benefits attained by increased production as well as breakeven analysis, which is identifying the point at which a business’s gross sales and expenditures align. This process is critical in determining which price points for products and services will produce the greatest profits.
- Constraint Analysis: Production managers apply constraint analysis to optimize the cost efficiency of manufacturing processes and to determine where bottlenecks occur. The work involved in this process helps to reduce the impact of constraints on production, revenue, profit and cash flow.
How Managerial Accounting Differs From Financial Accounting
Managerial and financial accounting have unique purposes. From a top-level perspective, financial accounting provides information for decisions such as how to allocate resources among companies, while management accounting helps with estimating and tracking costs in order to make informed decisions about how to allocate resources within a company. Financial accounting looks at historical information from past events, while management accounting looks to the future as it aims to interpret data for strategic decision-making. Financial accounting is generally more objective, as it involves factual analysis of things that have already occurred, while managerial accounting is more subjective in evaluating data to make projections.
Managerial accounting was developed in the late 1800s as a way to provide the information needed to manage production of items like steel and textiles. It is focused on operating segments and is geared toward planning the financial future of a business, setting realistic goals and efficiently directing company resources. The discipline offers the operation metrics necessary for planning business growth strategies, making informed economic decisions and improving operational efficiency. Reports generated are often used to support requests for company expenditures, such as daily and weekly budgeting reports. Executives apply managerial accounting when reviewing these reports to track deviations from budgets to actual results.
Financial accounting was created in the early 1900s to support the growth of credit, governmental regulations and taxes. Managers use it to provide quarterly and yearly financial reports to entities outside of the organization including the shareholders, investors, tax professionals, creditors and even the media. This information is typically used to support investing and lending decisions, as well as the reporting on a company for financial news outlets.
Leaders at every level in successful companies apply the principles of managerial and financial accounting. Graduates of MBA programs that provide a strong foundation in both disciplines are prepared to hit the ground running with confidence in their management and executive roles.