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Managerial accounting is used to improve the efficiency of the management process by focusing on management planning, cost controls and financial monitoring to ensure the financial success of departments and the overall company.

Managerial Accounting Defined

Managerial accounting is really pretty simple. Also known as cost accounting, this form of accounting focuses on measuring, analyzing, interpreting, and communicating financial information to accomplish organizational goals and objectives.

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Accounting managers construct the inner plan and budget monies, make decisions how to use monies and evaluate performance once decisions are made. And unlike financial management, the key role of accounting managers is to help managers make decisions inside the organization. Managerial accounting has four main functions, which we’ll discuss now.

Managerial Accounting Functions

We now know that managerial accounting concerns itself with the collection and presentation of financial data for the internal organization. It also focuses more on the future than historical financial performance. Its four functions are:

  1. Planning
  2. Decision making
  3. Monitoring and controls
  4. Accountability

The planning function is all about estimating future financial performance. Tools used for estimation include the cash flow forecast, profit and loss statement and balance sheet.

The cash flow forecast tells a manager how much cash is available at a given time, usually determined by the company. It helps a manager balance the cash within a business. Accountants use a profit and loss statement to show revenue, costs and expenses during a given time period (usually a quarter or a year). The information on this report helps managers make revenue generating or cost cutting decisions.

The balance sheet shows a company’s assets, liabilities and shareholder equity. It reveals what a company owns and owes, and the amount of shares that are owned by shareholders.The next function is decision making. Armed with financial data, managers use this information to make important decisions. Some of the techniques they use to make decisions are costing, cost-volume-profit analysis, investment appraisals and profitability analysis.

Costing is used to estimate the cost of products, by comparing the overhead expenses needed to produce a singe product. This information is used to make decisions about raw materials, process changes or modifications and pricing. The cost-volume-profit analysis is used to analyze how costs and volume affect operating income and net income. Investment appraisal is used to evaluate the value of an investment in terms of rate of return.

Managers might use this technique for the purchase of new equipment or even when hiring additional staff.Next is monitoring and controls, and this is where managers will measure performance by using a budget. A budget compares anticipated income and expenses to actual numbers. Departmental managers use this document to gauge spending and purchasing decisions.

Accountability is last, but not least by any means. Sound accounting procedures and performance measurements are essential for the success of any business. It is the accounting manager’s responsibility to use due diligence when measuring and reporting financial information to others.

Lesson Summary

Managerial accounting is the form of accounting focused on measuring, analyzing, interpreting and communicating financial information to accomplish internal organizational goals and objectives. It is rooted in the management process and involves planning, decision-making, monitoring and controls and accountability.

While each function utilizes different techniques and reports, they work together to achieve the financial objectives and goals of an organization.

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