In the world of business, information is paramount. Managerial accounting provides a valuable lens through which companies can gain a deeper understanding of their financial operations and, subsequently, make informed, strategic decisions. This comprehensive guide dives into the core principles, techniques and applications of managerial accounting, from its foundational concepts to its exciting frontier in the digital age.
What Is Management Accounting?
Management accounting communicates financial data specific to managerial decisions. Managerial accountants analyze and present business costs and operation metrics from each line of product, activity or facility to develop an internal report that executives use to guide company operations and assist in their decision-making process.
Managerial accounting is a form of strategic accounting that combine business information, events and organizational strategy to deliver reports and key recommendations based on analysis from trained accountants.
Dennis Furey, is the CEO and Cofounder of Furey Financial(opens in a new tab), an accounting services firm supporting high-growth companies across many verticals. He says that,
“The perception by some business owners is that accounting is just for taxes and investments. When they really want to scale their business, they should look to incorporate more advanced accounting elements such as accounting analytics that can support management key performance indicators.”
Accounting firms should assist clients in managing the backend to provide clean data and auditable financials, which allows those clients to focus 100 percent of their efforts on growing the company.
Managerial accounting delivers key insights, backed by pertinent data. It enables managers to have a simplified way of looking at their complex financial data. For example, managerial accounting can help a manager decide what price they will assign to a new product by providing data on manufacturing costs, market factors and potential profitability. Here are the functions of managerial accounting:
- Data Presentation: Management accountants present data in a way that is easily digestible by modifying the profit and loss statement and balance sheet.
- Data Modification: Management accountants modify financial account data according to what their company needs to review. For example, they can provide data based on a specific product, geography, period, supplier or sales territory.
- Data Analysis and Explanation: Management accountants rearrange the financial accounting data and produce comparative statements with different variables. They also produce statistics such as ratios and KPIs that help project trends and report performance results.
- Qualitative Data Collection: Qualitative information is data that a researcher draws from experiences and themes. It is not the typical quantitative data drawn from counts and mathematics. Business examples of qualitative data include employee satisfaction, management policy effectiveness and supplier relationship quality.
- Forecasting: Forecasting can be short term or long term and involves the analyst projecting whether set goals are achievable.
- Organization Assistance: Some companies struggle with how they allocate their resources like funding and staff. A management analyst can make recommendations on how a company should structure itself to make the best use of its resources and cost out specific activities and their management.
- Planning: Typical planning tools in management accounting include capital budgeting, fund flow statements, cash flow statements, budgets, standard costing and marginal costing.
- Budget Coordination: Each department or program should arrange budgetary targets according to a specific period. A management accountant can prepare these functional budgets according to department in order to ensure cohesive management and the proper coordination of the higher-level budget.
- Budgetary Control: Standard costing enables companies to translate the objectives into benchmarks for a period, helps identify scope creep and provides good budgetary control.
- Decision-Making Assistance: Managers can develop policies and make the most appropriate decisions with accurate and timely financial information.
- Additional Studies: Management accountants often perform special cost and economic studies to determine the answers to management’s pressing questions.
- Employee Motivation: Management accountants are directly involved in employee motivation, as they determine if there are favorable budget outcomes. They can recommend bonuses or other ways to motivate employees.
Traditionally, the marketplace has seen accountants as the “bean counters” in the organization. However, since the 2008 global economic crisis, the role of management accounting in global business has changed. Accounting now plays a more central role than ever in managerial decisions. Accountants have gone from strictly back-office technical work to C-suite strategic work. The increasingly critical role of accountants can be seen in such process analyses as fraud analysis, risk management, activity-based costing, life-cycle costing and opportunity cost analysis. Accountants use these types of techniques, generate results and roll those results into a business’s policies and strategic planning. Further, they can perform dual roles, acting as both financial and managerial accountant for a firm.
Managerial accountants can also manage cash flow, set sales tactics, decide on pricing for customers and determine inventory cost. These activities usually result in quick, internal decisions.
The role of management accounting in public sector companies is crucial to ensuring control and efficiency. Public sector companies are often more beholden to stakeholders than private companies are. For example, a public health department is accountable to an entire city or county, and any decisions it makes are available for public scrutiny. This reality makes the management of its finances and accounting decisions that much more transparent and vulnerable. Accountants used to be passive agents in public firms. Now however, they can use new tools, such as management information systems and collaboration with other agencies.
The limitations of basic financial accounting also delineate the limitations of management accounting. The correctness of the managerial accountant’s findings is directly related to the accuracy of the company’s financial statements. Furthermore, the management accountant must articulate their findings clearly enough to enable the decision-making manager to see the comprehensive picture. Frequently, managers do not have enough of a background in accounting to understand the terms and details of an accounting analysis, much less to scale that data appropriately throughout the organization. The managerial accountant takes into their analysis all aspects of a business and can boil it down to a KPI (key performance indicator) for a person or company to be measured by and to act upon.
List of Management Accounting Techniques
Accountants classify management accounting techniques by their type of calculation or information: historic financial information, future information, cost accounting calculations, mathematical analysis and miscellaneous tools, such as revaluation accounting techniques or integrated auditing.
Accountants choose one technique or method over another based on the nature of a company’s business operations and industry. The following are fundamental techniques in developing metrics in managerial accounting:
- Activity-Based Costing (ABC): This accounting approach assigns costs based on the resources a product, service or project uses.
- Grenzplankostenrechnung (GPK) Costing: Called marginal planned cost accounting in English, this German strategy is the standard for cost accounting. It provides meaningful insight to internal company users regarding accounting information.
- Lean Accounting: Accountants also call this accounting for lean enterprise, as they have designed this approach to act as a companion to lean manufacturing firms. Concepts central to this approach include the following: organizing costs by value streams, using nonfinancial information in financial statements and changing how firms value inventory.
- Resource Consumption Accounting (RCA): RCA is a combination of the traditional GPK costing approach and the activity-based costing that focuses on resources instead of costs. Proponents of RCA say that it is easier for non-accountants to understand and that it gives more accurate results, thereby enabling better decision-making.
- Throughput Accounting (TA): One of the newer accounting techniques, TA involves a more simplified approach that does not allocate costs, but instead emphasizes throughput, the amount of goods passing through a process or system. The three main variables for this approach are the throughput, investment and operating expense. The theory of constraints, i.e., those factors that limit systems from peak producing, also plays into this methodology as a part of the investment.
- Transfer Pricing: Used in both banking and manufacturing, transfer pricing assigns value and revenue within and between different companies and company units to serve both internal company needs and varying governmental regulatory requirements.
Financial vs. Managerial Accounting
Financial accounting and managerial accounting have different intents. Primarily, financial accountants prepare historical financial statements for parties outside of their company, while management accountants prepare forward-looking analyses and reports for internal recipients in order to guide company decisions.
Financial accounting methods are case-based and directly related to events that happen in a company. Management accounting methods include abstract models that sometimes behave as generic examples in order to explain ideas and concepts. Although everyone can see the results of financial accounting in a company’s released financial statements, only managers see the results of the management accounting in internal reports and calculations. Frequently, the managerial accountant performs an analysis with one of a few motivations: to support management’s ideas for improvement, buttress the exploration of new directions or validate decisions managers are considering regarding real data. Finally, the two types of accounting are bound by different standards. Financial accounting standards, such as generally accepted accounting principles (GAAP), guide financial accounting, how accountants report and what exactly they report. In contrast, management accounting has the leeway to consider the audience and the desired information needed to effectively drive the decision-making process.
Even though the practice of management accounting is still not universal, it is not a new concept. There are some accounting practices that experts consider traditional and others they consider new and innovative. Experts often level the criticism that accounting education changed little from the 1920s to the 1980s. However, in the 1990s, the American Accounting Association called for sweeping change in accounting education in order to keep up with the evolution of business and its needs. Schools still teach traditional standard costing (TSC) and cost of goods sold (COGS), but now they also teach more innovative methods, such as variance analyses, life-cycle analyses, activity-based costing, the German GPK costing methodology and resource consumption accounting (RCA). Institutions such as the International Federation of Accountants (IFAC) find that these practices help to offer a more modern approach.
Managerial Accounting Topics
The key managerial accounting topics concern accounting analyses and services. Sometimes, these activities involve computing the manufacturing product cost used in external financial statements, as prescribed in GAAP. However, more often, managerial accounting focuses on internal planning and control accounting techniques.
The managerial accounting role is responsible for the decisions that management makes based on the analysis that the former provides. Therefore, management accountants need to fully understand the following topics and be able to leverage them in order to help make the major decisions:
How to Calculate Job Order Costing
Job order costing is the system that manufacturing companies use to assign and collect the costs for individual product units. Accountants perform this function mainly when their firms produce a variety of products. To calculate job order costing, accountants generate a job cost sheet that has sections for raw materials, direct labor and manufacturing overhead (applied).
For example, if a company asks a manufacturer to produce a piece of equipment, such as a portable cement mixer, its job costing sheet may look like the one below.
The accountants calculate the rates by multiplying their company’s internal standards by the number of hours they assume this production will take. To come up with the total cost of the product, the manufacturer provides an estimate based on the following calculation:
How to Calculate Process Costing
When manufacturing firms produce one type of product, they use process costing. The accountants calculate these cost flows through the departments. For example, a manufacturing company makes acetic acid. Instead of using job costing sheets, it prices through the departments that the product touches, as illustrated in the department flow below:
Three of these departments fall under the Work-In-Progress (WIP) account; it is in this account that accountants designate costs. Each of these departments generates costs during production, as per the worksheet below.
Imagine that manufacturing creates a portion of the product, costing $47,000 so far. Looking between the departments at the journal entries, observe the crediting and debiting as the product moves from one department to another (i.e., from Preparation to Testing to Packaging and finally, to Finished Goods).
Absorption Costing vs. Variable Costing
Absorption costs (AC) are all costs in production, including fixed costs. Variable costing (VC) includes only the costs incurred during production. Here are the formulas for each:
The AC formula differs from the VC formula in that AC includes the fixed MOH, making it more comprehensive and giving the company a better idea of pricing for goods and services for decision-making purposes.
Understanding Cost Behavior and Cost-Volume-Profit (CVP) Relationship
Cost behavior refers to how the costs of products change in reaction to their level of activity. These costs include variable costs, step variable costs, curvilinear costs, fixed costs and mixed or semi-variable costs. A cost-volume-profit (CVP) analysis, often called a break-even analysis, is how an accountant accounts for these cost changes. Specifically, a CVP analysis reveals the effect on the cost of a product when a company manufactures one additional unit. It assumes that the sales price, fixed costs and variable cost per unit remain constant. The formula for this analysis is as follows:
For example, a company with fixed costs of $50,000 and a contribution margin of 25% must earn revenue of $200,000 to break even:
Accountants can apply this formula to see how many units a business needs to sell to break even. If you target a specific CVP figure, you can also figure out its target sales volume. CVP is only reliable if a business fixes the costs for a specified production level.
How to Prepare an Operational Budget
An operational budget shows a company’s projected revenue and expenses for a given period of time. These projections typically focus on the next year and include the anticipated materials and labor costs. At a high level, the steps to prepare an operational budget include:
- Identify the annual expenses.
- Estimate the annual number of units produced and sold, if different.
- Divide the expenses by the production, yielding the cost per unit value.
- Estimate revenue based on the units sold, and calculate the gross income per unit.
- Subtract the cost per unit value from the revenue per unit. This calculation yields the profit margin by unit. A negative profit margin would indicate either expenses must be reduced or revenue increased to cover the shortfall. A positive profit margin would indicate future profits. These calculations effectively represent eight budgets rolled into one, including sales, production, direct materials purchased, direct labor, overhead, ending finished goods inventory, cost of goods sold and selling and administrative expenses.
Standard Costing and Variance Analysis
This flexible budgeting approach accounts for an adjustment of the budget when changes in activity occur. The variables that accountants review are the direct material costs, direct labor costs and overhead costs. In the analysis of variance, the accountants determine if the estimate of these costs at the beginning of the year (the standard) compares favorably or unfavorably to the actual ones. For example, if the standard labor cost for the company to produce a unit of hydrochloric acid is $2.00, and the actual labor cost for the company to produce this same unit is $2.05, there would be a $0.05 unfavorable variance:
The company would need to adjust its forecast to account for the variance in this budget item.
How to Use Activity-Based Costing (ABC)
The ABC costing method assigns costs to every product based on what the product consumes. It segregates fixed, variable and overhead costs. For example, a manufacturing company makes two products. Product A uses three times the power of Product B per month. When the $200 power bill arrives, it would be logical to calculate whether the price assigned to each product makes sense based on this discrepancy in power use.
This is only one factor (cost of utilities) that goes into setting a price, but it employs a simple analysis that an accountant can repeat for all of the other costs.
Pricing of Individual Products and Services
Management accountants need to understand that especially in small and midsized businesses, there is a risk associated with having outdated prices. Because the costs of labor, materials and overhead are always changing, so do product prices. Effective product pricing requires the accountant to identify what the most and least profitable products are, who the customers are and which variables affect the profitability of the company’s products.
How to Perform a Profitability Analysis of Products and Customers
A customer profitability analysis historically attributes profits and costs to each customer, whether individually or in groups. This analysis determines whether serving certain customers or customer segments is worth the effort. It also helps businesses figure out which customers they should attract, keep and grow based on their profit contribution. Some differences in customers’ needs that can affect a company’s profitability include discounts to secure a customer’s business, specific service needs, product specialization and marketing to a customer segment.
For example, the following company offers consulting and service visits to its customers, as well as the ability to process customers’ sales orders. The organization has two segments, the individual customers and the small business customers. Anecdotally, the company thinks that the individuals are a segment that wastes resources. Therefore, the business does not wish to further pursue this segment. The analysis below compares these two segments and adds up the annual sales from each, less the costs of visits and order processing. In reality, the individual customer segment is more profitable, even though the small businesses place more orders annually.
Capital budgeting is the process companies use to evaluate and prioritize significant investments. Examples of capital expenditures include new equipment purchases, existing equipment rebuilds and construction. The calculations that accountants use for capital budgeting can include risk assessments, the number of years to recoup an investment from cash flow, future cash flows, future accounting profit and the present value of cash flow.
A ratio analysis compares the line items in financial statements. It can provide information regarding a company’s operational efficiency, liquidity, profitability, activity and debt. It also allows for benchmarking of companies in a similar industry. Even though a ratio analysis uses historical information, accountants apply it to project future performance. In order to discover trends, analysts must perform several ratio analyses and compare them to those of other years. One type of ratio analysis, the current ratio analysis, is a quick way to measure a company’s liquidity. Here is the formula:
Let’s say there’s a company with current assets of $600 and current liabilities of $400. Given these figures, you would calculate the current ratio as follows:
Principles of Managerial Accounting
The principles of managerial accounting guide accountants in identifying financial information that can help a company make decisions. These principles address an accountant’s influence on, relevance to, value for and credibility with a business. The principles also help accountants balance these various concepts.
The two main principles that guide costing accounting are the principle of causality and the principle of analogy. The principle of causality deals with the modeling of company operations based on their relationships to one another. The principle of analogy considers a management accountant’s responsibility to provide a company’s management with decision support information.
The objective of management accounting is to use the statistical financial data you generate to facilitate a company’s progress. This work includes planning future policies, controlling a company’s performance, developing strategies to solve business problems and evaluating current operations. Management accountants often review reports and performance calculations, such as inventory turn reports, work efficiency reports and aging summaries.
Management accounting frequently deals with “what-if” scenarios; these scenarios allow you to review the best practices regarding comparisons of past and present planning to future planning. This type of accounting differs from financial accounting, which evaluates how a company as a whole has already performed. Management accounting analyses enable an accountant to break a company’s finances into segments in order to determine performance and locate any areas of concern or potential opportunities. Segmentation examples include geographic locations, brands, product lines, specific products and customer demographics.
Branches of Management Accounting
The different branches of management accounting are strategic management, performance management and risk management. Managerial accountants create additional value for a company, rather than just providing back-end financial support.
Strategic management occupies the high-level area of management accounting. This branch is responsible for formulating and implementing initiatives for a company to achieve its goals. Strategic management is the objective setting and directing of departments and employees. This type of management helps you produce plans and policies for consistent business development.
Performance management is about more than just human performance at a company; it is about how the company is doing as a whole. It can be about the senior leadership’s expectations or the task owner’s requirements. Performance management is primarily concerned with how effectively employees are working to produce quality results.
Risk management is the practice of identifying, prioritizing and defining the financial effect of problems. Risks are any circumstances that threaten the bottom line of a company, such as failing projects, market fluctuations, legal liabilities or disasters. A management analyst works on plans to mitigate risks for a company.
Characteristics of Management Accounting
Management accounting emphasizes analysis-based projections to drive recommendations to be acted upon. Using comparative analyses, cause and effect relationships and the element of cost, management accountants interpret and communicate financial information to help improve organizational efficiency.
Accountants illustrate the characteristics above in the techniques they use to translate data into useful information. They can perform an analysis of events and generate operational metrics using one of the following:
A margin analysis reveals how profitable a business is. An accountant can use this kind of analysis to compare different companies. You need three pieces of information to calculate a margin analysis:
- Sales revenue
- Cost of goods sold (COGS)
One of the best ways to prove the success of a business is by the gross profit-margin ratio. This ratio expresses the percentage of sales remaining after COGS-related expenses and shows stakeholders how well a company converts sales to income. You calculate the gross profit-margin ratio by subtracting the COGS from the net sales revenue and dividing that number by the net sales revenue.
Here is the formula for the gross profit-margin ratio:
For example, consider a toy store that has net sales revenue of $20,000 and COGS of $10,000.
Here is the formula for the net profit-margin ratio:
The numerator of this formula represents the net profit. Therefore, you can also express the formula as follows:
The net profit for the toy store is $1,000, and the gross revenue is $20,000.
A high net profit-margin ratio means that the business is performing well. (The toy store, for instance, is doing well, as most retailers have a net profit-margin ratio of around 2%.) A low net profit-margin ratio can indicate weak sales, high costs or both.
- Constraint Analysis:
A constraint analysis focuses on the bottlenecks in a business, which have the most effect on profitability. These bottlenecks (or “constraints”) may be due to internal policies, physical or production limitations or other factors. What-if operational forecasting can illustrate the negative impact associated with individual constraints and help prioritize business needs to maximize profits.
To perform capital budgeting, follow these steps:
- Explore Available Opportunities: Evaluate each capital option, and decide which makes the most logical and financial sense for the problem.
- Estimate the Operating and Implementation Costs: Research the multiple options, and decide whether each of them solves the problem with a long-term or short-term solution.
- Estimate the Impact on Cash Flow: Determine whether the proposed capital project generates income. Use any similar past projects as models. If there is no revenue, estimate any cost savings or benefit.
- Assess the Risk: If the project fails or cannot produce, calculate what the company stands to lose.
- Develop the Implementation Plan: Determine how the company will pay for the project, how it will track costs and how it will record benefits.
- Trend Analysis and Forecasting:
A trend analysis evaluates information in multiple periods to see if there are patterns such as improvements or decreases. Accountants can use trend analyses as predictive tools, but they should be aware of any factors that could alter predictions. In management accounting, there are two trend analyses worth mentioning: the revenue and cost analysis and the investment analysis. To calculate a trend analysis, accountants plot the data points on a horizontal graph and add a trend line. If the trend line has a positive slope (in other words, if it goes up), they can determine a possible forecast of improvement. If the trend line has a negative slope (if it goes down), they need to determine which business factors to adjust.
- Product Costing and Inventory Valuation:
Product costs are the costs to manufacture a product. An individual product’s cost is the sum of direct materials, direct labor and manufacturing overhead. Inventory valuation is the total cost for all the products in your inventory and is reported on an entity’s balance sheet as a current asset.
The target cost is a way to set a target on cost in order to determine your profit margin. The formula is:
For example, a manufacturer in a highly competitive environment makes collagen for cosmetics companies. The manufacturer can only charge $2 per ounce. Let’s say the collagen maker wants a profit margin of 20% based on cost. To achieve this goal, you must calculate the target cost per unit:
Therefore, in order to achieve a 20% profit margin, this manufacturer must keep its cost per unit under $1.60.
During regular accounting cycles, analysts can review bookkeeping transactions. For example, if they spot unusual variances during a trend analysis, they may delve further into individual transactions in order to locate errors or the reason for the variance. They perform a transaction analysis using the following steps:
- Review whether all the recorded information concerns the business in question and has been properly approved.
- Review whether transactions were made to the proper ledger accounts.
- Determine whether each transaction is mathematically correct.
- Determine whether all account activity has been charged appropriately.
The techniques an accountant chooses vary based on the needs of a business.
Cost Accounting vs. Management Accounting
Cost accounting focuses specifically on a product’s quantitative costs, while management accounting considers a variety of analyses and factors, including qualitative information from staff. Management accounting often incorporates cost accounting results into its reporting.
There are vital distinctions between these two branches of accounting, even though they also have many elements in common: They are both critical to internal management operations and decision making; accountants prepare both of them for specific periods; and accountants report neither of them in their annual financial statements. Here are the main differences between the two types:
- Management accounting uses cost accounting, but not vice versa.
- Accountants use cost accounting exclusively to calculate costs and report historical information. These costs, combined with other company information and analytics, comprise management accounting.
- Cost accounting gives stakeholders only quantitative information. Management accounting combines the quantitative data with the qualitative data.
- The preparation of cost accounting information is governed by specific rules and procedures. No such rules or procedures exist for the preparation of management accounting information.
- The goal of cost accounting is to figure out the price of a product and/or service. The goal of management accounting is to determine future goals and activities.
- Accountants limit cost accounting to cost data. They do not limit management accounting but allow it to include such factors as taxes, budgets, forecasting and planning.
- Cost accounting stresses short-range planning, while management accounting concerns both short and long-range planning. Management accounting employs techniques like sensitivity analyses and probability structures.
Management Accounting Basic Framework
The management accounting basic framework should include controlling, directing and planning. Management accountants should set up and maintain key business systems and help make business decisions for short- and long-term operations.
There are many competing cost measurement methodologies. This abundance of choices can cause confusion when you are trying to determine which information is essential for understanding your business. Because all the methods measure the consumption of resources to some degree, you must use a blend of these various methodologies in order to obtain thoroughly reconciled and verified analyses.
The basic framework for management accounting should start with cost measurement and cost uses. The diagram below shows a further delineation of the framework’s anatomy. Ultimately, the framework gives accountants new to a company or new to managerial accounting a place to begin. With this basic framework, a company can understand how to incorporate information systems, performance assessments and cost forecasting.
What Are the Primary Functions of Management Accounting?
Management accounting acts as a strategic partner to your business, providing critical data for company operations. Managerial accountants often lead the business team, supplying forecasts, planning performance variance analyses and reviews and monitoring costs.
The management accountant often walks the line between their management team and their company’s corporate-level interests. This means that while they’re always striving to demonstrate good practices, they may be preparing reports and analyses that do not show allegiance to either the management team or the company’s corporate-level interests. For example, a business management team prioritizes financial modeling; a corporate office prioritizes reports on financial data and reconciliations of source systems. The following are examples of tasks that management accountants may perform:
- Rate and volume analyses
- Business metrics development
- Price modeling
- Product profitability
- Geographic vs. industry or client segment reporting
- Sales management scorecards
- Cost analyses
- Cost–benefit analyses
- Cost-volume-profit analyses
- Lifecycle cost analyses
- Client profitability analyses
- Information technology cost transparency
- Capital budgeting
- Buy vs. lease analyses
- Strategic planning
- Strategic management advice
- Internal financial presentation and communication
- Sales forecasting
- Financial forecasting
- Annual budgeting
- Cost allocation
There are several organizations and rules that govern management accounting. Mainly, they provide standards and credentialing for professional accountants in the United States and abroad. These organizations include the following:
- International Accounting Standards Board (IASB): This board is an independent group of accounting experts that sets the global standards and interpretations for accountants.
- The International Financial Reporting Standards (IFRS): These global accounting standards from IASB provide common language for businesses so that accountants can compare and understand any company’s accounts. IFRS are beginning to replace some national accounting standards and are a response to the many multinational organizations prevalent in today’s global economy.
- Institute of Management Accountants (IMA): This worldwide association is a professional accounting organization founded in the U.S. It offers a certification, Certified Management Accountant (CMA), to candidates with the required education and examination scores. The institute also offers connections and education to its members.
- Chartered Institute of Management Accountants (CIMA): Based in the United Kingdom, CIMA is another global professional accounting organization.
- Association of International Certified Professional Accountants (AICPA): Together with CIMA, this association offers the Chartered Global Management Accountant (CGMA) designation, which targets more business accounting principles, rather than just traditional accounting practices.
- Global Management Accounting Principles (GMAPs): As part of the required CGMA designation, accountants must understand and use the GMAPs to help build successful organizations. CIMA and AIPCA have conducted extensive studies and international research to create these principles.
- Financial Accounting Standards Board (FASB): Designated as the accounting standard for publicly traded companies, FASB is an independent, private-sector organization that sets standards for accounting and reporting in the United States.
- Generally Accepted Accounting Principles (GAAP): GAAP are a mix of standards and practices that U.S. public companies must follow when they prepare their financial statements.
Here are some other major global organizations that have similar credentialing for their countries:
- Institute of Certified Management Accountants (ICMA) in Australia
- Institute of Cost Accountants of India
- Chartered Institute of Public Finance and Accountancy in England and Wales
- Association of Chartered Certified Accountants (ACCA) in the United Kingdom
How to Become a Management Accountant
A management accountant, or management analyst, is someone who works with financial information on behalf of internal stakeholders. They are responsible for major business activities, such as overseeing a firm’s accounting, analyzing the financial statements for trends and forecasts, assisting in business development and engaging in risk management.
The minimum education required to work as a management analyst is a bachelor’s degree from a school that can accredit its accounting students. When hiring, many employers also look for the additional professional qualifications of CMA, CGMA, Chartered Accountant (CA) in the United Kingdom, Certified Public Accountant (CPA) in the United States, or Certified Practicing Accountant (CPA) in Australia. (A company seeks a specific credential, based on whether it’s a national or global organization.) The CA and CPA designations are mainly financial accounting-specific credentials and are not necessarily an indication of a management accounting education.
The skills required to work as a management analyst include math and business concepts. A solid foundation in accounting is critical to a complete understanding of basic taxation, financial reports, ethics and compliance. Accounting professionals also need leadership and communication skills, i.e. soft skills such as persuasiveness, that allow leaders to thrive. Being an expert in your industry, be it manufacturing or public health, also helps.
Students can find managerial accounting curricula in the business administration programs of colleges and universities. Many of these programs offer education and credentialing, so their students can be competitive regarding the job market. Here are some examples of classes required for an accounting degree:
- Cost Measurement and Estimation
- Cost Management
- Short-Term Decision Making
- Cost-Volume-Profit Analysis
- Differential Analysis
- Variance Analysis
- Capital Budgeting
- Performance Evaluation
- Cash Flow Preparation and Use
- Using Managerial Accounting: Trends and Ratios
Many companies that specialize in accounting also provide their employees with resources to pursue continuing education units (CEUs), a requirement of many of the credentials. These resources can include webinars and seminars as well as access to online accounting journals, blogs, articles and sometimes workgroups. Many of the professional organizations, such as IMA(opens in a new tab), offer continuing education unit resources on their websites.
Management Accounting Systems
Management accounting systems are supportive software for managerial accountants. They offer reports and analytics from the transaction data that an organization collects. Sometimes, accountants can find managerial accounting modules in their regular accounting software, but there are systems that directly target management accounting.
Some of the available platforms are meant for upper-level management, and some are meant for technical staff. Technical functions include items like spreadsheets and databases. Some of the functional modules in management accounting software include accounts payable, accounts receivable, journals, general ledgers, payroll and balance. The best systems incorporate the lower-level, more technical details, such as timecard hours, with the high-level functions and comprehensive financials, such as profit-margin analyses and financial reporting.
Frequently Asked Questions About Managerial Accounting
The following are frequently asked questions culled from message boards, social media and students.
What is the difference between financial accounting and managerial accounting?
Financial accounting primarily serves external stakeholders by preparing historical financial statements. Managerial accounting, meanwhile, focuses on providing forward-looking analyses and reports for internal use to guide decision-making. Financial accounting follows standards, such as the Generally Accepted Accounting Principles (GAAP), and is tied to historical events, while management accounting is more flexible, tailored to the needs of internal decision-makers. Managerial accounting uses methods, including activity-based costing and variance analysis, to support effective decision-making.
Can management accounting help small businesses?
Yes! Management accounting is not only for big businesses. For small businesses and startups to survive in the marketplace, they need the competitive edge that an analysis of their financial condition can provide. Management accounting analyses can provide these companies with the tools to help them manage their cash flow, minimize their expenses, improve their returns and make good business decisions.
How can management accounting help formulate strategy?
Management accounting can provide information about where companies can find a competitive advantage. It can also help a company budget more efficiently.
What is a management accounting control system?
A management accounting control system (MACS) refers to the collective processes and activities that guide the financial information flow in a company.
Who needs management accounting?
Any company, large or small, that wants to be more successful and survive in the evolving marketplace needs management accounting.
Who is the father of management accounting?
Luca Bartolomeo Pacioli is the father of management accounting. He was an Italian mathematician who, in 1494, started the double-entry system of accounting, which debited one account while crediting another.
When should you use management accounting?
Financial accounting provides quarterly or annual reports. Accountants can use management accounting analyses on a more regular basis to continue to make small adjustments and guide their companies to a higher level of efficiency.
Streamline Your Managerial Accounting in the Cloud With NetSuite’s Financial Management Solution
Managerial accounting is vital to nearly every aspect of a business: strategic planning, financial forecasting, risk management, cost efficiency, competition and a wide variety of other issues. This is precisely why business owners and leaders recognize that mastering the many facets of managerial accounting means the difference between success and failure. But they also understand that they need the tools to achieve this goal. NetSuite’s financial management solution expedites financial transactions and provides real-time visibility into a company’s performance. The robust solution integrates with all NetSuite order management, inventory, CRM and ecommerce functions.
Learn more about how you can use NetSuite to manage your company’s finances and ensure compliance.