What Is Managerial Accounting?

Managerial accounting is the practice of identifying, measuring, analyzing,

interpreting, and communicating financial information to managers for the pursuit
of an organization's goals. It varies from financial accounting because the
intended purpose of managerial accounting is to assist users internal to the
company in making well-informed business decisions.

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Managerial Accounting

How Managerial Accounting Works

Managerial accounting encompasses many facets of accounting aimed at improving the
quality of information delivered to management about business operation metrics.
Managerial accountants use information relating to the cost and sales revenue of
goods and services generated by the company. Cost accounting is a large subset of
managerial accounting that specifically focuses on capturing a company's total
costs of production by assessing the variable costs of each step of production, as
well as fixed costs. It allows businesses to identify and reduce unnecessary
spending and maximize profits.

Read more about the common concepts and techniques of managerial accounting.

Managerial Accounting vs. Financial Accounting

The key difference between managerial accounting and financial accounting relates
to the intended users of the information. Managerial accounting information is
aimed at helping managers within the organization make well-informed business
decisions, while financial accounting is aimed at providing financial information
to parties outside the organization.

Financial accounting must conform to certain standards, such as generally accepted

accounting principles (GAAP). All publicly held companies are required to complete
their financial statements in accordance with GAAP as a requisite for maintaining
their publicly traded status. Most other companies in the U.S. conform to GAAP in
order to meet debt covenants often required by financial institutions offering
lines of credit.

Because managerial accounting is not for external users, it can be modified to meet
the needs of its intended users. This may vary considerably by company or even by
department within a company. For example, managers in the production department may
want to see their financial information displayed as a percentage of units produced
in the period. The HR department manager may be interested in seeing a graph of
salaries by employee over a period of time. Managerial accounting is able to meet
the needs of both departments by offering information in whatever format is most
beneficial to that specific need.

KEY TAKEAWAYS
Managerial accounting involves the presentation of financial information for
internal purposes to be used by management in making key business decisions.
Techniques used by managerial accountants are not dictated by accounting standards,
unlike financial accounting.
The presentation of managerial accounting data can be modified to meet the specific
needs of its end-user.
Managerial accounting encompasses many facets of accounting, including product
costing, budgeting, forecasting, and various financial analysis.
Types of Managerial Accounting
Product Costing and Valuation
Product costing deals with determining the total costs involved in the production
of a good or service. Costs may be broken down into subcategories, such as
variable, fixed, direct, or indirect costs. Cost accounting is used to measure and
identify those costs, in addition to assigning overhead to each type of product
created by the company.

Managerial accountants calculate and allocate overhead charges to assess the full
expense related to the production of a good. The overhead expenses may be allocated
based on the number of goods produced or other activity drivers related to
production, such as the square footage of the facility. In conjunction with
overhead costs, managerial accountants use direct costs to properly value the cost
of goods sold and inventory that may be in different stages of production.

Marginal costing (sometimes called cost-volume-profit analysis) is the impact on

the cost of a product by adding one additional unit into production. It is useful
for short-term economic decisions. The contribution margin of a specific product is
its impact on the overall profit of the company. Margin analysis flows into break-
even analysis, which involves calculating the contribution margin on the sales mix
to determine the unit volume at which the business’s gross sales equal total
expenses. Break-even point analysis is useful for determining price points for
products and services.