Basics of Managerial Accounting

Managerial Accounting

There are two central areas in accounting information system: financial accounting and management accounting. The financial accounting system is engaged on dealing with the changes in assets and liabilities, accounting revenues, and administration or management of finances. Primarily, financial accounting involves making monetary records available to external users such as analysts, business owners, prospective investors, and creditors. These people have hardly had the means of acquiring information that is internal to the entity. They only rely on general reports released by the company. For that reason, financial disclosures are explicit and adhere to defined standards. Moreover, in a financial accounting system, external parties view these reports in an encapsulated form.

On the contrary, management accounting involves measures and methodologies that are concentrated on the efficient utilization of an entity’s resources, which aid the manager in augmenting the shareholder and customer value. The information associated with managerial accounting is primarily directed on goods or services, units in an organization, and business actions. Managerial accounting encompasses topics on finance, marketing, and related disciplines. In addition, it covers long-term strategic plans, operating budgets, and non-financial information such as operations’ percentage defects, rate of on-time delivery, and outcomes of clients and customers surveys.

A fundamental objective of managerial accounting is to better or enhance the performance, strength, and efficacy of management planning and control functions. Also, Managerial accounting aims to supply the information that is needed when making internal decisions.

Management Activities

With the support of the management, business owners and key executives of an entity establish their goals. With that in mind, companies amass resources, employ people, and participate in an array of systematized business endeavors. The everyday activities of the management team constitute four courses of action: decision making, planning, directing, and controlling.

  • Decision Making

Good decisions are derived from tireless accession and assessment of information. With good decisions comes business value. Managerial accounting supplies the information necessary to incite decision-making processes. Also, the management team determines which among the other possible choices or courses of action will support the company in effectively achieving its objectives.

  • Planning

Planning is generally focused on identifying what needs to get done, how to carry it out, and who will perform the necessary actions. Prior to establishing decisions or pursuing for the realization of these decisions, the management must perform careful planning. With this, the company will be fixated on unified objectives regardless of the employment status, position, or function of its people.

Budgets are an entity’s financial plans. The management will determine the inflows and outflows of economic resources. In addition, comprehensive financial and operational descriptions of expected and forthcoming operations will be developed.

  • Directing

While planning for the future, managers have to oversee and supervise day-to-day business undertakings. They have to delegate roles and responsibilities, guide the employees on how to accomplish their chores, motivate and inspire them until the fulfillment of the tasks, and respond to employees’ queries on how to pull off their tasks. Using a computerized accounting system, managerial accountants take into account and list all the assignments and undertakings that must be realized. Some of these include running trial balances and wrapping up accounting processes every end of the month.

  • Controlling

Controlling keeps all business activities on track and identifies if the company’s objectives are met. According to University of North Florida, this can be achieved by measuring performance, comparing actual performance with budgets, and taking action when needed. In evaluating and assessing the performance, managers have different gauges.

Cost Classifications

Aside from common accounting concerns and issues identified with management and administrative activities, companies involved in the manufacturing sector must also address matters regarding the purchasing and processing of raw materials to the desired end product. Managers must answer questions pertaining to the costs associated with producing a product or providing a service, effect of decreasing the production volume relative to the cost, impact of automation of total costs, and measures in controlling the costs.

There are three classifications of manufacturing costs that companies take into consideration when producing goods or rendering services. They include: direct materials, direct labor, and manufacturing overhead.

  • Direct Materials

Raw materials are the primary materials utilized in the manufacturing process. These can either be direct or indirect. Direct materials are materials that turn into an important component of the finished goods and whose costs can be easily tracked to the end product. On the other hand, indirect materials are associated with the manufacturing overhead.

  • Direct Labor

Direct labor is comprised of gross salaries anted to the people who directly work on the product. Also referred as touch labor, direct labor compensates workers who “touched” the product while it was being produced. If labor costs are incurred when there is no physical or direct contact to any product, it is known as indirect labor. Examples include salaries of security guards, janitors, and supervisors.

  • Manufacturing Overhead

Manufacturing overhead covers all manufacturing costs excluding direct materials and direct labor. Examples are property taxes, insurance on the facility, depreciation, indirect materials, and indirect labor.

Product Costs versus Period Costs

Apart from manufacturing and non-manufacturing costs, product costs and period costs are the other ways of monitoring costs.

Product costs are composed of the direct materials, direct labor, and manufacturing overhead; all of which are  important components in creating a product. These costs are listed in an inventory account and are not considered as expense until they are marketed.

On the other hand, costs that are not product costs fall to the period costs category. These include non-manufacturing costs, selling expenses, administrative costs, and rental costs, among others.

Other Costs

There are also costs associated with management activities — variable and fixed costs; direct and indirect costs; and differential, opportunity, and sunk costs.

Variable and fixed costs are cost categories footed on the behavior of costs relative to the changes in volume. Direct and indirect costs are cost classifications based on the convenience of tracking the costs to a cost object. Differential, opportunity, and sunk costs are terminologies utilized in problem solving and in evaluating decisions.

Roles of the Managerial Accountant

Management accountants can either be the controller, treasurer, internal auditor, or the one who has a direct or indirect involvement on the daily operations of an entity.

The chief accountant, who is tasked to manage and oversee the accounting unit of the company, draws up reports, and explains and discusses information with the line manager(s) is known as the controller. If there is the need to augment capitals or manage cash, assets, or investments, the treasurer should be entrusted to perform those functions. The internal auditor examines the accounting procedures, relevant reports, and the organization’s performance.

Managers in line positions or those with direct involvement in the operations of the facilities can either be hospital directors, teachers, or assembly workers. On the other hand, managers in staff positions support the company’s mission but are indirectly involved in the unit’s operations. These are controllers, treasurers, human resource directors, etc.

Career in Managerial Accounting

The Institute of Management Accountant (IMA) conducts the Certified Management Accountant (CMA) program. Aside from other educational requirements, applicants must have at least 2 years of continuous practice in management accounting to be qualified.

Like any other profession, managerial accountants also adhere to a code of ethics. As such, they are expected to be competent, diligent in their work, exhibit integrity, be objective, and honor and secure client’s confidentiality.