Businesses are complex entities that involve a great deal of decision making. Knowing how to make sound decisions is paramount to success. Managerial accounting provides a range of tools that help businesses make strategic decisions. This article examines the principles and tools of managerial accounting, how they are used to support business decision making and the benefits they offer.
What is Managerial Accounting?
Managerial accounting is the practice of using financial information to inform decision making. It combines accounting principles with strategic planning and budgeting that analyse future trends to identify potential risks and opportunities. It is often referred to as managerial or cost accounting and is intimately linked to decision making and strategy.
Benefits of Managerial Accounting
The primary objective of managerial accounting is to help businesses make more informed, profitable decisions. It provides a range of tools for identifying, measuring and predicting costs and offering insights into how businesses can improve operational and financial results.
When used appropriately, tools of managerial accounting can greatly enhance business performance and profitability. Here are a few of the primary benefits:
• Increased efficiency: Managerial accounting provides a comprehensive view of the performance and cost of business functions, allowing for improved decision making and better allocation of resources.
• Improved financial performance: By focusing on reducing costs and increasing profits, managerial accounting can provide insights and guidance to ensure the best financial outcome for a business.
• Improved planning and forecasting: Predictive analytics enables businesses to plan more effectively and quantify potential risks or opportunities.
• Improved operational performance: Managerial accounting provides an accurate measure of operational performance, enabling a business to quickly identify issues and make changes to improve efficiency.
• Improved decision making: With better data-based insights, businesses can make better decisions faster, avoiding costly mistakes.
Principles of Managerial Accounting
Managerial accounting is based on the same principles underlying all business accounting: the revenue and cost modeling and the economic concept of opportunity cost. Other principles include:
• Financial Statements: Companies use financial statements (Income Statement, Cash Flow Statement and Balance Sheet) to analyze the performance.
• Cost-Benefit Analysis: Costs and benefits are tracked to determine the best way to allocate resources.
• Cost Accounting: This assesses the cost of goods and services by analyzing labor, materials and overhead costs.
• Activity-Based Costing: This measures the cost of activities that a company undertakes to identify areas of inefficiency.
Tools of Managerial Accounting
Managerial accounting tools provide businesses with the ability to evaluate performance, identify problems, manage resources, make strategic decisions and improve operations. Here are the main tools and techniques used:
• Budgeting: Companies create financial plans to guide operations, guide decision making and to track performance.
• Forecasting: Predictive analytics are used to anticipate future trends and identify potential risks and opportunities.
• Variance Analysis: This compares expected outcomes with actual outcomes to identify areas of inefficiency.
• Break-Even Analysis: Companies analyse their fixed and variable costs to identify their break-even point and how to boost profits.
• Responsibility Accounting: This divides profits and costs by branch, department or individual to assess the performance of individual components.
• Capital Budgeting: Companies use this to assess and optimize the return on capital investments.
Managerial accounting provides the data, analytics and insights businesses need to make better decisions and maximize returns. By understanding the principles and tools, companies can use them effectively to support their decision-making processes and boost business performance. With the right information and insight, businesses can make faster, more informed decisions and improve their overall profitability.