Management Accounting
Management accounting is also referred to as managerial accounting and can be defined as an
accounting branch that deals with the measurement, recording, analysis and interpretation of
information that can be used by the management to make important decisions regarding an
organization’s future activities and operations.
Its proper application plays a major role in planning, formulating policies and controlling the
general operations of a business. Management accounting data is used by all levels of
management i.e. top-level, middle-level and lower level, with each level requiring different
types of information.
This type of accounting is distinct from financial accounting or bookkeeping. They can be
differentiated by the intended use of information. Financial accounting is mainly focused on
providing information about financial activities to external parties i.e. external stakeholders or
those outside the company while management accounting information is aimed at managers to
help them in the decision making process i.e. for internal use. Unlike financial accounting that is
concerned with recording and reporting various financial transactions of a business,
management accounting focuses more on forecasting and long-term business decisions and
goes beyond the day to day tallying of finances. This type of accounting is more concerned with
recording and communicating information that helps managers and other concerned parties in
decision-making processes. Thus, it focuses more on internal decision-making within an
enterprise.
In order to provide managers with quality information that can be used to make sound
decisions, various activities, operational metrics and events are carefully analyzed and such
data is then translated into usable information. Detailed information related to the activities of
an organization can be obtained through such analysis techniques. Unlike financial accounting,
the various techniques that can be used in management accounting are quite flexible and are
not dictated by accounting standards. They can vary largely between different organizations i.e.
they are selected based on the particular management’s informational needs.
TECHNIQUES USED:
Various techniques are used in managerial accounting to achieve different objectives. Some of
them are listed below:
Capital budgeting: Capital budgeting techniques are used in decision-making processes
related to expenditure of capital. The two main techniques used are Internal Rate of
Return (IRR) and Net Present Value (NPV). It helps managers to decide whether long-
term investments are profitable to the business or not.
Cash flow analysis: Cash flow analysis is done to determine the cash impact i.e. the cash
inflows or outflows resulting as a consequence of a specific business decision.
Margin analysis: It primarily deals with the determination of the breakeven point and is
one of the most widely used techniques in managerial accounting. Information
regarding breakeven point is used to make decisions and calculate the optimal sales mix
for various product lines of a company.
Constraint analysis: The major bottlenecks impacting a business can be monitored by
analyzing the company’s product lines. Such constraints or bottlenecks could be within
the sales process, the production line, etc. Decisions can then be taken to reduce or
eliminate the inefficiencies caused by these bottlenecks and thus increase profits.
Trend Analysis: Various trends or patterns in product costs and profits are identified
and compared with the forecasted values under this technique. The reasons for
variances, if any, are analyzed.
Financial Leverage Metrics: It is concerned with providing reports about how an
organization uses its borrowed capital for the purpose of increasing investment returns
and for asset acquisition. Using this information, managers can analyze the debt and
equity mix of the business and take decisions in order to use them in the best possible
way.
Inventory valuation and product costing: Various costs associated with a firm’s
products, inventory levels, overhead charges, etc. are identified and calculated under
inventory valuation and costing. Product costs are further classified as direct costs,
indirect costs, fixed costs, variable costs, etc. It helps managers to make decisions
regarding product costs and required profit levels.
Thus, management accountants play an important role in any organization. They provide
various key insights using available financial and statistical information that are used by
managers and directors to make important decisions regarding the future of the company.
