Managerial Accounting Assignment Help

Introduction
Management accounting can be viewed as ‘Management-oriented Accounting’. Basically it is the
study of managerial aspect of financial accounting, "accounting in relation to management function". It
shows how the accounting function can be re-oriented so as to fit it within the framework of
management activity. The primary task of management accounting is, therefore, to redesign the
entire accounting system so that it may serve the operational needs of the firm. If furnishes definite
accounting information, past, present or future, which may be used as a basis for management action.

What is Managerial Accounting?

Managerial accounting is concerned with providing information to managers, that is, to those who are
inside an organization and who direct and control its operations. Managerial accounting can be
contrasted with financial accounting, which is concerned with providing information to stockholders,
creditors and others who are outside an organization.
Managerial accounting is an activity that provides financial and nonfinancial information to an
organization’s managers. Managers include, for example, employees in charge of a company’s
divisions; the heads of marketing, information technology, and human resources; and top-level
managers such as the chief executive officer (CEO) and chief financial officer (CFO). To do their jobs,
such managers need more than just the general-purpose financial statements provided by the
financial accounting system. This section explains the purpose of managerial accounting (also called
management accounting) and compares it with financial accounting.

Uses of management accounting

Management accounts will enable you to:

 Compare your accounts with original budgets or forecasts

 Manage your resources better
 Identify trends in your business
 Highlight variations in your income or spending which may require attention

They should be used for the following:

Measurement of Performance: Managers have to compare the actual results of operations to
budgeted figures to evaluate the performance of the business. They use managerial accounting
techniques such as standard costing to evaluate the performance of specific departments. They then
make necessary adjustments in those departments which are not performing well.

Planning and control

 Collecting cash
 Controlling stocks
 Controlling expenses
 Co-ordination and monitoring of strategy/performance
 Monitoring gross margins

Managers use managerial accounting techniques to plan what to sell, how much to sell, what price is
to be charged to reimburse the costs of production and also earn an optimal profit. Also they have to
plan how to finance the operations and how to manage cash etc. This is very important to keep the
business operations working smoothly. The capital budgeting and master budget are the two
important topics in this area.

Decision making

 Using cost information for pricing, capital investment and marketing

 evaluating market and product profitability
 evaluating the financial effect of strategies and plans

When managers have to decide whether or not to start a particular project, they need managerial
accounting information to estimate the benefits of various opportunities and decide which one to
choose. Mangers often use relevant costing techniques.

Record keeping

 recording business transactions

 measuring results of financial changes
 projecting financial effects of future transactions
 preparing internal reports in a user-friendly format

Managerial accounting principles and concepts

Principles
Management accountants can rely on causality and analogy as foundational principles as they are
grounded in decision science – the laws of logic.
Causality principle — the relation between a managerial objective's quantitative output and the
input quantities that must be, or must have been, consumed if the output is to be achieved.
Principle of Causality enables modeling the organization's costs based on the relationship between the
inputs and outputs of the resources involved in the production of products and services it provides.
Often this is straightforward when dealing with strong causal relationships (i.e. raw materials to make
product A). However, where weaker causal relationships exist, costs need to be attributed according to
the concept of attributability, which maintains the integrity of causality.
Analogy principle — the use of causal insights to infer past or future outcomes.
Principle of Analogy governs the user of management accounting information's ability to apply the
knowledge or insights gained from the causal relationships modeled (e.g., in planning, control, what-if
analysis) using inductive and deductive reasoning about past and future outcomes for continuous
optimization efforts.

Concepts
The following concepts serve as operational guidelines and modeling building blocks to the two main
principles (causality and analogy) in developing a reflective cause & effect model and then using the
information the model provides. These concepts are intended to cover a variety of assumptions that
would make up a model, their characteristics, and relationships and to provide rational perspectives
when modeling many managerial costing issues.
The first ten concepts support the Principle of Causality the modeling of Cause & Effect-based
modeling principles, while the remaining four concepts are applicable to the Principle of
Analogy and informational in nature and supports managers with decision making guidelines.
Concepts applicable to causality and modeling:

 Attributability
 Capacity
 Cost
 Homogeneity
 Integrated data orientation
 Managerial objective
 Resource
 Responsiveness
 Traceability
 Work

Concepts applicable to analogy and information use:

 Avoidability
 Divisibility
 Interdependence
 Interchangeability

The limitations of managerial accounting

Though managerial accounting is helpful tool to the management as it provides information for
planning, controlling and decision making, still its effectiveness is limited by a number of reasons.
Some of the limitations of managerial accounting are as follows:

1. Based On Accounting Information

Managerial accounting is based on data and information provided by financial accounting and cost
accounting. As such the correctness and effectiveness of managerial decisions will depend upon the
quality of data provided by cost and financial accounts. So, effectiveness of management account is
limited to the reliability of sources of information.

2. Lack Of Knowledge
The use of managerial accounting requires the knowledge of number of related subjects. Deficiency in
knowledge in related subjects like accounting principles, statistics, economics, principle of
management etc. will limit the use of management accounting.

3. Intensive Decisions
Decision taking based on managerial accounting that provide scientific analysis of various situations
will be time consuming one. As such management may avoid systematic procedures for taking
decision and arrive at decision using intuitive. And intuitive limit the usefulness of managerial
accounting.

4. Managerial Accounting Is Only A Tool

The tools and techniques of managerial accounting provide only information and not decisions.
Decisions are to be taken by the management and implementation of decisions are also done by
management.

5. Evolutionary Stage
Managerial accounting is still in a development stage and has not yet reached a final stage. The
techniques and tools used by this system give varying and differing results. It is still named as internal
accounting and/ or operational accounting.

6. Personal Prejudices And Bias

The interpretation of financial information may differ from person to person depending upon the
capability of the interpreter. Analysis and interpretation of data and information may be influenced by
personal basis. As such, the objectivity of decision may be affected by personal prejudices and bias.

7. Psychological Resistance
Changes in traditional accounting practices and organizational set up are required to install the
managerial accounting system. It call for a rearrangement of the personnel and their activities and
framing of new rules and regulations which generally may not be liked by the people involved.
Managerial accounting varies from company to company. Each managerial accounting system is also
interacting with a unique business. Each business has its own estimates and traditions. Therefore,
each managerial accounting system has its own flaws and challenges.

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.

Cash Flow Analysis

Managerial accountants perform cash flow analysis in order to determine the
cash impact of business decisions. Most companies record their financial
information on the accrual basis of accounting. Although accrual accounting
provides a more accurate picture of a company's true financial position, it also
makes it harder to see the true cash impact of a single financial transaction. A
managerial accountant may implement working capital management strategies in
order to optimize cash flow and ensure the company has enough liquid assets to
cover short-term obligations.

When a managerial accountant performs cash flow analysis, he will consider the
cash inflow or outflow generated as a result of a specific business decision. For
example, if a department manager is considering purchasing a company vehicle,
he may have the option to either buy the vehicle outright or get a loan. A
managerial accountant may run different scenarios by the department manager
depicting the cash outlay required to purchase outright upfront versus the cash
outlay over time with a loan at various interest rates.

Inventory Turnover Analysis

Inventory turnover is a calculation of how many times a company has sold and
replaced inventory in a given time period. Calculating inventory turnover can help
businesses make better decisions on pricing, manufacturing, marketing, and
purchasing new inventory. A managerial accountant may identify the carrying
cost of inventory, which is the amount of expense a company incurs to store
unsold items. If the company is carrying an excessive amount of inventory, there
could be efficiency improvements made to reduce storage costs and free up cash
flow for other business purposes.
Constraint Analysis
Managerial accounting also involves reviewing the constraints within a production
line or sales process. Managerial accountants help determine where bottlenecks
occur and calculate the impact of these constraints on revenue, profit, and cash
flow. Managers can then use this information to implement changes and improve
efficiencies in the production or sales process.

Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order to
acquire assets and increase its return on investments. Through balance
sheet analysis, managerial accountants can provide management with the tools
they need to study the company's debt and equity mix in order to put leverage to
its most optimal use. Performance measures such as return on equity, debt to
equity, and return on invested capital help management identify key information
about borrowed capital, prior to relaying these statistics to outside sources. It is
important for management to review ratios and statistics regularly to be able to
appropriately answer questions from its board of directors, investors, and
creditors.

Accounts Receivable (AR) Management

Appropriately managing accounts receivable (AR) can have positive effects on a
company's bottom line. An accounts receivable aging report categorizes AR
invoices by the length of time they have been outstanding. For example, an AR
aging report may list all outstanding receivables less than 30 days, 30 to 60 days,
60 to 90 days, and 90+ days. Through a review of outstanding receivables,
managerial accountants can indicate to appropriate department managers if
certain customers are becoming credit risks. If a customer routinely pays late,
management may reconsider doing any future business on credit with that
customer.

Budgeting, Trend Analysis, and Forecasting

Budgets are extensively used as a quantitative expression of the company's plan
of operation. Managerial accountants utilize performance reports to note
deviations of actual results from budgets. The positive or negative deviations
from a budget also referred to as budget-to-actual variances, are analyzed in
order to make appropriate changes going forward.

Managerial accountants analyze and relay information related to capital

expenditure decisions. This includes the use of standard capital budgeting
metrics, such as net present value and internal rate of return, to assist decision-
makers on whether to embark on capital-intensive projects or purchases.
Managerial accounting involves examining proposals, deciding if the products or
services are needed, and finding the appropriate way to finance the purchase. It
also outlines payback periods so management is able to anticipate future
economic benefits.

Managerial accounting also involves reviewing the trendline for certain expenses
and investigating unusual variances or deviations. It is important to review this
information regularly because expenses that vary considerably from what is
typically expected are commonly questioned during external financial audits. This
field of accounting also utilizes previous period information to calculate and
project future financial information. This may include the use of historical pricing,
sales volumes, geographical locations, customer tendencies, or financial
information.