how managerial accounting works
managerial accounting aims to improve 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 the pillars of managerial accounting are planning decision making and controlling in addition forecasting and performance tracking are key components through this focus managerial accountants provide information that aims to help companies and departments in these key areas managerial accounting vs financial accountingthe 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 1because 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 managerial accounting does not need to follow gaap standards because it is used for internal purposes and not for external reports types of managerial accountingproduct 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 equals total expenses break even point analysis is useful for determining price points for products and services 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 