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Concept Version 12
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Managerial Accounting

Through integrating accounting knowledge with strategic decision-making, organizations can improve performance, refine strategy, and mitigate risk.

Learning Objective

  • Integrate a knowledge of accounting with its impact on strategic decision-making


Key Points

    • Through utilizing managerial accounting perspectives, strategic managers can vastly improve their understanding of performance and recognize areas of potential improvement.
    • One critical difference between financial and managerial accounting is that managerial accounting is designed to flexibly align to current operations, while financial accounting sticks to global formats.
    • Another key difference between financial and managerial accounting is chronological focal point. Managerial accounting is forward-looking, while financial accounting tends to look at the past.
    • A few examples of managerial accounting include cost benefit analysis, life cycle costs, developing new business metrics, and geographically segmented reporting.

Terms

  • financial accounting

    Accounting that focuses on preparation of stakeholder documents (particularly for publicly traded companies) and collecting data on past operational performance.

  • managerial accounting

    Accounting that combines strategic decision-making with accounting knowledge through providing specific tools to measure the financial implications of various internal activities.


Full Text

Management accounting is one of the most interesting and broad-minded applications of the accounting perspective. There exists a strong relationship between the knowledge accounting delivers to managerial teams, and the strategic and tactical decisions made by management. Through this integration, organizations can improve their decision-making to strategic value in the form of improved performance and mitigated risks.

Differentiating Managerial Accounting

When looking at traditional financial accounting, managerial accounting differs in a few key ways:

  • For public organizations, a variety of reports are released quarterly and annually for stakeholders. Managerial accounting creates additional documents used for internal, strategic decision-making.
  • Financial accounting is generally historical, while managerial accounting is about forecasting.
  • Managerial accounting tends to lean a bit more on abstraction, utilizing various models to support financial decisions.
  • While financial accounting fits the mold expected by stakeholders, managerial accounting is flexible and strives to meet the needs of management exclusively.
  • Financial accounting looks at the company holistically, while financial accounting can zoom in at various levels (i.e. product level, division level, etc.)

Differences between Financial and Managerial Accounting

This is a great image depicting the various differences in perspective found between different accounting methodologies. Looking at managerial accounting in this diagram, one can better understand its place in the organization.

This is a great image depicting the various differences in perspective found between different accounting methodologies. Looking at managerial accounting in this diagram, one can better understand it's place in the organization.

Examples of Managerial Accounting

There are countless specific examples of managerial accounting practices. Taking a look at a few will provide additional scope and perspective on the field:

Throughput Accounting: Production processes have a great deal of inter-dependency. This can create opportunity costs, as interdependent resources are being restrained. Measuring the contribution per unit of constrained resource is called throughput accounting.

Lean Accounting: During the days when the Toyota Production System was just becoming celebrated as a leaner process, accountants began to consider the restrictions of traditional accounting methods on lean processes. As a result, managerial accounts began constructing a better way to measure just-in-time manufacturing process success.

Some simpler examples of common managerial accounting tasks include developing business metrics, cost-benefit analyses, IT cost transparency, life cycle cost analysis, strategic management advice, sales forecasting, geographically segmented reporting, and rate and volume analysis.

Managerial accounting is inherently flexible, and drives towards maximizing internal efficiency through careful consideration of opportunity costs and various customized metrics.

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