Managerial accounting involves collecting, analyzing, and reporting information about the operations and finances of a business. These reports are generally directed to the managers of a business, rather than to any external entities, such as shareholders or lenders.
The functions of managerial accounting include:
- Margin analysis. Determining the amount of profit or cash flow that a business generates from a specific product, product line, customer, store, or region.
- Breakeven analysis. Calculating the mix of contribution margin and unit volume at which a business exactly breaks even, which is useful for determining price points for products and services.
- Constraint analysis. Understanding where the principle bottlenecks are in a company, and how they impact the ability of the business to earn revenues and profits.
- Target costing. Assisting in the design of new products by accumulating the costs of new designs, comparing them to target cost levels, and reporting this information to management.
- Inventory valuation. Determining the direct costs of cost of goods sold and inventory items, as well as allocating overhead costs to these items.
- Trend analysis. Reviewing the trend line of various costs incurred to see if there are any unusual variances from the long-term pattern, and reporting the reasons for these changes to management.
- Transaction analysis. After spotting a variance through trend analysis, a person engaged in managerial accounting might dive deeper into the underlying information and examine individual transactions, in order to understand exactly what caused the variance. This information is then aggregated into a report to management.
- Capital budgeting analysis. Examining proposals to acquire fixed assets, both to determine if they are needed, and what the appropriate form of financing may be with which to acquire them.
Given the broad range of investigative and analysis activities noted above, we could state that managerial accountants acts in an advisory role, to warn managers of impending issues and to direct their attention toward possibly profitable opportunities.
The other type of accounting is financial accounting, which is concerned with the proper recordation and reporting of accounting transactions to be in compliance with the applicable accounting framework (such as Generally Accepted Accounting Principles or International Financial Reporting Standards). The primary output of financial accounting is the financial statements.