Managerial accounting, also called management accounting, is an organization's internal accounting provided to managers in order to inform planning, operations management, and decision-making. Because it is solely an internal tool, not distributed to the public, it is not required to follow GAAP. Instead it is tailored to an organization's or even individual manager's need for information for planning, pricing, staffing, sales, evaluation, or control. These reports follows internal procedures instead.
Types of Managerial Accounting Reports
Managerial accounting is naturally a vital part of the planning tool kit. Some common reports for planning purposes include:
Variance analysis determines, just like the name suggests, the difference between a standard or estimates and projections and actual costs. The difference between actual and standard costs, such as how much it costs two different computer chip manufacturers to produce the same chip, measures an organization's efficiency and is key to business benchmarking. Estimate or projection variance analysis is a way for a company to analyze its planning processes.
Bottleneck accounting is a specialty field in variance analysis that examines the variances that production bottlenecks create and their relative costs.
Analyzing how much something costs begins with measuring direct expenses such as materials and labor. More sophisticated managerial accounting includes indirect expense analysis, such as facility overhead or the costs of project accounting, and calculating opportunity costs, essentially what other ways the organization could have invested the money.
- Activity-based costing is a fairly recent, since the 1980s, cost analysis discipline that looks at costs by activity rather than by product. In many cases, this allows for deeper analysis of the organization as a system of inter-connected parts. It divides each product or service into the following:
- Unit-level activities (production of one unit)
- Batch-level activities (cost per batch)
- Product-sustaining activities (what's necessary to keep producing)
- Facility-sustaining activities (keeping the necessary physical plant in operation)
- Both total cost analysis and life cycle cost analysis examine the cost of a business process, such as research and development, or of a physical asset, such as equipment. Because these look at the total expenses involved in a particular business activity, they're vital to determining its profitability.
Return on Investment
Return on investment (ROI), is the other side of cost analysis. While it naturally includes cost analysis, it also measures the direct (and increasingly, indirect, such as brand enhancement) returns, and calculates the ratio.
Projections are estimates for the future, such as:
- Necessary resources
Because there are so many variables that can't be easily predicted, from inflation rates to consumer demand to materials prices, projections are one of the most complicated areas of managerial accounting and are usually built with extensive modeling.
The balanced scorecard is an offshoot of total quality management (TQM) and combines standard financial measures with measures from the customer satisfaction perspective (such as number of new products), business process perspective (such as efficiency measures or personnel turnover), and innovation and learning perspectives (such as the time staff spend on professional development).
Digital dashboards are applications that display critical business information through a graphic interface and are designed, like a car's dashboard, to provide the majority of needed information at a quick glance. Unlike standard reports, they run live, so a manager can see the most recent data available within its business context. They certainly became a business fad during the dotcom bubble, but like many business concepts that started as fads, are useful when implemented in the right way for the right situations.