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What Is Managerial Accounting?

Few outside of the accounting field and executive management arena truly understand that managerial accounting transcends the recording of debits and credits. In fact, managerial accountants play a vital role in keeping companies running.

Managerial Accounting vs. Financial Accounting

Three characteristics distinguish managerial accounting from financial accounting: the audience for the information produced, the time period under observation, and the static or dynamic nature of the data.

Managerial Accounting Financial Accounting
Internal Audience External Audience
Future Projections Past Reporting
Dynamic Data Static Data

Managerial accounting focuses on what it takes to keep a business operating profitably. Tracking and projecting revenue and expense needs is critical. The data collected and the results reported help managers choose the best courses of action. Projecting the budget and investment cash flow are important functions that managerial accountants coordinate and lead. Since the outcome of managerial analysis is future-directed, assumptions and projections are used. These can and do change in scenario analysis, and assumptions are present in these projections and analyses.

Of course, financial accounting is also vital. The focus of financial accounting is to record the activity that has already occurred. Complete and accurate reporting is necessary to provide information to external investors, government taxing authorities and consumers. Compliance with accounting principles and government regulations is essential in financial reporting.

Management Accounting: Adding Value

Every organization needs people who understand the nuances of managerial accounting. Understanding business results and projections is essential to interpreting data for decision-making.

Historical data is not neglected in managerial analysis. Instead, the insights it provides into past results help predict the future. Decision-makers need to assess whether to stay on course or amend their plans. Being able to adjust to changes in the physical or economic environments rests on the shoulders of today’s business leaders.

Cost Accounting Is NOT Managerial Accounting

Cost accounting is but one key element of managerial accounting skills.

Analyzing and determining costs of products and services is critical to effectively pricing products and services for the marketplace. For example, the profit margin for re-tooling an aircraft engine and that of manufacturing the same engine from scratch wouldn’t be the same. Accurately accounting for all the expenses involved in each product, interpreting the potential market volume for each, and predicting the resources needed for each are functions of cost accounting.

Managerial accounting practices include those skill sets but extend to budget and variance analysis, operational control, risk management, capacity evaluations, and data analysis support to each business unit within an organization.

Just Another Required Course?

As a student of managerial accounting, you quickly learn that operational controls are just as important as financial controls. The turnover ratio of employees in the customer service department isn’t expressly reflected in the company’s income statement or balance sheet; however, business leaders know that that turnover rate is an element embedded within the bottom line through onboarding costs, lost productivity and training time.

A knee-jerk reaction to a high turnover rate has to be balanced by management assessment and knowledge of typical industry turnover rates, historical turnover rates and an understanding of the current economic job climate. Businesses might expect a high turnover number in customer service, but if the same occurs within production-line employees, it may be a red flag that warrants immediate concern.

Tough Choices

How does one choose between two equally good (or bad) choices? Which product lines are the most profitable? Will bundling products help or hinder revenue generation? Business leaders have to make these choices every day.

Tactical execution and measurements need to be in place to determine the success of strategic plans to enter new markets, expand product offerings, or sell off a well-established part of the business. To be effective, managerial accountants must have the skills to calculate, assess and communicate the options.

Dedicated Departments

Smaller and midsize companies often combine the functions of managerial and financial accounting under one umbrella. Such accounting departments require an equal focus on both aspects to support the needs of the internal and external audiences that will consume the financial data. When the two accounting competencies are combined into one department, it is important for department leaders to possess the knowledge and skills specific to each area.

In larger firms in the United States, managerial accounting departments assume the Financial Planning & Analysis (FP&A) function. FP&A Trends.com acknowledges that the FP&A function has always been around. Business Finance, Budgeting and Planning, Business Planning and Analysis, and Business Control are other names for FP&A.

Tradition Transformed

The eight core competencies evaluated through the Certified Management Accountant exam (CMA) cover the broad spectrum of skills expected from today’s management accounting professional.

In a recent article titled “Risk Management: It’s What We Do,” Strategic Finance magazine describes skills deemed necessary for management accounting:

  • Investment Decision-Making
  • Planning, Budgeting and Forecasting
  • Decision Analysis
  • Cost Management
  • Corporate Finance
  • Performance Management
  • External Financial Reporting Decision-Making
  • Financial Statement Analysis

What Is Expected of Accounting-Focused MBAs

An MBA program with a managerial accounting focus equips students with skills that enable them not only to create and evaluate performance reports of all types but also to provide context for the numbers. Skilled managers understand ratio analysis, provide management controls and perform risk assessments. They also serve as the go-to source for data evaluation.

To manage accounting departments and organizations as a whole, today’s financial leaders need decision-making and risk-management skills. By earning an MBA with an emphasis in Accounting, students can gain knowledge of advanced managerial accounting that will enable them to lead a company toward optimal performance.

Learn more about the UWF online MBA in Accounting program.


Sources:

Strategic Finance — Risk Management: It’s What We Do!

FP&A Trends — Around the World, FP&A Goes by Many Names


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