In management accounting or managerial accounting, managers use the provisions

of accounting information in order to better inform themselves before they decide matters within
their organizations, which aids their management and performance of control functions.

Accounting is supposed to be boring: pencil-pushing bean counters, adding endless

columns of numbers. However, when it is your business that is concerned, and you need to know
how to price your product, how many units you need to sell in order to be profitable or how
much of a bonus you can afford to give your employees, accounting is anything but boring. This
is managerial accounting.

Managerial accounting, also known as cost accounting, is the process of identifying,

measuring, analyzing, interpreting, and communicating information to managers for the pursuit
of an organization's goals. The key difference between managerial and financial accounting is
managerial accounting information is aimed at helping managers within the organization make
decisions, while financial accounting is aimed at providing information to parties outside the
organization.

Managerial Accounting vs. Financial Accounting

Managerial accounting consists of the internal systems that an organization uses to

measure and evaluate its processes for the management of the organization. Financial accounting
deals with providing information to those outside the organization, such as stockholders and
creditors.

Components of Managerial Accounting

The most recognized components of managerial accounting are budgets, internal

management performance reports that compare actual results to budgets or projections, reports of
income and expenses, reports of the return on investment, and sales analyses. Less widely known
components are comparisons of costs of goods sold to standard costs, a companywide "balanced
scorecard" and activity-based cost analyses.
BREAKING DOWN Managerial Accounting
Managerial accounting encompasses all fields of accounting aimed at informing
management of business operation metrics. Managerial accountants use information relating to
the costs of products or services purchased by the company. Budgets are also extensively used as
a quantitative expression of the business’s plan of operation. Individuals in managerial
accounting utilize performance reports to note deviations of actual results from budgets.

Margin Analysis
Managerial accounting handles margin analysis to assess profits when weighed against varying types of
costs. 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 equal
total expenditures. This information calculated by managerial accountants is useful for
determining price points for products and services.

Constraint Analysis

Managerial accounting also manages constraints within a production line or sales process.
Managerial accountants determine where principle bottlenecks occur and calculate the impact of
these constraints on revenue, profit, and cash flow.

Capital Budgeting

Managerial accounting involves utilizing information related to capital expenditure decisions.

Managerial accountants utilize standard capital budgeting metrics, such as net present
value and internal rate of return, to assist decision makers on whether to embark on capital-
intensive projects or purchases. Managerial accounting involves examining proposals, deciding if
the products or services are needed, and finding the appropriate way to finance the purchase. It
also outlines payback periods so management is able to anticipate future economic benefits.

Trend Analysis/Forecasting

Managerial accounting involves reviewing the trendline for certain costs and investigating
unusual variances or deviations. This field of accounting also utilizes previous period
information to calculate and project future financial information. This may include the use of
historical pricing, sales volumes, geographical locations, customer tendencies, or financial
information.

Product Costing/Valuation

Managerial accounting deals with determining the actual costs of products or services.
Managerial accountants calculate and allocate overhead charges to assess the true expenses
related to the production of a product. The overhead expenses may be allocated based on the
quantity of goods produced or other drivers related to the production, such as the square foot of
the facility. In conjunction with overhead costs, managerial accountants use direct costs to
properly assess the cost of goods sold and inventory that may be in different stages of
production.
When we talk about cost behavior, we aren't referring to "good" or "bad" behavior. Cost behavior
is nothing more than the sensitivity of costs to changes in production or sales volume. The range
of output or sales over which cost behavior patterns remain unchanged is called the relevant
range.

Fixed costs: Fixed costs are constant in total over the relevant range. Fixed costs per unit often
cause difficulties for students because of the inverse relationship between fixed costs and
increases in production. As production increases, total fixed costs stay the same within the
relevant range, but since we are dividing a constant numerator [total fixed costs] by a
progressively larger denominator [total production or sales], the resulting costs per unit become
smaller and smaller. Fixed costs include things like rent, insurance premiums, salaries,
depreciation and property taxes..

Variable costs: Variable costs vary in total with volume, but are constant per unit within the
relevant range. Total variable costs for a given situation are equal to the number of units
multiplied by the variable cost per unit. Variable costs include things like labor and materials.
Some overhead [indirect costs] such as indirect labor, supplies and some utilities are also
variable. Note that the graph of a variable cost is a straight line with positive slope, beginning at
the origin. the slope of the variable cost line is the variable cost per unit.
Mixed costs: A mixed costs contains both fixed and variable elements. There are a variety of
procedures that can be employed to separate the fixed and variable components. The easiest is to
use two points on the total cost line to derive the slope and intercept. This is rough and ready and
may yield inaccurate results. Regression analysis is a more accurate procedure which also has the
benefit of providing measures of goodness of fit; these tell us how well the derived equation fits
the observed data. The Y-intercept of a mixed cost line is the total fixed costs. The slope is the
variable cost per unit, and any point on the line represents the total cost at the indicated volume.
Click here for a graph.

Step costs: Yet another cost behavior pattern has a stair step pattern. Charlie doesn't happen to
have any costs that behave this way, but if he did, they would look like this.
Fixed costsare constant in total regardless of the activity level. Thus, the fixed costs in March (as
well as in all months) would be equal to $30,000.

Variable costsare constant per unit regardless of the activity level. The variable cost per unit can
be calculated using the given information for February as follows:

$10,000 ÷ 5,000 units = $2.00 per unit

Thus, the variable costs in march were equal to $16,000[8,000 units x $2.00].

The mixed costscan be calculated by taking the total cost and subtracting the fixed and variable
costs from it as follows:

70,500 - 30,000 - 16,000 = $24,500