Basics of Managerial Accounting

Product of BKMSH

Basics of Managerial Accounting

There are two central areas in accounting information system: financial accounting and management
accounting. The financial accounting system is engaged on dealing with the changes in assets and
liabilities, accounting revenues, and administration or management of finances. Primarily, financial
accounting involves making monetary records available to external users such as analysts, business
owners, prospective investors, and creditors. These people have hardly had the means of acquiring
information that is internal to the entity. They only rely on general reports released by the company. For
that reason, financial disclosures are explicit and adhere to defined standards. Moreover, in a financial
accounting system, external parties view these reports in an encapsulated form.
On the contrary, management accounting involves measures and methodologies that are concentrated
on the efficient utilization of an entitys resources, which aid the manager in augmenting the shareholder
and customer value. The information associated with managerial accounting is primarily directed on
goods or services, units in an organization, and business actions. Managerial accounting encompasses
topics on finance, marketing, and related disciplines. In addition, it covers long-term strategic plans,
operating budgets, and non-financial information such as operations percentage defects, rate of on-time
delivery, and outcomes of clients and customers surveys.
A fundamental objective of managerial accounting is to better or enhance the performance, strength,
and efficacy of management planning and control functions. Also, Managerial accounting aims to supply
the information that is needed when making internal decisions.

Management Activities
With the support of the management, business owners and key executives of an entity establish their
goals. With that in mind, companies amass resources, employ people, and participate in an array of
systematized business endeavors. The everyday activities of the management team constitute four
courses of action: decision making, planning, directing, and controlling.

Decision Making
Good decisions are derived from tireless accession and assessment of information. With good decisions
comes business value. Managerial accounting supplies the information necessary to incite decisionmaking processes. Also, the management team determines which among the other possible choices or
courses of action will support the company in effectively achieving its objectives.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Basics of Managerial Accounting

Planning
Planning is generally focused on identifying what needs to get done, how to carry it out, and who will
perform the necessary actions. Prior to establishing decisions or pursuing for the realization of these
decisions, the management must perform careful planning. With this, the company will be fixated on
unified objectives regardless of the employment status, position, or function of its people.
Budgets are an entitys financial plans. The management will determine the inflows and outflows of
economic resources. In addition, comprehensive financial and operational descriptions of expected and
forthcoming operations will be developed.

Directing
While planning for the future, managers have to oversee and supervise day-to-day business
undertakings. They have to delegate roles and responsibilities, guide the employees on how to
accomplish their chores, motivate and inspire them until the fulfillment of the tasks, and respond to
employees queries on how to pull off their tasks. Using a computerized accounting system, managerial
accountants take into account and list all the assignments and undertakings that must be realized.
Some of these include running trial balances and wrapping up accounting processes every end of the
month.

Controlling
Controlling keeps all business activities on track and identifies if the companys objectives are met.
According to University of North Florida, this can be achieved by measuring performance, comparing
actual performance with budgets, and taking action when needed. In evaluating and assessing the
performance, managers have different gauges.

Cost Classifications
Aside from common accounting concerns and issues identified with management and administrative
activities, companies involved in the manufacturing sector must also address matters regarding the
purchasing and processing of raw materials to the desired end product. Managers must answer
questions pertaining to the costs associated with producing a product or providing a service, effect of
decreasing the production volume relative to the cost, impact of automation of total costs, and measures
in controlling the costs.
There are three classifications of manufacturing costs that companies take into consideration when
producing goods or rendering services. They include: direct materials, direct labor, and manufacturing
overhead.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Basics of Managerial Accounting

Direct Materials
Raw materials are the primary materials utilized in the manufacturing process. These can either be
direct or indirect. Direct materials are materials that turn into an important component of the finished
goods and whose costs can be easily tracked to the end product. On the other hand, indirect materials
are associated with the manufacturing overhead.

Direct Labor
Direct labor is comprised of gross salaries anted to the people who directly work on the product. Also
referred as touch labor, direct labor compensates workers who touched the product while it was being
produced. If labor costs are incurred when there is no physical or direct contact to any product, it is
known as indirect labor. Examples include salaries of security guards, janitors, and supervisors.

Manufacturing Overhead
Manufacturing overhead covers all manufacturing costs excluding direct materials and direct labor.
Examples are property taxes, insurance on the facility, depreciation, indirect materials, and indirect
labor.

Product Costs versus Period Costs

Apart from manufacturing and non-manufacturing costs, product costs and period costs are the other
ways of monitoring costs.
Product costs are composed of the direct materials, direct labor, and manufacturing overhead; all of
which are important components in creating a product. These costs are listed in an inventory account
and are not considered as expense until they are marketed.
On the other hand, costs that are not product costs fall to the period costs category. These include
non-manufacturing costs, selling expenses, administrative costs, and rental costs, among others.

Other Costs
There are also costs associated with management activities variable and fixed costs; direct and
indirect costs; and differential, opportunity, and sunk costs.
Variable and fixed costs are cost categories footed on the behavior of costs relative to the changes in
volume. Direct and indirect costs are cost classifications based on the convenience of tracking the
costs to a cost object. Differential, opportunity, and sunk costs are terminologies utilized in problem
solving and in evaluating decisions.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Basics of Managerial Accounting

Roles of the Managerial Accountant
Management accountants can either be the controller, treasurer, internal auditor, or the one who has a
direct or indirect involvement on the daily operations of an entity.
The chief accountant, who is tasked to manage and oversee the accounting unit of the company, draws
up reports, and explains and discusses information with the line manager(s) is known as the controller. If
there is the need to augment capitals or manage cash, assets, or investments, the treasurer should be
entrusted to perform those functions. The internal auditor examines the accounting procedures, relevant
reports, and the organizations performance.
Managers in line positions or those with direct involvement in the operations of the facilities can either
be hospital directors, teachers, or assembly workers. On the other hand, managers in staff positions
support the companys mission but are indirectly involved in the units operations. These are controllers,
treasurers, human resource directors, etc.

Career in Managerial Accounting

The Institute of Management Accountant (IMA) conducts the Certified Management Accountant (CMA)
program. Aside from other educational requirements, applicants must have at least 2 years of
continuous practice in management accounting to be qualified.
Like any other profession, managerial accountants also adhere to a code of ethics. As such, they are
expected to be competent, diligent in their work, exhibit integrity, be objective, and honor and secure
clients confidentiality.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com