Managerial accounting is one of the concepts in accounting and it provides important information to help users to come up with better decisions concerning certain issues in business organizations. Managerial accounting provides the users with both financial as well as non financial information to organizations management team and decision makers. There are certain important things which make up managerial accounting and which make it easier and possible for it to be applied in decision making. These include managerial accounting basics which outline the purpose and nature of managerial accounting, managerial decisions, the aspects of accounting and fraud and ethics issues which arise in managerial accounting. There are also the managerial cost concepts which deals with different types of cost involved in managerial accounting, how the costs are classified as well as the cost concepts covered in companies which provide services. (Shaw, 2010)
The final aspect of managerial accounting deals with reporting process for manufacturing activities; this is the analytical part of it. This provides way in which the costs are reported and includes use of balance sheets, income statement, flow of activities which can be in a diagram or flow chart and a manufacturing statement which shows all the costs which have been incurred in manufacturing process. (Shaw, 2010)
Purpose and Uses of managerial accounting concepts and principles
The major purpose and use of managerial accounting is to provide important information which is useful in decision making. For instance costs which are incurred in production of a certain product can be used to come up with the best price which can be branded on those products in order to make profit. This is usually done through efficient collection of data concerning certain aspects, managing of that data properly where solid information is provided then finally reporting of the information as it is demanded by the users. (Shaw, 2010)
Managerial accounting concepts can be used to measure financial performance of an institution or government at large. For instance in a government set up there are lots of funds which are released and which should be accounted for, because of this government sectors concerned with public funds use managerial accounting concepts to analyze the usage of the released funds whether they are properly used or not. The managerial accounting principles are applied to the public sector organizations to encourage accountability. (Warren et al, 2008)
The principle of managerial accounting on the other hand they were designed in a way to suit the profit making organizations hence there are sectors they can not be applied like non-profit making organizations.
Nature of managerial accounting
There are certain major characteristics which make up managerial accounting and for them to be understood clearly a comparison is made between managerial accounting and financial accounting.
Users and decision makers
Different companies collect data, process the data and come up with financial reports and managerial accounting information which suit different categories of users. Managerial accounting focuses mainly on the internal use i.e. it provides information and data which is suitable for use by managers within the organization for making and implementing decisions concerned with company’s activities hence to come up with proper financial decisions. On the other hand financial accounting focuses mainly on external use i.e. it provides data and information that is suitable for use by investors and creditors. (Shaw, 2010)
Managerial accounting principles give emphasis to the future events i.e. what is expected to happen in future like changes in economic trends and how they can affect financial operations. On the other hand financial accounting focuses mainly on the current happenings and the past; this makes managerial accounting principles appropriate for use in public sector for making financial decisions. (Maher et al, 2007)
Purpose of information
Financial accounting information is basically used by investors and other external users to make investment decisions concerning the companies. For instance whether to invest in a certain company or not, whether to lend to the company or not, this is usually based on the financial report which has been provided. The external users use this information to identify opportunities in the companies and to come up suitable decisions whether to take the opportunities or not. On the other hand the internal users of the managerial information use it to plan for the future where they see an opportunity they plan on investment and where there is an obstacle plan on how to overcome the obstacle in future so as to achieve the desired outcome. It helps internal users to come up with planning and control decisions concerning certain things in the organization. (Shaw, 2010)
Flexibility of the practice
Managerial accounting is used for planning and controlling company activities by the internal users. Since there are different internal activities which are carried out in companies the information required is usually different based on the activity, hence making it difficult to have standardized managerial accounting systems in all companies. As a result of this the managerial accounting systems are usually flexible to fit different scenarios in companies. Designing of a managerial accounting system in a company is basically based on the nature of the business as well as the organization of internal operations in the company. (Wild et al, 2009).
It is possible to find that in company different managerial accounting systems are used by different managers in different positions based on the kind of information they want and how they want it to be reported. The only thing which should guide the managers is to know whether the information being collected can be useful for planning, decision making as well as control purposes. (Wild et al 2009).
Managerial accounting is involved with predictions of conditions and events, for instance one of the managerial accounting reports is the budget. Budget is very important since it gives predictions of things like revenue and expenses hence managers being in a position to make informed decisions. If the reports were only based on past and present it would be difficult for mangers to plan activities and they would be inefficient in managing and evaluating current activities in the company. (Wild et al 2009).
On the other hand financial accounting uses financial reports which are based on both past activities as well as current activities. This is to protect the external users of the information from getting false expectations of the business environment.
In the process of managerial accounting there are different costs which are incurred which are referred as managerial costs. These managerial costs are usually categorized based on management needs; they are classified based on behavior, traceability, controllability, relevance and function. (Weygandt, 2009)
Classifications based on behavior
There are two types i.e. fixed cost and variable cost, fixed costs are constant in that they do not change based on the range of activity carried out over a certain period of time. Variable costs on the other hand change based on fraction to changes in the volume of an activity being carried out. Classification of costs based on behavior is very important since it helps managers in making decisions on cost-volume-profit analysis as well as making short term decisions. (Warren et al, 2008)
Classification by traceability
Under this there are direct costs and indirect costs, direct costs they can be traced on a single cost object for instance a case where material and labor costs of an object can be added directly. Indirect costs can not be added directly to a product, for instance installation of a program in a company which is used by all departments in the company. Calculating costs incurred in a given department may not be easy since the installation cost is not direct to the department but indirect. (Maher et al, 2007)
Classification by controllability, this is basically based on the responsibilities given to different people in the organization. The costs can be either controllable or not controllable based on the responsibility given to the person in position. For instance one can be given responsibility to control certain costs which are incurred and others can be behold your powers to control, so the responsibility given determines whether certain costs can be classified as controllable or uncontrollable. This varies depending on organizational structure of companies. (Weygandt, 2009)
Classification by relevance, under this there are sunk costs and out-of pocket costs. Sunk costs are the costs which have already been incurred and they can not be changed by any means. This helps in making future decisions since one is aware of the costs which are there. For instance the costs incurred in purchasing office equipments. Out-of-pocket costs are the costs which require future spending of cash, these are very important in decision making since you plan ahead and know what exactly to spend. (Shaw, 2010)
Managerial accounting costs and principles are very important in business activities since they help business organizations in making viable decisions both current and future. The decisions which are made are concrete since they are based on facts from data and information collected, the data ns information is analyzed and managed based on requirements of an organization and provided as a final report. Because of the important information provided to organizations through managerial accounting it is important that managerial accounting concepts and principles be implemented in all business organizations.
Maher, M.W., Stickney, P.C., & Weil, R.L. (2007). Managerial Accounting: An introduction to concepts, methods and use. Cengage Learning publishers, Athens.
Shaw, W. (2010). Managerial accounting concepts and principles. Web.
Warren, C. S., Reeve M.J., & Duchac, J. (2008). Financial and managerial accounting. Cengage Learning Publishers, Athens.
Weygandt, J.J., Kimmel P.D., & Kieso, D.E. (2009). Managerial accounting: Tools for business decision making. (5th ed.). John Wiley and Sons Publishers, River Street Hoboken.
Wild, J.J., Shaw K.W., & Chiappetta, T. (2009). Fundamental Accounting Principles. (19th ed.). McGraw-Hill Irwin Publishers, United States.