What is Managerial Accounting? 

Managerial accounting is described as the practice wherein the financial information is analyzed, interpreted, and communicated to the managers to achieve the organization's goals.  

Managerial accounting different from financial accounting because the purpose of managerial accounting is to assist the company in taking useful business decisions while financial accounting provides necessary information which helps in taking such decisions. 

What Are the Features of Managerial Accounting? 

The features of managerial accounting can be discussed under the following heads: 

1. Selective Nature: Managerial accounting helps in selecting only that information that is necessary for the management of the company out of all the information provided by the financial accounting system. 

2. More Emphasis on Future: The management accountants do not keep track of the historical data and believe in the futuristic approach. The use of standard costing, budgetary control, and cost variances techniques by the accountants highlights the futuristic approach of managerial accounting. 

3. Study causes and effects relationship: Unlike financial accounting, management accounting helps in identifying the reason for the amount of profit earned or loss suffered by the company during the year by studying the cause-and-effect relationship between the variables that contribute towards affecting the business activity and the degree of profitability. 

4. Improvement of efficiency: The management accountants are handed over the task to match the actual performance of the management with that of the targeted performance and if there is any negative deviation, the causes are found out, and then ideas are shared amongst the employees to improve their efficiency. 

Different Types of Techniques Used in Managerial Accounting 

1. Product Costing and Valuation: Product costing helps in determining the total costs that are involved in the manufacturing of a product which is divided into fixed, variable, direct, and indirect costs. The managerial accountants then calculate and allocate the overheads to determine the total expenses incurred in producing a product. 

2.Cash Flow Analysis: The managerial accountants generally perform the cash flow analysis to determine the impact that business decisions had on the cash flows.  The managerial accountants by adopting capital management strategies help to optimize cash flows in the company thereby ensuring that it has sufficient liquid assets that can be used to meet its short-term obligations. 

3. Inventory Turnover Analysis: The inventory analysis under managerial accounting helps to calculate the number of times an inventory has been sold and replaced by the company in a specified period. This kind of analysis helps the management in better decision-making as compared to financial accounting with regards to pricing, manufacturing, marketing, and purchasing of new inventory. 

4. Constraint Analysis: Managerial accounting helps in identifying the constraints that occur in the production line and the accountants identify the areas where such loopholes occurred and the impact that it had on the profits, cash flows of the company. The managers thereafter use this information to improve efficiency during the production and sales process. 

5. Margin Analysis: It involves identifying the benefits that are brought to the organization by optimizing the production. The margin analysis is an essential technique that involves calculating the breakeven point to determine the optimum sales mix necessary for the company's products. 

6. Capital Budgeting analysis: Capital budgeting involves the analysis of the information which are required to make important decisions with regards to capital expenditures. It involves the calculation the of net present value (NPV) and internal rate of return (IRR) by the accountants. 

What Is the Scope of Managerial Accounting? 

The main objective of managerial accounting is to maximize profits and minimize losses. It is a rearrangement of information on financial statements which is required by the management for taking effective decisions.  

It is impossible to enforce managerial decisions without referring to the concrete financial information which serves as a basis for adopting suitable managerial techniques.  Managerial accounting is different from financial accounting in the sense that it focuses more on supplying information that would nullify the effect of a problem rather than helping to conclude. 

Limitations of Managerial Accounting 

In management accounting, the information is usually gathered from the financial statements which help in taking better managerial decisions, as a result, the strength of the decisions taken depends on the quality of the data as provided by the financial statements so prepared by the management.  In managerial accounting, different managers may interpret the same information in a variety of ways depending on their skill and experience which leads to biases in the decision-making process.

Important Terms used in Management Accounting

• Accounting Equation: The accounting equation comprises assets on the one side and liabilities and shareholder's equity on the other side. All the 3 terms form part of the balance sheet. Under the equation, both sides are balanced out. 
• Net income: It is determined by preparing an income statement wherein the total expenses are deducted from the total revenue earned by the business in a given year to arrive at a figure of net income. 
• Cost of Goods Sold: It can be defined as the amount of cost incurred in manufacturing a product or rendering service but does not include any indirect costs. 
• Contribution Margin: It is calculated by subtracting variable cost per unit from the sales price and helps managers to evaluate the impact that their decisions will have on the net income of the company.   
• Break-even Analysis: It helps in determining how many units of a product are to be sold so that the company incurs is no net loss or earns no net profit. 
• Price Variance: It helps to evaluate how a sudden change in the cost of direct materials affects the total cost. 
• Quantity Variance: It shows that how using small quantities of direct materials reduces the total costs and using large quantities will lead to wastage and ultimately increase total costs. 

Formulas 

$\begin{array}{l}\text{Assets = Liabilities + Shareholders's Equity}\text{.}\\ \text{Net Income = Revenue - Expenses}\text{.}\\ \text{Cost of Goods Sold = Cosy of Production + Opening Stock of finished goods - Closing stock of finished goods}\text{.}\\ \text{Contribution Margin = Sales Price - Variable cost per unit}\text{.}\\ \text{Break-even point = Fixed Cost / Contribution margin per unit}\text{.}\\ \text{Price Variance = (Standard Price - Actual Price) }\times \text{ Actual quantity}\text{.}\\ \text{Quantity Variance = (Standard Quantity - Actual Quantity) }\times \text{ Standard Price}\text{.}\end{array}$

Context and Application 

Managerial Accounting is generally used in taking short-term and long-term business decisions that contribute to maintaining the financial health of the company. Managerial accounting is mostly intended at increasing the operational efficiency of the company and taking some important long-term investment decisions which contribute immensely towards the growth of the organization.  

Managerial accounting is also used in those situations where a company is faced with a highly competitive and fast-paced business environment. Moreover, this type of accounting is helpful in those situations where a company needs an effective decision-maker.  It enables managers to have an access to financial information as to when the need for the same arises shortly.