Definition of Managerial Accounting
Managerial accounting is often referred to as management accounting. The Institute of Management Accountants describes management accounting as “the internal business-building role of accounting and finance professionals who design, implement, and manage internal systems that support effective decisions, and support, plan, and control the organization's value-creating operations.”1 In short, managerial accounting supports the decision making process through planning and controlling operations. Planning primarily appears in the budgeting process. Controlling occurs when managers compare actual performance with budgeted amounts to identify differences and then act upon differences that appear to be significant. Role of managerial Accounting
The practical role of the management accountant is to increase knowledge within an organization using a set of practices and techniques aimed at providing managers with financial and operational information to help them maintain effective control over corporate resources and reduce the risk associated with making decisions. Therefore the information generated by the management accountant should meet the following requirements: 1) allocate costs between costs of goods sold and inventories for internal and external profit reporting 2) provide relevant information to help managers make better decisions 3) provide information for planning, control and performance measurement In order to calculate profit for any given period, costs need to be charged to each individual product before matching them to revenues. This is to distinguish between costs of goods sold and costs associated with closing inventories and form the basis for determining the inventory valuation, current period’s costs and calculating profit, and also form the basis for determining the stock valuation to be included in the statement of financial position. This information is essential for meeting external financial accounting requirements and to produce internal profit reports. To provide relevant information for better decision making, the management accountant produces routine and non-routine reports. Routine reports relates to the profitability of various segments of the business such as products, services, customers and distribution channels in order to ensure that only profitable activities are undertaken. These reports also serve the purpose for resource allocation and product mix and discontinuation decisions. In some situations, cost information extracted from the costing system also plays a crucial role in determining selling prices, especially in markets where customized products and services are provided that do not have readily available market prices. Non-routine information is required for strategic decisions made at infrequent intervals and includes decisions relating to the development and introduction of new products and services, investment in new plant and equipment and the negotiation of long term contracts with customers and suppliers. The management accountant provides information for planning, control and performance measurement. The management accountant plays a crucial role in the development of both long-term and short-term plans. The short-term plans are in the form of the budgeting process and are prepared in more detail than long-term plans and are one of the mechanisms used by managers as a basis for control and performance evaluation. They identify the sources or inflows of economic resources, and the uses or outflows of economic resources of a company. Control is the process of ensuring that the actual outcomes conform to the planned outcomes by setting targets or standards, often from the budgeting process, against actual results measured. Performance is then measured and compared with the targets on a periodic basis. The role of the management accountant is to provide managers with feedback information in the form of periodic reports,...
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