What is Managerial Accounting? Managers Need Actionable Information
March 4, 2023
3 min read
There are two major ways to increase net income or profit:
· Increase revenues
· Reduce costs
Rarely can you increase revenues without also increasing costs to support the increased revenues. If costs increase at a faster rate than revenues increase, due to inefficiencies, then increasing revenues is counterproductive. Or in the second case, if a reduction in costs, say marketing of advertising, has an unintended negative impact on revenues, then that cost reduction strategy is also counterproductive. These scenarios illustrate the fundamental importance of really having a good handle on all the aspects of costs and the dynamics of how they vary.
Understanding cost structure and determining costs of producing goods or delivering services can get complicated. Complexity increases as the number of variables and components of cost increase. Complexity can vary depending on the scale of an operation, the degree of automation and labor, the number of inputs, and the complexity of overhead calculations and estimates. Cost accounting is a sub discipline of accounting that deals with measuring costs accurately. Cost Accounting is a function internal to the enterprise and not shared with the outside world like Financial Accounting.
Cost accounting is a process of collecting, analyzing, summarizing, and evaluating the various elements that make up the total costs of production and delivery. Cost accounting techniques are used to understand the cost structure and how different cost components vary with the amounts produced. Operations and production processes can be optimized with a greater understanding of cost structure.
Cost accounting is used to analyze different alternatives in order to make optimal decisions about the most cost efficient use of resources and production and distribution processes. Cost accounting has close ties to operation’s management and industrial process design. You may be able to reduce costs by substituting less expensive materials, or streamlining a workflow in a manufacturing floor design.
Looking at it from an Income Statement point of view the goal of managing and controlling costs allows the maximum amount of revenue to fall to the bottom line as net income.
Cost accounting provides detailed cost information so managers can control current operations and plan for the future. What gets measured gets managed. Its primary function is to facilitate decision making for managers. This is why cost accounting is sometimes called managerial accounting.
The goal is to produce reports or computer dashboards that are used by management to determine the most appropriate course of action based on the cost efficiency, supply chains, and production capability. It helps managers make smarter, better informed decisions.
There is a variety of approaches to cost accounting. Different companies use different systems and how its done can vary across different parts of the same organization.
Unlike the financial accounting systems that record the debits and credits of transactions and assist in the preparation of financial statements, cost accounting systems and reports are not subject to rules and standards such as Generally Accepted Accounting Principles.
Financial Statements are shared with parties outside a company like bankers, investors, governmental authorities, and suppliers. Because they are shared with outsiders for them to make decisions about the health and profitability of a company, they need to be uniform, consistent, and adhere to certain standards.
Managerial and cost accounting reports are proprietary. They are not shared outside the company. There is more latitude and flexibility in preparing what information is important and how best to present it to be actionable.
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