Managerial accounting is the internal business function responsible for allocating business costs to goods or services produced by companies and analyzing other financial information resulting from business operations. This accounting method is also referred to as cost accounting. Cost accounting is the specific process of allocating raw material, labor and overhead costs to consumer products. Managerial accounting often expands on this function to include forecasting, budgets and assessing the profitability of current business operations.
The cost allocation process used in internal managerial accounting processes does not follow any accounting standards or guidelines. Companies are usually allowed to allocate costs using a variety of methods, such as job costing, process costing, throughput costing or activity-based costing. These allocation methods are used based on the type of good or service produced by the company and the amount of economic resources included in each product. When companies report inventory amounts on external financial statements, they must use the absorption costing method according to a recognized standard, such as the generally accepted accounting principles (GAAP) in the United States.
Absorption costing applies all the direct costs for producing goods or services to the individual products. However, fixed manufacturing costs are not included in the inventory amount reported on financial statements since these are considered period costs under managerial accounting rules. Period costs are only recognized on financial statements in the accounting period in which they occur, not when goods are produced.
Managerial accounting is also concerned with forecasting the amount of sales or new business opportunities companies may achieve when operating in the business environment. Management accountants use statistical techniques such as decision trees, game theory, net present value calculations or a variety of other quantitative or qualitative methods when creating economic forecasts.
A common management tool created during the managerial accounting process is a company’s budget. Budgets are commonly used to plan and review various business operations. Individual budgets may include cash, sales or production budgets that list the specific information for each of these accounting functions. Production budgets are often broken out into a standard or flexible budget format. The standard budget process helps managerial accountants determine where variances have occurred during the production process and if these variances are favorable or unfavorable. These budgets allow the managerial accounting process to create future budgets that may contain more accurate information than prior production budgets.
Flexible budgets allow for the increase or decrease of items produced by the company. Rather than focusing a specific monetary amount on production processes, flexible budgets may allow for a small range of acceptable variances in the budget process. These variances can account for changes in sales volumes, raw material usage and increased labor costs that may occur during normal business operations.