Managerial Accounting Meaning, Pillars, and Types (2023)

What Is Managerial Accounting?

Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization's goals.

Managerial accounting differs from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions.

Key Takeaways

  • Managerial accounting involves the presentation of financial information for internal purposes to be used by management in making key business decisions.
  • Techniques used by managerial accountants are not dictated by accounting standards, unlike financial accounting.
  • The presentation of managerial accounting data can be modified to meet the specific needs of its end-user.
  • Managerial accounting encompasses many facets of accounting, including product costing, budgeting, forecasting, and various financial analysis.
  • This differs from financial accounting, which produces and disseminates official financial statements for public consumption that conform to prevailing accounting standards.


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Managerial Accounting

How Managerial Accounting Works

Managerial accounting encompasses many facets of accounting aimed at improving the quality of information delivered to management about business operation metrics. Managerial accountants use information relating to the cost and sales revenue of goods and services generated by the company. Cost accounting is a large subset of managerial accounting that specifically focuses on capturing a company's total costs of production by assessing the variable costs of each step of production, as well as fixed costs. It allows businesses to identify and reduce unnecessary spending and maximize profits.

Managerial Accounting vs. Financial Accounting

The key difference between managerial accounting and financial accounting relates to the intended users of the information. Managerial accounting information is aimed at helping managers within the organization make well-informed business decisions, while financial accounting is aimed at providing financial information to parties outside the organization.

Financial accounting must conform to certain standards, such as generally accepted accounting principles(GAAP). All publicly held companies are required to complete their financial statements in accordance with GAAP as a requisite for maintaining their publicly traded status. Most other companies in the U.S. conform to GAAP in order to meet debt covenants often required by financial institutions offering lines of credit.

Because managerial accounting is not for external users, it can be modified to meet the needs of its intended users. This may vary considerably by company or even by department within a company. For example, managers in the production department may want to see their financial information displayed as a percentage of units produced in the period. The HR department manager may be interested in seeing a graph of salaries by employee over a period of time. Managerial accounting is able to meet the needs of both departments by offering information in whatever format is most beneficial to that specific need.

Types of Managerial Accounting

Product Costing and Valuation

Product costing deals with determining the total costs involved in the production of a good or service. Costs may be broken down into subcategories, such as variable, fixed, direct, or indirect costs. Cost accounting is used to measure and identify those costs, in addition to assigning overhead to each type of product created by the company.

Managerial accountants calculate and allocate overhead charges to assess the full expense related to the production of a good. The overhead expenses may be allocated based on the number of goods produced or other activity drivers related to production, such as the square footage of the facility. In conjunction with overhead costs, managerial accountants use direct costs to properly value the cost of goods sold and inventory that may be in different stages of production.

Marginal costing (sometimes calledcost-volume-profit analysis) is the impact on the cost of a product by adding one additional unit into production.It is useful for short-term economic decisions. The contribution margin of a specific product is its impact on the overall profit of the company. Margin analysis flows into break-even analysis, which involves calculating the contribution margin on the sales mix to determine the unit volume at which the business’s gross sales equal total expenses. Break-even point analysis is useful for determining price points for products and services.

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Cash Flow Analysis

Managerial accountants perform cash flow analysis in order to determine the cash impact of business decisions. Most companies record their financial information on the accrual basis of accounting. Although accrual accounting provides a more accurate picture of a company's true financial position, it also makes it harder to see the true cash impact of a single financial transaction. A managerial accountant may implement working capital management strategies in order to optimize cash flow and ensure the company has enough liquid assets to cover short-term obligations.

When a managerial accountant performs cash flow analysis, he will consider the cash inflow or outflow generated as a result of a specific business decision. For example, if a department manager is considering purchasing a company vehicle, he may have the option to either buy the vehicle outright or get a loan. A managerial accountant may run different scenarios by the department manager depicting the cash outlay required to purchase outright upfront versus the cash outlay over time with a loan at various interest rates.

Inventory Turnover Analysis

Inventory turnover is a calculation of how many times a company has sold and replaced inventory in a given time period. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory. A managerial accountant may identify the carrying cost of inventory, which is the amount of expense a company incurs to store unsold items.

If the company is carrying an excessive amount of inventory, there could be efficiency improvements made to reduce storage costs and free up cash flow for other business purposes.

Constraint Analysis

Managerial accounting also involves reviewing the constraints within a production line or sales process. Managerial accountants help determine where bottlenecks occur and calculate the impact of these constraints on revenue, profit, and cash flow. Managers can then use this information to implement changes and improve efficiencies in the production or sales process.

Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order to acquire assets and increase its return on investments. Through balance sheet analysis, managerial accountants can provide management with the tools they need to study the company's debt and equity mix in order to put leverage to its most optimal use.

Performance measures such asreturn on equity, debt to equity, andreturn on invested capital help management identify key information about borrowed capital, prior to relaying these statistics to outside sources. It is important for management to review ratios and statistics regularly to be able to appropriately answer questions from its board of directors, investors, and creditors.

Accounts Receivable (AR) Management

Appropriately managing accounts receivable (AR) can have positive effects on a company's bottom line. An accounts receivable aging report categorizes AR invoices by the length of time they have been outstanding. For example, an AR aging report may list all outstanding receivables less than 30 days, 30 to 60 days, 60 to 90 days, and 90+ days.

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Through a review of outstanding receivables, managerial accountants can indicate to appropriate department managers if certain customers are becoming creditrisks. If a customer routinely pays late, management may reconsider doing any future business on credit with that customer.

Budgeting, Trend Analysis, and Forecasting

Budgets are extensively used as a quantitative expression of the company's plan of operation. Managerial accountants utilize performance reports to note deviations of actual results from budgets. The positive or negative deviations from a budget also referred to as budget-to-actual variances, are analyzed in order to make appropriate changes going forward.

Managerial accountants analyze and relay information related to capital expenditure decisions. This includes the use of standard capital budgeting metrics, such as net present value and internal rate of return, to assist decision-makers on whether to embark on capital-intensive projects or purchases. Managerial accounting involves examining proposals, deciding if the products or services are needed, and finding the appropriate way to finance the purchase. It also outlines payback periods so management is able to anticipate future economic benefits.

Managerial accounting also involves reviewing the trendline for certain expenses and investigating unusual variances or deviations. It is important to review this information regularly because expenses that vary considerably from what is typically expected are commonly questioned during external financial audits. This field of accounting also utilizes previous period information to calculate and project future financial information. This may include the use of historical pricing, sales volumes, geographical locations, customer tendencies, or financial information.

Is Financial Accounting the Same as Managerial Accounting?

While they often perform similar tasks, financial accountingis the process of preparing and presenting official quarterly or annual financial information for external use. Such reports may include audited financial statements that help investors and analysts decide whether to buy or sell shares of the company. Because of this managerial accounting in the U.S. must adhere to GAAP standards.

Managerial accounting, in contrast, uses pro forma measures that describe and measure the financial information tracked internally by corporate managers.

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Do Managerial Accountants Need to Follow GAAP?

No, managerial accountants are not legally obligated to follow GAAP because the documents they produce are not regulated by GAAP. These documents focus on internal company metrics that focus on company performance.

What Types of Information Does Managerial Accounting Compute?

Managerial accounting is useful for companies to track and craft spending budgets, reduce costs, project sales figures, and manage cash flows, among other tasks.

What Are the 3 Pillars of Managerial Accounting?

Managerial accounting is used for planning, decision-making, and controlling. These are the three pillars of the field. In addition, forecasting and performance tracking are key components.

The Bottom Line

Managerial accounting is important for drafting accurate and complete financial statements for internal use and crafting a company's long-term strategy. Without good managerial accounting, corporate leadership can struggle to make appropriate choices or misunderstand the firm's true financial picture. Because managerial accounting documents are not official, they do not have to conform to GAAP and can be used internally for a variety of purposes.


What are the pillars of managerial accounting? ›

What Are the 3 Pillars of Managerial Accounting? Managerial accounting is used for planning, decision-making, and controlling. These are the three pillars of the field.

What are the types of managerial accounting? ›

Types of Managerial Accounting
  • Capital Budgeting. Managerial accountants help business leaders evaluate projects and investments and make decisions about buying or selling assets. ...
  • Margin Analysis. With increased production, the cost of production also rises. ...
  • Cash Flow Analysis. ...
  • Constraint Analysis. ...
  • Trend Analysis.
Oct 4, 2022

What is management accounting definition and types? ›

Managerial accounting, also called management accounting, is a method of accounting that creates statements, reports, and documents that help management in making better decisions related to their business' performance. Managerial accounting is primarily used for internal purposes.

What are the 4 types of accounting? ›

What are the 4 types of accounting?
  • Corporate accounting.
  • Forensic accounting.
  • Public accounting.
  • Government accounting.

What are the 5 pillars of accounting? ›

Pillars of Accounting are 5 explained below one by one:
  • Assets. Asset is any kind of resource that can add to growth of business. ...
  • Revenue. Income coming from the sale of good or the service provided by the company are the revenues. ...
  • Expenses. Money company spend to make the business going. ...
  • Liabilities. ...
  • Equity or Capital.
Aug 5, 2022

What are the 5 pillars of management? ›

At the most fundamental level, management is a discipline that consists of a set of five general functions: planning, organizing, staffing, leading and controlling. These five functions are part of a body of practices and theories on how to be a successful manager.

What are the 3 types of managerial roles? ›

Managers' roles fall into three basic categories: informational roles, interpersonal roles, and decisional roles.

What are the four areas of managerial accounting? ›

Preparation of these data and reports is the focus of managerial accounting, which consists mainly of four broad functions: (1) budgetary planning, (2) cost finding, (3) cost and profit analysis, and (4) performance reporting.

What are the 2 types of management? ›

There are three broad categories of management styles: Autocratic, democratic and laissez-faire.
Types of management styles
  • Authoritative management style. ...
  • Persuasive management style. ...
  • Paternalistic management style.
Dec 19, 2022

What is the role of managerial accounting? ›

Managerial accountants calculate overhead expenses and other variables to determine the true cost of a product or service, which can provide direction for companies looking to sell or divest. Cash flow analysis. Managerial accountants may also be tasked with determining the cash impact of various business decisions.

What are the 7 types of accounting? ›

Here's an overview of some common accounting types a business may need: Financial accounting. Managerial accounting.
  • Financial accounting. ...
  • Managerial accounting. ...
  • Cost accounting. ...
  • Tax accounting. ...
  • Auditing.

What are the 3 main accounting elements? ›

There are three main elements of the accounting equation:
  • Assets. A company's assets could include everything from cash to inventory. ...
  • Liabilities. The second component of the accounting equation is liabilities. ...
  • Equity.

What are the 10 core values of Management Accountant? ›

Core Values
  • Respect for the Individual.
  • Passion for Serving Members.
  • Highest Standards of Integrity and Trust.
  • Innovation and Continuous Improvement.
  • Teaming to Achieve.
  • We do this by:

What are the 4 pillars of financial planning? ›

Four Pillars of Financial Planning
  • Managing Cash Flow and Financial Resources. This critical first pillar focuses on making sure you and your loved ones are provided for. ...
  • Accumulating Wealth. ...
  • Managing Income Taxes. ...
  • Planning for Retirement.

What are the 6 types of accounts? ›

Common account types include checking, savings, money market, CDs, IRAs and brokerage accounts.

What are the 4 most important pillars of successful team management? ›

When working with any new team I look for these 4 key pillars.
  • COLLABORATION. Individuals coming together by bringing innovative ideas implemented with a high level performance will get you to where you're going so much faster, and with way less resources. ...
  • CONFLICT. ...

What are the four pillars of managerial functions describe? ›

The four functions of management are planning, organizing, leading and controlling. In order to be a successful manager, you must do all four while managing your work and team. These are the foundations of any professional managerial position.

What are the 4 pillars of managing performance? ›

The cycle of performance is based on 4 key pillars: planning, monitoring, reviewing and rewarding. Let's take a look at each of these 4 stages in a bit more detail to help you understand the performance management cycle.

What are the 7 core functions of management? ›

Each of these functions plays a critical role in helping organizations achieve efficiently and effectively. Luther Gulick, Fayol's successor, further defined 7 functions of management or POSDCORB—planning, organizing, staffing, directing, coordinating, reporting and budgeting.

What are the 7 functions of accounting? ›

The 7 functions of accounting are Accounts Payable and receivables, Payroll, Inventory cost management, Cash collections & record keeping, Budgeting, Reporting financial statements, and Legal compliance & finance controls.

What are the 11 principles of management? ›

  • Henry Fayol's 14 Principles of Management. ...
  • Division of Work. ...
  • Authority. ...
  • Discipline. ...
  • Unity of Command. ...
  • Unity of Direction. ...
  • Collective Interest Over Individual Interest. ...
  • Remuneration.
Nov 22, 2022

What are the 10 types of management? ›

10 common management styles
  • Authoritative management style. ...
  • Democratic management style. ...
  • Consultative management style. ...
  • Laissez-faire management style. ...
  • Collaborative management style. ...
  • Transformational management style. ...
  • Coaching management style. ...
  • Delegative management style.
Oct 12, 2022

What are the two pillars of management? ›

You will learn the four pillars of management: planning, organizing, directing, and controlling, and learn how to apply them to turn wishes, dreams, and ideas into reality.

What is managerial accounting in simple words? ›

Managerial accounting is the practice of using accounting information — from revenues to production inputs and outputs affecting the supply chain — internally, in support of organization-wide efficiency and for tracking the organization's progress toward attaining its stated goals.

What is the most important part of managerial accounting? ›

Answer and Explanation: The main aspect of managerial accounting is concerned with accurate cost analysis. In a business, the managers should make an appropriate cost analysis in order to understand the cost that takes place in the business and to provide proper measures for future operations.

What are the 11 branches of accounting? ›

Here is a list of 12 branches of accounting along with a description of each area's focus:
  • Financial accounting. ...
  • Managerial accounting. ...
  • Cost accounting. ...
  • Auditing. ...
  • Tax accounting. ...
  • Fiduciary accounting. ...
  • Project accounting. ...
  • Forensic accounting.
Mar 15, 2021

What are the 9 branches of accounting? ›

The eight branches of accounting are:
  • Fiduciary accounting.
  • Financial accounting.
  • Forensic accounting.
  • Cost accounting.
  • Tax accounting.
  • Auditing.
  • Accounting information systems.
  • Managerial accounting.

What are the 3 branches of accounting? ›

Though there are 12 branches of accounting in total, there are 3 main types of accounting. These types are tax accounting, financial accounting, and management accounting.

What are the 2 most important accounting principles? ›

Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules and regulations. Principle of Consistency: Consistent standards are applied throughout the financial reporting process.

What are the 12 principles of accounting? ›

12 basic principles of accounting
  • Accrual principle. ...
  • Conservatism principle. ...
  • Consistency principle. ...
  • Cost principle. ...
  • Economic entity principle. ...
  • Full disclosure principle. ...
  • Going concern principle. ...
  • Matching principle.
Feb 4, 2020

What are the 8 accounting concepts? ›

: Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realisation Concept, Accrual Concept and Matching Concept.

What are the four pillars of accounting? ›

Let us look into the accounting world: the four legs of accounting dharma are: Authentication, Authorisation, Accounting and Accuracy.

What are the three pillars of accounting? ›

Take a look at the three main rules of accounting: Debit the receiver and credit the giver. Debit what comes in and credit what goes out. Debit expenses and losses, credit income and gains.

What are the 3 goals of managerial accounting? ›

Managerial accounting revolves around three primary components: Planning. Controlling. Decision making.

What does 4 pillars mean? ›

The 4 pillars of meaning

In her book, Smith divides the quest for meaning into four pillars: belonging, purpose, storytelling, and transcendence. Belonging defines a connection to a larger community. Forging and sustaining relationships is how we increase this connection, which in turn makes our lives feel meaningful.

What is the four pillar model? ›

The Four Pillars approach is recognized internationally as an effective way to address the harms associated with substance use. It uses the four pillars of Prevention, Harm Reduction, Enforcement, and Treatment to form a balanced, solid foundation on which to build a comprehensive community drug strategy.

Why is it called four pillars? ›

There are four founders behind Australian gin brand Four Pillars: Stuart Gregor, Matt Jones, Cameron MacKenzie and Wilma. A sleek, bespoke copper and stainless steel still named for Cam's late mother, Wilma is as much a part of the Four Pillars story as its three actual founders.

What are the 10 core values of management accountant? ›

Core Values
  • Respect for the Individual.
  • Passion for Serving Members.
  • Highest Standards of Integrity and Trust.
  • Innovation and Continuous Improvement.
  • Teaming to Achieve.
  • We do this by:

What does 3 pillars mean? ›

Originally, the Three Pillars name stood for Father, Son, and Holy Spirit — the three main entities of our faith.

What is the three pillar model? ›

So by replacing economics with strategy, the Three Pillar model (strategy, law, ethics) becomes a framework that is more appropriate for all forms of business, leadership, and personal decision making.


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