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Managerial Accounting

Reviewed by Athena | Updated on Oct 05, 2020

Catalogue

Introduction

Management accounting is a branch of accounting, where the management uses various financial information in order to make strategic decisions and plan for future business needs.

The data collated under managerial accounting comprises all fields of accounting and all departments in an organisation. It is effective in making key decisions in highly-competitive businesses, especially with regard to sales, cash-flows, investments, and budgeting.

Difference Between Managerial Accounting and Financial Accounting

Managerial accounting information is confidential in nature. It focuses on helping the management plan and makes decisions for the future. Financial accounting, on the other hand, is more informative in nature and is designed for external users.

Financial accounting needs to adhere to the Accounting Standards (AS) and generally-accepted principles of accounting (GAAP), whereas managerial accounting can be altered according to the needs of the management of a particular company. This can vary from company to company, or even between departments of the same company.

Key Techniques used in Managerial Accounting

* - Activity-based Costing:* This is a method of costing which identifies indirect costs and assigns them to each activity undertaken in an organisation. Unlike conventional costing, which arbitrarily allocates overhead costs, activity-based costing identifies the relationship between the costs incurred and the products being manufactured or the activity being undertaken. Based on this, the costs are then allocated.

* - Marginal Analysis:* Marginal analysis is the analysis of additional benefits obtained from an activity when additional costs are incurred. It refers to the marginal, i.e. small benefit that can be availed, say per additional unit manufactured, by making a small change in production or labour.

* - Capital Budgeting:* Capital budgeting is a process used while making capital investments or incurring capital expenditures, such as the purchase of new equipment, construction of buildings, etc. A quantitative analysis of these proposed fixed investments is carried out by taking into account future profits and the present value of cash flows.

* - Trend Analysis:* This is a technique used to predict future events based on past trends. It is based on the fact that past data can be analysed and used to spot a pattern of what might happen in the future. It is a management tool to control cost and price and predict sales and performance.

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