Definition of managerial accounting

Managerial accounting has been defined by Investopedia as the practice of “identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization’s goals.” Managerial accounting can also be called cost accounting or management accounting.

Another possible definition of management or managerial accounting is that it is the part of accounting that prepares financial information and documents for managers to make better decisions for improved business performance in an organization. It is the process of identifying, measuring, analyzing and interpreting accounting information for internal decision making.

The major difference between financial accounting and managerial accounting is that the former deals with the coordination and reporting of a firm’s financial transactions to external stakeholders, particularly investors and lenders. On the other hand, managerial accounting focuses on analysis of financial information for internal use in managerial decision making.

Management accountants use a company’s financial information to analyse various operational metrics and events. This helps them to interpret existing data in a way that the company’s managers can understand and use in their decision making processes.

The primary objective of management accounting is to provide comprehensive information about the firm’s operations through an in-depth analysis of each individual line of products, operating activity, plant, facility, etc. Managerial accounting also helps management in performing its functions more efficiently in terms of planning, organizing, directing, and coordinating activities. Management accounting acts as a source of data or planning, decision making, and forecasting. It also encourages meaningful discussions within an organization’s management team, leading to more efficient allocation of resources.

To achieve these goals managerial accountants use various managerial accounting techniques such as margin analysis, constraint analysis, capital budgeting, decision trees, trend analysis, and inventory costing.

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