Broadly speaking, there are two major types of accounting-financial and managerial. The financial statements used by the outside world and the internal data pertaining to a company, are managed very differently from each other. While, investors and creditors rely upon financial statements for taking decisions related to investing in the company, insiders like the management use managerial reports to review performance, and base their decisions, related to execution and control, on forecasted data.
Chartered Institute of Management Accountants (CIMA) defines managerial accounting as 'the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that is used by management to plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its resources.' As far as its scope and application is concerned, CIMA states that 'a management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way, as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking.'
As such, the scope and extent of this discipline covers computing and providing all sorts of financial information that are required by the decision makers of the organization for its growth, development, and other related aspects. It is also known as 'management accounting.'
This field of accounting is concerned with providing vital information to managers, who direct and control a business. Listed below are the major activities that management accountants perform:
- Allocation of various costs
- Analyzing rates and quantities (especially, in case of manufacturing firms)
- Preparing annual budgets and related reports
- Preparing business metrics, such as returns on investments, EBIT, etc.
- Forecasting sales, revenue, and financial expenses and gains
- Price modeling
- Strategic planning and management advise
- Various reporting based upon industrial, geographical, and client-based variables
- Analysis of cost, cost-volume, and cost-volume-profit statements
- Capital budgeting
- Calculating and analyzing profitability of a product or venture
- Life cycle cost analysis
- Sales management scorecards
- IT cost transparency
Underlying Concepts at Work
The concepts that play a major role in various management accounting activities include:
- Transfer pricing
- Cost accounting
- Throughput accounting
- Lean accounting
- Grenzplankostenrechnung (GPK) or marginal planned cost accounting
- Resource consumption/usage accounting
Managerial Accounting Vs. Financial Accounting
The practical and conceptual differences between financial and managerial accounting are as follows:
- Whereas financial statements are meant for use by outsiders to the organization, managerial statements and reports are meant for use by the internal management.
- Financial accounting in different countries is based on the individual standard procedures formed by the official accounting body of that nation. There are no such mandated regulatory procedures for managerial accounting, and individual organizations may or may not choose to set any such procedures for it.
- The nature of financial information provided is historical in nature, as they depict the existing state of affairs, whereas information provided by management accountants are mostly predictive in nature.
- Preparation and publishing of financial statements and reports by public limited companies is a legal necessity, whereas such an obligation is absent in case of the latter.