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 called cost-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.

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 as return on equity, debt to equity, and

return 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.

Through a review of outstanding receivables, managerial

accountants can indicate to appropriate department managers if
certain customers are becoming credit risks. 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.