Managerial Accounting

Managerial accounting, also called management accounting, is the branch of accounting that produces information for people inside an organization: executives, department heads, plant managers and project teams. It covers costing products and services, preparing budgets and forecasts, measuring performance against targets, and analyzing options such as pricing changes, new investments and outsourcing. Its reports are tailored to the decision at hand and are not bound by external reporting rules.

Managerial accounting differs from financial accounting, which prepares standardized statements for shareholders, lenders and regulators under generally accepted accounting principles (GAAP) or IFRS. In the United States, the main professional credential in the field is the Certified Management Accountant (CMA), awarded by the Institute of Management Accountants; in the United Kingdom and many other countries, the equivalent is the Chartered Institute of Management Accountants qualification.

• Product costing: methods such as job order costing, process costing and activity-based costing (ABC) assign materials, labor and overhead to products and services.
• Cost behavior analysis: separating fixed, variable and mixed costs, which underpins cost-volume-profit (CVP) analysis and break-even calculations.
• Budgeting: building operating and cash budgets, and using a flexible budget to compare actual results with what costs should have been at the actual level of activity.
• Variance analysis: explaining the difference between budgeted and actual results, for example by splitting a cost overrun into price and quantity effects.
• Relevant cost decisions: make or buy, special orders, dropping a product line and pricing.
• Capital budgeting: evaluating long-term investments with payback, net present value and internal rate of return.
• Performance measurement: organizing the business into responsibility centers such as a cost center or profit center, and tracking key performance indicators and balanced scorecards.

A coffee roaster sells bags at $12, with variable costs of $7 per bag and monthly fixed costs of $40,000. A managerial accountant calculates the contribution margin per bag as $12 minus $7, or $5. The break-even volume is:

Here $\text{Fixed costs}$ are costs that do not change with volume and $\text{Contribution margin per unit}$ is selling price minus variable cost per unit. The result is $40,000 divided by $5, or 8,000 bags a month. If a café chain offers to buy 2,000 extra bags at $9 each and the roaster has spare capacity, the order adds $2 of contribution per bag, or $4,000 a month, even though $9 is below the full average cost per bag. Financial accounting would show the profit after the fact; managerial accounting supports the decision before it is made.

Modern managerial accounting grew out of nineteenth-century railway and textile businesses and was developed further by early twentieth-century firms such as DuPont, which created the return on investment formula that bears its name. In 1987, H. Thomas Johnson and Robert Kaplan's book "Relevance Lost" argued that management accounting had become too tied to external reporting, prompting the spread of activity-based costing and the balanced scorecard. Today the field relies heavily on enterprise software, data analytics and rolling forecasts, and managerial accountants often work in the controller's office or in financial planning and analysis teams, providing the cost and budget information on which day-to-day decisions rest.