What are the functions of Managerial Accounting?
The primary function of managerial accounting is to analyze and measure the financial information using various tools and provide its interpretation to financial managers for the purpose of decision making so that organization’s goals are met.
Let us discuss the top functions of managerial accounting in detail –
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Functions of Managerial Accounting
- Forecasting – It helps in forecasting profit and cash flow, which a company can expect from a specific product line, customer base, geography, and so on. Thus, the company is able to manage its overall cash-flows accordingly.
- Manage Profitability – It plays an important role in determining the break-even point of the company through the margin analysis techniques, which helps in the determination of optimal sales mix for the company’s products. This helps the company to manage its profitability.
- Identifying Bottlenecks – It supports the managers in identifying the hurdles or bottlenecks through constraint analysis techniques in the organization and analyzing its impact on revenue-generating capacity and profit of the company. The management can then make decisions regarding changes that are required in the systems of the company.
- Increase Efficiency – It helps in increasing the organization’s efficiency by maximization of profits through coordination of different techniques such as budgeting, financial reporting & analysis, and financial interpretation. Coordination of these techniques helps the managers in the creation of budgets and set of standard costs, which play an important role in financial decision making.
- Improve Performance – Managerial accounting functions help the managers in controlling the organization’s performance through the application of various techniques.
- Cash Flow Estimation – It helps the company’s management in estimating cash flows in the immediate future, source of revenue, and any bottlenecks.
- Variance Analysis – It helps in the analysis of variances between budgets and actual numbers; the analysis is performed through the application of various budgeting and forecasting techniques. The management once aware of the variances in the budget, and the actual results can make informed decisions in the company.
- Make or Buy Decision – It helps internal management by providing insight over the make-or-buy decisions for products or product lines or certain projects. Thus, management can decide whether it shall manufacture the products in-house or shall buy the same from the outside market.
- New Product Launch – It helps in taking the decision with respect to designing new products by giving insights on the costs of new designs, comparison of cost from the target, and analysis of variance.
- Trend Analysis – It helps in analyzing the trends of the business using various techniques of budgeting and forecasting.
- Capital Budgeting Decision – Managerial accounting through its capital budgeting analysis technique helps management in making a decision regarding the proposal for acquiring fixed assets & equipment. The management can decide which financing proposal is better for the organization based on this.
- Identifying Profitable Projects – It helps in determining the rate of return, which ultimately helps management in the selection of the most profitable project or proposal. The project that yields better results is selected thereafter.
- Cost Allocation – It also helps in inventory valuation by calculating and allocating overhead cost and assessment of direct cost relating to the cost of goods sold.
Thus, it is clear that managerial accounting is an important function and plays an integral role in decision making in the organization. Their functions are also called as advisory functions since they help the managers in handling the impending issues and determining the possible profitable business opportunities. It helps managers in making informed business decisions and also prepares them for any future contingencies.
This has been a guide to the Functions of Managerial Accounting and its definition. You may learn more financing from the following articles –