Functions of Managerial Accounting

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 –

Functions of Managerial Accounting

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Functions of Managerial Accounting

  1. Forecasting – It helps in forecasting profit and cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more, 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.
  2. Manage Profitability – It plays an important role in determining the break-even pointBreak-even PointThe break-even point (BEP) formula denotes the point at which a project becomes profitable. It is determined by dividing the total fixed costs of production by the contribution margin per unit of product manufactured. Break-Even Point in Units = Fixed Costs/Contribution Margin read more 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.
  3. 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.
  4. Increase Efficiency – It helps in increasing the organization’s efficiency by maximization of profits through coordination of different techniques such as budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more, financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read more & 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.
  5. Improve Performance – Managerial accounting functions help the managers in controlling the organization’s performance through the application of various techniques.
  6. Cash Flow Estimation – It helps the company’s management in estimating cash flows in the immediate future, source of revenue, and any bottlenecks.
  7. 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.
  8. 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.
  9. 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.
  10. Trend Analysis – It helps in analyzing the trends of the business using various techniques of budgeting and forecasting.
  11. Capital Budgeting Decision – Managerial accounting through its capital budgeting analysisCapital Budgeting AnalysisCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds.read more 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.
  12. Identifying Profitable Projects – It helps in determining the rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more, which ultimately helps management in the selection of the most profitable project or proposal. The project that yields better results is selected thereafter.
  13. Cost Allocation – It also helps in inventory valuation by calculating and allocating overhead costOverhead CostOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more and assessment of direct cost relating to the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more.

Conclusion

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.

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