The Practical Role of Managerial Accounting

The practical role of managerial
accounting is to increase
knowledge within an
organization and therefore
reduce the risk associated with
making decisions. Accountants
prepare reports on the cost of
producing goods, expenditures
related to employee training
programs, and the cost of
marketing programs, among
other activities. These reports are
used by managers to measure
the difference, or "variance,"
between what they planned and
what they actually accomplished,
or to compare performance to
other benchmarks.
For example, an assembly line
supervisor might be interested in
finding out how efficient his/her
line is in comparison to those of
fellow supervisors, or compared
to productivity in a previous time
period. An accounting report
showing inventory waste, average
hourly labor costs, and overall
per-unit costs, among other
statistics, might help the
supervisor and superiors to
identify and correct inefficiencies.
A detailed report might evaluate
the assembly line data and
estimate trends and the long-
term effects of those trends on
the overall profitability of the
organization.
As another example, a product
manager for a line of hair care
products at a corporation that
manufactured beauty aids would
probably want to know how
much overhead each of the
products is consuming. A report
that breaks down the amount of
overhead attributable to each
product might help the manager
better determine the profitability
of each item in the line of goods
and to find out if the sales and
profit goals for each item are
being met. For instance, a certain
type of shampoo may be selling
very well and generating large
amounts of cash flow. However,
a close accounting of that
product's actual costs within the
organization may reveal that its
contribution to overall profits
significantly lags that of other
offerings in the hair care line.
Armed with that information, the
product manager might elect to
adjust marketing expenditures to
emphasize more profitable items,
or to concentrate on reducing
expenses related to the
shampoo.
Because of the need for detailed
information about specific
operations within a company,
management accounting reports
are typically much more in-depth
than traditional financial
accounting reports, such as
balance sheet ratios and net
income calculations. Most
managerial reports also differ
from financial reports in their
frequency. Many internal
reports, in fact, are generated
monthly, weekly, or even daily in
the case of information such as
cash receipts and disbursements.
Despite their emphasis on detail,
a critical characteristic of most
managerial accounting reports is
that they are presented in
summary format. Managers can
read the summaries, efficiently
identify possible problem areas,
and then examine the details
within those areas to determine
a course of action