What Is Managerial Accounting?

David Letterman once quipped: "There's no business like show business, but there are several businesses like accounting." As with all jokes, there's more than a little truth to what otherwise sounds frivolous. Without accounting, there are no IPOs to celebrate, no sales figures for computing commissions and no profits to print up in an annual report. But accounting is not only for accountants. Accounting is one of the pillars of doing business in the modern world. Accounting is thus more than a form of quantitative analysis; accounting is a philosophy. All business leaders know that without an accounting perspective, there can be no "big picture."

What Is Managerial Accounting?

Managers are decision-makers. And every manager's decisions are only as good as the data backing them up. Any successful executive should possess a grasp of basic accounting principles. Whatever their area of responsibility, all managers must keep track of and wisely allocate resources: financial, human, technological, etc. All managers should be able to read a budget, measure performance efficiencies and provide strategic direction based upon a broad understanding of cost versus benefit.

Managerial accounting refers, at one level, to the practice of using accounting information -- revenues, inventories (supplies), pricing (e.g., wholesale, consumer), return on investment (ROI), etc. -- to guide organization-wide operations. As such, managerial accounting is fundamentally different from financial accounting. Financial accounting refers to the process of reporting profits and losses to third parties. Financial accounting statements are issued to creditors, stockholders, governmental bodies such as the Internal Revenue Service, and even employees.

Managerial Accounting in Practice

What are some examples of how managers use accounting information to contribute to their business's long-term success?

1) Variance Analysis: Budgets contain projections. Budgets are therefore expressions of expectations. However, actual outcomes often do not match these expectations. In some scenarios, these expectations are exceeded. In other instances, these expectations are not met. Variance analysis is a kind of detective work. What factors are responsible for the measurable difference between the amount budgeted and the amount ultimately incurred (or lost)? More importantly, how did these specific factors interact to produce this variance, and what can be done in the future to prevent similar, unfavorable results? Variance analysis provides managers with a set of versatile tools and can be performed on everything from manufacturing costs to monthly sales performance to salaries and wages.

2) Responsibility Centers: Managerial accounting principles are indispensable to identifying and accurately evaluating areas of accountability within the organization. Good managerial accounting practices also ensure that the appropriate tools and metrics are applied depending upon the actual resources that fall within -- and affect -- these various areas of responsibility.

Different management approaches apply to these different areas of responsibility. Good managerial accounting practices also take this fact into consideration and create protocols and procedures to guarantee that these various responsibility centers interoperate as smoothly as possible. For example, a business revenue center has no control over costs; thus, assessing a revenue center's performance based on anything other than actual sales is non-productive. Likewise, a cost center has no control over sales. Profit centers, however, are akin to "businesses within the business," and therefore their revenues, costs and asset portfolios must be carefully monitored.

3) The Balanced Scorecard: Developed by Harvard's Robert S. Kaplan and the Palladium Group's David P. Norton out of research conducted in the early 1990s, the balanced scorecard approach to measuring performance has become one of the most popular such methods employed by upper management. As Kaplan and Norton have noted in subsequent research, use of the balanced scorecard approach has "allowed companies to track financial results while monitoring progress in building the capabilities needed for growth."

The balanced scorecard is much more than a measurement tool, however. It is a comprehensive management system that attempts to achieve a 360-degree view of a business's performance by incorporating four distinct perspectives: financial health, customer satisfaction, the efficiency of internal processes, and the organization's ability to acquire knowledge and deploy that knowledge to increase its competitive capacities. Kaplan and Norton have shown that, by taking all of these perspectives into account, executives are better equipped to plan and implement their strategies to achieve their objectives.

4) Ethics: According to a report issued by the Institute of Management Accountants (IMA), management accountants are uniquely positioned to "integrate ethical thinking into the core aspects of business process management" to "operationalize a culture of ethics," and to "lead by example." Because they handle sensitive financial information that could be misused or abused by unscrupulous individuals both within and outside the organization, management accountants are leaders in the area of corporate ethics. Management accountants espouse the values of competence, confidentiality, integrity and credibility. Good managerial accounting practices offer invaluable legal protections (e.g. against allegations of insider trading or against allegations of retaliation or punitive actions against employees who report negative accounting information) and reputation protection for any business.

Learning Managerial Accounting Through Baylor's Online MBA

Baylor's online MBA program is committed to training tomorrow's business leaders in the essentials of strong and ethical managerial accounting. Baylor's online MBA curriculum features two accounting prerequisites, both designed for non-accountants. ACC 5301 - Accounting focuses on budgets and financial statements, providing students with the vocabulary they will need to be fluent in accounting: the language of business. ACC 5420 - Managerial Accounting provides students with hands-on experience utilizing accounting information in an executive role, examining its flow through the entire organization as well as leveraging its power to measure performance, shape decisions and influence strategic direction.

The accounting faculty of Baylor's online MBA also bring a rare mixture of real-world expertise, scholarly rigor and teaching excellence to the program. Studying managerial accounting through the online MBA will allow you to spend time with instructors like Dr. Charles Davis. A practicing financial systems analyst (for Reynolds Metals) and management consultant, Dr. Davis is also the author of one of the leading textbooks in managerial accounting, currently in its 2nd edition and published by John Wiley & Sons. Dr. Davis is also very active in the IMA, and has received three Certificates of Merit for articles he has authored for the organization's various journals. As Dr. Davis emphasizes, the focus of his instruction is "on understanding accounting concepts, not on accounting mechanics."

Learn more about Dr. Davis, his colleagues, and what makes studying managerial accounting through Baylor University's online MBA program a singularly rewarding experience.

Learn more about the Baylor online MBA program.


Sources:

Brainy Quote

Harvard Business Review: The Balanced Scorecard: Measures That Drive Performance

Harvard Business Review: Using the Balanced Scorecard as a Strategic Mangement System

IMA: Values and Ethics - From Inception to Practice

Wiley: Managerial Accounting, 2nd Edition

Have a question or concern about this article? Please contact us.