Usefulness of Managerial Accounting

Usefulness of Managerial Accounting
Managerial accounting is useful providing information to the managers inside the organization. When confronted with decisions where managers need to decide what is best for an organization, managerial accounting provides excellent tools. Mr.John Doe needs to determine the length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates. He can determine it by calculating the Payback period.

To determine the payback period you simply take the investment required and divide it by the net annual cash inflows.

For example, if Mr. Doe wants to invest $140,000 in a trendy restaurant. The machinery required has an useful life of ten years and he expects that this restaurant will generate net annual cash inflows of $35,000. Mr. Doe needs to consider the company policy that requires a payback period of five years or less on all its investments. For Mr. Doe to make an informed decision consistent with the company’s policies he must determine that this investment payback is less than five years.

Applying the Payback formula, Mr. Doe divides the initial investment of $140,000 by the net annual cash inflows or $35,000. The result is a payback period of four years.

This decision and many decisions relevant to meeting an organization’s business plan are addressed by managerial accounting. Since managers’ decisions involve short and long-term planning they must get the entire organization engaged working toward the organization’s goals. As part of this process they use relevant information, not only financial information prepared according to Generally Accepted Accounting Principles (GAAP), but also non-financial information or qualitative information even if this information does not meet GAAP. The quantification of non-monetary data poses difficulties when quantifying it and here is where managerial accounting plays an important role. If a manufacturing manager wants to add a new shift, the financial statements in conformity with GAAP are not going to be useful because the elements needed in that calculation are outside the scope of financial accounting.

Managerial accounting is an exciting field open to those who possess analytical skills, critical thinking, and have solid values and commitment to an organization’s strategic objectives.

Accountants that choose this direction should join professional organizations such as the Institute of Management Accountants where they can acquire a wealth of information and support that enables them in decision-making. One of the core requirements of this professional organization is that management accountants must abide by its Standard of Ethics Conduct. For instance, the Confidentiality Policy requires that management accountants must refrain from disclosing confidential information gained in the course of their work except when authorized by management, unless legally obligated to do so.

Although management accountants are involved with decision-making they use similar tools as forensic accountants who see beyond the numbers by searching information from other sources other than financial information such as non-monetary data.


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You Should Also Read:
Financial Accounting and its Standards
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Unusual Significant Transactions

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