Managerial accounting allocates costs to goods or services and analyzes financial information. Cost accounting allocates raw materials, labor, and overhead costs to products. Companies can use various allocation methods. Absorption costing applies direct costs to products, but fixed manufacturing costs are not included. Managerial accounting also involves forecasting and budgeting. Budgets can be standard or flexible and allow for variances in production processes.
Managerial accounting is the internal business function responsible for allocating business costs to goods or services produced by companies and analyzing other financial information resulting from business operations. This accounting method is also known as cost accounting. Cost accounting is the specific process of allocating raw materials, labor, and overhead costs to consumer products. Managerial accounting often expands on this role to include forecasting, budgeting, and evaluating the profitability of current business operations.
The cost allocation process used in internal management accounting processes does not follow any accounting standard or guideline. Businesses are typically allowed to allocate costs using a variety of methods, such as job costing, process costing, performance costing, or activity-based costing. These allocation methods are used based on the type of good or service produced by the company and the amount of economic resources included in each product. When companies report inventory amounts in external financial statements, they must use the absorption cost method in accordance with a recognized standard, such as generally accepted accounting principles (GAAP) in the United States.
Absorption costing applies all direct costs of producing goods or services to individual products. However, fixed manufacturing costs are not included in the amount of inventory reported in the financial statements, as these are considered period costs under management accounting rules. Period costs are only recognized in the financial statements in the accounting period in which they occur, not when goods are produced.
Managerial accounting is also concerned with forecasting the number of sales or new business opportunities that companies can achieve by operating in the business environment. Management accountants use statistical techniques such as decision trees, game theory, net present value calculations, or a variety of other quantitative or qualitative methods when creating economic forecasts.
A common management tool created during the managerial accounting process is a company’s budget. Budgets are commonly used to plan and review various business operations. Individual budgets may include cash, sales, or production budgets that list specific information for each of these accounting functions. Production budgets are often divided into a standard or flexible budget format. The standard budget process helps management accountants determine where variances have occurred during the production process and whether these variances are favorable or unfavorable. These budgets allow the management accounting process to create future budgets that may contain more accurate information than previous production budgets.
Flexible budgets allow you to increase or decrease the items produced by the company. Instead of focusing a specific amount of money on production processes, flexible budgets can allow for a small range of acceptable variances in the budget process. These variations can explain changes in sales volumes, the use of raw materials, and increased labor costs that can occur during normal business operations.
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