Question

Provide an example of how your organization uses managerial accounting. Discuss why this application of managerial accounting contributes the organization's success

Answer 1

Managerial accounting refers to the internal processes used to account for business transactions. Managerial accounting is the type of accounting that provides quick information to managers and decision-makers within a company or organization. Managerial accounting, such as weekly or daily budgeting, is used to help managers make decisions that increase the organization's operational effectiveness and efficiency. Below are the characteristics of managerial accounting:

Aggregation: Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.

Efficiency: Managerial accounting reports on specifically what is causing problems and how to fix them.

Proven information: Managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

Reporting focus: Managerial accounting is more concerned with operational reports, which are only distributed within a company.

Systems: Managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.

Time period: Managerial accounting may address budgets and forecasts, and so can have a future orientation.

Timing: Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away.

Valuation: Managerial accounting is not concerned with the proper valuation of assets and liabilities, and their impairments, revaluations, etc. but it is concerned with only their productivity.

Provide an example of how your organization uses managerial accounting:

There are a number of common scenarios in which managerial accounting is appropriate. The first applies to those situations in which a company competes in a fast-paced and highly-competitive business environment. Any scenario where a quick decision is valuable is when managerial accounting makes the most sense. Examples may include cash flow management, sales tactics or budgeting.

As an example, let's say Company X is in the business of providing cloud computing Services. Now an Internet company subscribes to cloud computing services with company X. Prices to rent out space in the cloud from company X have been increasing month-to-month. To reduce costs and increase operational efficiencies, the Internet company's managers can use budgets to see if the price increases are costing too much.

If the company budgets $100 a week for access to the cloud services and the actual expenditure for the week is $200, the managers know there is a 100 percent variance between budgets and actual costs – which is not a good sign. This is a case where managerial accounting is signaling the managers to either increase their expectations on prices or move to another provider.