This is article three in the Educational Business Series (EBS).
Introduction
Accounting topics commonly align with one or more of the three accounting classes: financial accounting; managerial accounting; and financial management.
Financial accounting addresses the recording and reporting of financial transactions and the preparation of financial statements (e.g., income statement, balance sheet, cash flow statement, etc.) for the benefit of an entity and external stakeholders such as investors, creditors, regulators, and tax authorities. It adheres to standardized frameworks such as Generally Accepted Accounting Principles (GAAP) in the United States or International Financial Reporting Standards (IFRS) globally (Kieso, et al, 2016).
Managerial accounting is “the provision of accounting information for a company’s internal users. More specifically, managerial accounting represents the firm’s internal accounting system designed to provide the necessary financial and non-financial information that helps company managers make the best possible decisions” (Mowen et al, 2018, p. 4). This involves “the process of collecting, analyzing, interpreting, and presenting financial and non-financial information to assist management in decision-making, planning, and control within an organization. Unlike financial accounting, which focuses on preparing standardized financial statements for external stakeholders, managerial accounting is internally focused and provides tailored information to support strategic and operational decisions” (xAI, Grok 4, 2025).
Financial management focuses on “strategic planning, organizing, directing, and controlling financial activities within an organization to achieve specific financial objectives. It involves the efficient and effective management of monetary resources to maximize value, ensure liquidity, and mitigate risks. Financial management encompasses a range of activities, including budgeting, forecasting, investment decisions, risk management, and the oversight of financial operations” (xAI, Grok 4, 2025).
This article introduces managerial accounting.
Managerial accounting positions in firms involve both line and staff roles and positions. Three of the most visible roles are the chief financial officer (CFO), the controller (i.e., chief accounting officer), and the treasurer. The CFO oversees financial management and reporting which are key aspects of managerial accounting; the controller supervises all accounting functions and reports to the chief operating officer (COO) and general manager; the treasurer is responsible for the finance function of managerial accounting, raising capital, managing cash and investments, etc. (Mowen et al., 2018, p. 15).
Business accounting systems should be able to deliver both financial accounting (see EBS 6) and managerial accounting information.
History
Managerial accounting was rudimentary before the industrial era. Primarily, it was focused on record keeping for trade and commerce in which merchants tracked costs, revenues, and profits.
In the industrial revolution (late 18th and 19th centuries), more systematic approaches emerged to better manage areas such as costs (e.g., cost accounting). The early 20th century brought a formal standardization, led by figures like Frederick Taylor, emphasizing efficiency and productivity which impacted workflows, labor costs, and production processes. Standard costing and budgeting were employed.
The mid-20th century brought production and economic expansion resulting in precise cost control and resource allocation. Techniques like break-even analysis and cost-volume-profit (CVP) analysis were used. Divisional structures emerged alongside tools such as responsibility accounting. The introduction of computers provided the speed necessary for detailed and timely reports.
The late 20th century saw strategic focus and new techniques (Just-In-Time inventory [JIT], Total Quality Management [TQM], etc.) in a globally competitive environment. Activity-based costing (ABC) under Robert Kaplan and others emerged along with new techniques (e.g. Balanced Scorecard, etc.) as accounting shifted to align with strategic goals.
Enterprise Resource Planning (ERP) systems were adopted in the 1990s integrating managerial accounting data with other business functions resulting in real-time reporting and analysis.
In the early 21st century, technology and data-driven decision-making has resulted driven by big data, cloud computing, and advanced analytics with real-time data analysis, forecasting, and scenario planning. The use of artificial intelligence (AI) and automation to predict costs, optimize pricing, and automate routine accounting tasks so that managerial accounts can focus on strategic analysis. Also, global businesses are increasingly aligned with international frameworks to ensure consistency across operations (xAI, Grok 4, 2025).
Body
Mowen et al. (2018) states that “managerial accounting information is needed by a number of individuals. In particular, managers and empowered workers need comprehensive, up-to-date information for the following activities: 1) Planning, 2) Controlling, and 3) Decision-making” (p. 5).
The planning involves using financial and non-financial information to support decision-making, budgeting, and performance evaluation within an organization.
This planning (define objectives, gather data, develop plans, implement plans, monitor and adjust) includes budgeting (master budget, flexible budgets, and zero-based budgeting); forecasting (quantitative and qualitative methods), cost analysis and control (fixed vs variable costs, direct vs indirect costs, cost-volume-profit analysis); strategic planning (balanced scorecard, SWOT analysis, and performance measurement and variance analysis (variance analysis, key performance indicators).
The controlling “refers to the process of monitoring, evaluating, and regulating business activities to ensure alignment with organizational plans, goals, and budgets. It focuses on providing managers with timely and relevant information to assess performance, identify deviations, and implement corrective actions” (xAI, Grok 4, 2025).
This includes performance measurement (key performance indicators, responsibility accounting); variance analysis (favorable and unfavorable variance); cost control (cost monitoring, standard costing, activity-based costing); budgetary control (static budgets, flexible budgets, rolling budgets); internal reporting and feedback (management reports, balanced scorecard).
This also includes establishing standards and targets; measuring actual performance; comparing actual vs planned performance, analyzing variances; taking corrective action; and providing feedback.
Objectives include operational efficiency; supporting decision-making, mitigating risk; and performance accountability.
Tools to accomplish managerial accounting control are varied and include software offerings, analytical tools, and visual tools.
Decision making involves choosing between alternatives and is intertwined with planning and control.
In addition to the above, it is important for businesses to maintain a customer orientation as a key focus. Firms can realize competitive advantages by creating better customer value and/or lower cost. “Customer value is the difference between what a customer receives and what the customer gives up when buying a product or service.” This can manifest as a range of tangible and intangible benefits (Mowen et al., 2018, p. 9).
Strategic positioning, correct management of the value chain, taking a cross-functional perspective, engaging in total quality management, employing time competitively, fostering efficiency, etc. all result in positive outcomes and create customer value (Mowen et al., 2018, pp. 10-12).
Mowen et al., (2018) states: "One of the most important yet difficult tasks of managerial accounting is to determine the cost of products, services, customers, and other items of interest to managers. Therefore we need to understand the meaning of cost and the ways in which costs can be used to make decisions, both for small entrepreneurial businesses and large international businesses" (p. 32).
Managers classify costs, how costs are used, assign costs to cost objects, prepare external reports, predict cost behavior, and employ all this in decision making. Costs are known as direct (traced to cost objects) or indirect (not easily be traced to cost objects). In external reporting, costs are either product costs (cost of goods sold) or period costs (expenses in the period incurred).
Costs are placed in three categories, depending on how they react to activity changes: variable (proportional to activity), fixed (remain the same as activity), and mixed (variable and fixed [Y=a+bX where X is the activity, Y is the total cost, a is the fixed cost element, and b is the variable cost per unit of activity]).
When the relation between cost and activity is linear, the variable and fixed elements of a mixed cost can be estimated using the high-low method.
The income statement is primarily used for external reporting as it organizes costs using product and period. In the contribution format, the income statement organizes costs using variable and fixed.
In decision making; differential cost and revenue, opportunity cost (the benefit lost when an alternative is selected over another alternative), and sunk cost (past cost that cannot be altered) are vital. The latter (i.e. sunk cost) are always irrelevant for making decisions though and should be ignored.
The following paraphrases (including quotes) Noreen et al. (2017):
Managers classify costs, how costs are used, assign costs to cost objects, prepare external reports, predict cost behavior, and employ all this in decision making. Costs are known as direct (traced to cost objects) or indirect (not easily be traced to cost objects). In external reporting, costs are either product costs (cost of goods sold) or period costs (expenses in the period incurred).
Costs are placed in three categories, depending on how they react to activity changes: variable (proportional to activity), fixed (remain the same as activity), and mixed (variable and fixed [Y=a+bX where X is the activity, Y is the total cost, a is the fixed cost element, and b is the variable cost per unit of activity]).
When the relation between cost and activity is linear, the variable and fixed elements of a mixed cost can be estimated using the high-low method.
The income statement is primarily used for external reporting as it organizes costs using product and period. In the contribution format, the income statement organizes costs using variable and fixed.
In decision making, differential cost and revenue (differ between alternatives), opportunity cost (the benefit lost when an alternative is selected over another alternative), and sunk cost (past cost that cannot be altered) are vital. The latter (i.e. sunk cost) are always irrevelant for making decisions though and should be ignored,
Cost-volume-profit (CVP) analysis models how profits respond to prices, costs, and volume which allow managers to find answers to important questions (e.g., break-even volume; margin of safety; changes made to prices, costs, and volume; etc.). CVP and profit graphs are useful for how costs and profits respond to changes in sales.
The contribution margin ratio is the ration of the total contribution margin to total sales and can be used to estimate what impact a change in total sales has on net operating income.
Break-even analysis estimates how much sales would have to be to break even. The unit sales to break even can be estimated by dividing the fixed expense by the unit contribution margin. Target profit analysis works by dividing the sum of the target profit and fixed expense by unit contribution margin. The margin of safety is the amount current sales exceed break-even sales.
The degree of operating leverage estimates what impact a given percentage change in sales has on net operating income. And changes in the sales mix affects the break-even point, margin of safety, etc.
Job order costing costs products when many different products or services are used. Materials requisition forms and labor time tickets assign direct materials and direct labor costs in a job order costing system.
Manufacturing overhead costs use a predetermined overhead rate. All of the costs are recorded a job cost sheet. The predetermined overhead rate is calculated by dividing the estimated total manufacturing cost for the period by the estimated total amount of allocation base for the period (e.g. direct labor hours, direct machine hours, etc.). Overhead is applied to jobs by multiplying the predetermined overhead rate by the amount of the allocation base for the job.
The predetermined over rate is based on estimates so the actual overhead cost may differ. This difference is underapplied or overapplied overhead which, for the period, can either close out to Cost of Goods Sold or allocated between Work in Process, Finished Goods, and Cost of Goods Sold. Inventories must be adjusted accordingly.
Variable and absorption costing are alternative methods of determining unit product costs. Under variable costing only those manufacturing costs that vary with output are treated as product costs (e.g. direct materials, variable overhead, ordinary direct labor, etc.). Fixed manufacturing overhead is treated as a period cost and expensed on the income statement as incurred. Absorption costing treats fixed manufacturing overhead as a product cost (along with direct materials, direct labor, and variable overhead) with a portion of fixed manufacturing overhead assigned to each unit as it is produced. In both cases, selling and administrative expenses are treated as period costs.
Segmented income statements evaluate profitability and performance. Using a contribution approach, variable and fixed costs are separated. The sales amount required for a segment to break even is computed by dividing the segment's traceable fixed expenses by its contribution margin ratio.
Traditional cost accounting can result in cost distortions for decision making as all manufacturing costs are allocated to products, nonmanufacturing costs caused by products are not assigned to products, and there's too much reliance on unit level allocation bases (e.g., direct labor and machine hours) resulting in overcosting high volume products and undercosting low volume products.
Activity based costing is concerned with overhead. It estimates the costs of resources consumed by cost objects and assumes these cost objects generate activities that in turn consume resources. Direct labor and materials; however, are accounted for the same in both traditional and activity based costing.
With respect to capital budgeting, the payback method of evaluating capital investment projects focuses on the payback period (the length of time it takes for a project to recover its initial cost). The faster an investment can be recovered, the more desirable it is.
Using the time value of money principle in the net present value method, future cash flows are discounted to their present value which if negative means rejecting the project. The discount rate in the net present value method is based on a minimum require rate of return. If the internal rate of return is less than the minimum rate of return, the project is rejected. Of course, more funds may be allocated to make projects desirable. The simple rate of return is found by dividing a project's accounting net operating income by the initial investment.
Various types of operating budgets relate to each other. The sales budget is the foundation for a master budget. The sales budget drives the production budget which drives the various manufacturing cost budgets. All of these budgets drive the cash budget and the budgeted income statement and balance sheet.
Actual revenues and costs differ from budgeted revenues and costs, the difference can be isolated.
Performance can be benchmarked with the difference to actual performance being the variance. Variance is reported to management regularly for both quantity and price elements of direct materials, direct labor, and variable overhead.
To evaluate performance, business units are called cost centers, profit centers, and investment centers which are evaluated using standard cost and flexible budget variances. Return on investment (ROI), residual income, and EVA are used to evaluate their performance. A balanced scorecard supports the organization's strategy.
Pricing products and services needs to be determined. Supply and demand principles must be considered. Cost plus formulas are often used to set prices but alternative pricing methods are available. In any case, the actual cost of a product should not exceed its target cost.
Also, a distinction should be made between absolute profitability and relative profitability. A segment is profitable if dropping it would result in lower absolute profits. A relative profitability measure ranks segments and are necessary if a constraint forces trade-offs between segments (Noreen et al., 2017).
Conclusion
“Managerial accounting plays a critical role in enabling organizations to make informed strategic and operational decisions. By providing detailed financial and non-financial information tailored to internal stakeholders, it supports budgeting, cost analysis, performance evaluation, and resource allocation. Through tools such as variance analysis, activity-based costing, and forecasting, managerial accounting enhances efficiency, optimizes profitability, and aligns operations with organizational objectives. Its forward-looking approach and focus on internal decision-making distinguish it from financial accounting, ensuring managers have actionable insights to navigate complex business environments. In conclusion, managerial accounting is an indispensable discipline that empowers businesses to achieve sustainable growth and competitive advantage through data-driven decision-making” (xAI, Grok 4, 2025).
As this is but a brief introduction; a recent edition of Mowen, et. al’s Managerial Accounting or Noreen et al’s Managerial Accounting for Managers is suggested for a comprehensive delve into this subject while the latest edition of Schaum Outline’s Managerial Accounting (with answers) is recommended to work through managerial accounting problems for competency.
Reader’s note: A finance calculator https://www.calculator.net/finance-calculator.html and financial calculators https://www.calculator.net/financial-calculator.html are available at calculator.net.
Reader’s note: As of the date of this article, the online course provider Udemy offers low cost courses in management accounting and related areas.
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