An Introduction to Managerial Accounting & Cost Concepts

by David Ingram

Managerial accounting is one of two major divisions in the accounting world. Financial accounting covers basic accounting functions focused on creating periodic financial statements. Managerial accounting tasks are inwardly focused and more complex than financial accounting techniques, creating insightful reports for managerial decision-making. Much of managerial accounting centers around cost analysis, making basic cost concepts a large component of managerial accounting curricula.

Managerial vs. Financial Accounting

Aside from the fundamental difference in the purposes of financial and managerial accounting, there are numerous subtle differences between the two. Managerial accounting techniques are not subject to national and international accounting standards like GAAP, for example, since reports are generated solely for internal users. Managerial accounting looks forward to estimate future income and expenses rather than looking backward to report on past performance. Financial accounting comprises a continual cycle, with each iteration ending in financial statement preparation, whereas managerial accounting consists of ongoing activities performed regularly.

Planning and Control

Managerial accounting is useful for increasing planning effectiveness and control in any area of operations. Managerial accounting techniques can help managers analyze production errors or quality standards coming off of an assembly line, for example. Managers can use managerial accounting information to analyze the cost-efficiency of using different suppliers or purchasing different quantities of raw materials, as another example. Managerial accounting data can reveal which sales teams operate more efficiently or productively than others, and can assist in the decision of whether to outsource or make investments in labor and capital equipment to perform on specific business functions.

Cost Basics

Accountants classify and differentiate the costs of doing business in a variety of ways. Businesses incur both direct and indirect costs; direct costs are incurred as a direct result of production activities, while indirect costs are incurred independently of production. Fixed costs are those which remain relatively constant over time, while variable costs increase or decrease in proportion with production volumes. Product costs are expenses which can be pegged to particular products or services, while period costs are those which can more easily be allocated to specific timeframes.

Assigning Costs

Accountants assign both direct and indirect costs to each product or service sold to reveal profitability data on individual products, processes, departments and business units. Accountants can calculate the cost of goods sold using the last-in, last out (LIFO) method or the first-in, first-out (FIFO) to assign varying product costs. The specific ID and weighted average methods offer alternatives to LIFO and FIFO. Accountants assign fixed costs such as overhead and administrative salaries based on a number of factors, including sales volumes for given periods.