8 Sep 2022

108

Managerial Accounting: What You Need to Know

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Managerial accounting in an organization is a function that is carried out by the entire middle and top level managers in the finance and accounting department. It entails the collection, interpretation and analysis of accounting data in order to facilitate decision-making (Berger, 2011) . Thus, there is usually no managerial accountant position in organization structures. Management accounting is mainly concerned with the costs of the business operations as compared to the profitability, whereby the minimization of costs is a key goal for many accounting and financial departments (Bhattacharyya, 2006) . Managerial accounting also plays a major role in the creation of business financial consultant Herein discussed are concepts of which managerial accounting is composed and their role in the discipline. 

Breakeven Analysis 

Breakeven analysis is used in various contexts in managerial accounting. In all contexts however, the breakeven point essentially refers to a point whereby the benefits match the costs e.g. when the revenues are equal to or exceed the expenses (Cafferky & Wentworth, 2010) . The breakeven point in terms of profitability is sometimes defined as the point where the contribution margin is equal to fixed costs. Breakeven analysis has numerous uses. Some of them include determining how the manipulation or the change in one variable affects other variables (Bhattacharyya, 2006) . For instance, the analysis can be used to reveal the effect that a change in prices could have on the organizations profits. 

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Breakeven analysis is also important in supporting decisions such as process or operation changes. For instance, if a fixed cost such as automation replaces a variable cost such as labour, breakeven analysis can be used to determine the effect that the effect would have on the organizations profits (Bhattacharyya, 2006) . Breakeven analysis is also important in determining the maximum amount of profit that an organization can make, or if any profit can be made at all. The breakeven point can be reduced through introduction of methods that are more efficient or technologies, elimination or reduction of fixed costs emphasis on high margin products, among other techniques. 

Flexible Budget 

Flexible budgets are budgets that vary depending on the amount of activity that is expected to take place within the organizations operations (Rajasekaran & Lalitha, 2011) . The expected changes in actual revenue determine the level of expenditure indicated in the budget. Once an accounting period has elapsed, the actual figures are compared to the budgeted figures in order to forecast future budgets with greater accuracy (Shim, Siegel & Shim, 2012) . The variable costs are the main focus in the model, whereby the activity levels expected in a certain period will determine the forecasted costs. 

Different kinds of flexible budgets exist, ranging from basic ones to complex ones. They are basic, intermediate and advanced flexible budgets. Flexible budgets are essential in management (Shim, Siegel & Shim, 2012) . For instance, they can be used as a performance evaluation tool and a planning tool, whereby expected levels of performance at any level of activity are compared to the actual levels. Flexible budgets are also more accurate than static budgets in environments where there is a high variance in variable costs. Moreover, in budgets that are yet to be finalized, flexible budgeting is a valuable tool because it ensures that the budgets can easily be revised as necessary (Rajasekaran & Lalitha, 2011) . However, flexible budgets are complex and are often difficult to formulate and implement. Flexible budgeting is also not useful for an organization that has very few variable costs since the variance of the costs has little effect on the revenue. In addition, flexible budgets cannot be used to compare actual revenue to budgeted revenue since in their preparation, the two values are usually equal. 

Variance Analysis 

Variance analysis refers to the identification of variances in various data and investigation into the cause of those variances. Variances may be favorable or unfavorable to an organization. For instance, incurring fewer expenses than expected is a favorable variance (Berger, 2011) . Understanding fluctuations could be potentially useful in managerial decision-making, enabling managers to identify variables which could be manipulated for the benefit of the company. Some variances that are often analyzed for decision-making include sales mix variance, raw material usage variance, labor rate variance, among others. 

Variance analysis allows for reasonable budgets to be created. It increases the level of accuracy of various forecasts, thereby facilitating future-oriented decision-making. Variance analysis also helps managers understand the dynamics in their operations (Jordan, 2011) . Managers study variances and the factors contributing to them in order to find ways in which to avoid them, or to cushion the organization against their effects. Variance analysis is also important in internal controls and in performance analysis (Jordan, 2011) . From the variances recorded in various figures, managers can evaluate departmental performance and devise ways in which performance can be maximized. 

Breakeven analysis, flexible budgeting and variance analysis are some of the most important components of managerial accounting. The overall aim of managerial accounting is to ensure the minimization of costs and expenses and the maximization of revenues in order to maximize profits (Cafferky & Wentworth, 2010) . Ultimately, the most successful enterprises emerge from the understanding and efficient usage of these variances in order to produce the desired effect. 

References Top of Form 

Berger, A. (2011). Standard Costing, Variance Analysis and Decision-Making: Managemant accounting and control . München: GRIN Verl. Top of Form 

Bhattacharyya, A. K. (2006). Principles and practice of cost accounting . New-Delhi: Prentice-Hall of India. Bottom of FormTop of Form 

Cafferky, M. E., & Wentworth, J. (2010). Breakeven analysis: The definitive guide to cost-volume-profit analysis . New York: Business Expert Press. 

Jordan, J. (2011). Production variance analysis in SAP controlling . Bonn: Galileo Press. Top of Form 

Rajasekaran, V., & Lalitha, R. (2011). Cost accounting . Delhi: Pearson. Bottom of FormTop of Form 

Shim, J. K., Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond . Hoboken, N.J: Wiley. 

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