What are the functions of Managerial Accounting?

Let us discuss the top functions of managerial accounting in detail –

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Functions of Managerial Accounting

  • Forecasting – It helps in forecasting profit and cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more, which a company can expect from a specific product line, customer base, geography, etc. Thus, the company can manage its overall cash-flows accordingly.Manage Profitability – It plays an important role in determining the break-even pointBreak-even PointThe break-even point (BEP) formula denotes the point at which a project becomes profitable. It is determined by dividing the total fixed costs of production by the contribution margin per unit of product manufactured. Break-Even Point in Units = Fixed Costs/Contribution Margin
  • read more through margin analysis techniques, which helps in the determination of the optimal sales mix for the company’s products. It helps the company to manage its profitability.Identifying Bottlenecks – It supports the managers in identifying the hurdles or bottlenecks through constraint analysis techniques in the organization and analyzing its impact on revenue-generating capacity and profit of the company. The management can then make decisions regarding changes required in the company’s systems.Increase Efficiency –  It helps increase the organization’s efficiency by maximizing profits by coordinating different techniques such as budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more, financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more & analysis, and financial interpretation. Coordination of these techniques helps the managers create budgets and set standard costs, which play an important role in financial decision-making.Improve Performance – Managerial accounting functions help the managers control the organization’s performance by applying various techniques.Cash Flow Estimation – It helps the company’s management estimate cash flows in the immediate future, source of revenue, and any bottlenecks.Variance Analysis – It helps in analyzing variances between budgets and actual numbers; the analysis is performed through the application of various budgeting and forecasting techniques. Once aware of the variances in the budget and the actual results, the management can make informed decisions in the company.Make or Buy Decision – It helps internal management by providing insight into the make-or-buy decisions for products or product lines or certain projects. Thus, management can decide whether it shall manufacture the products in-house or buy the same from the outside market.New Product Launch – It helps decide about designing new products by giving insights on the costs of new designs, comparing the cost to the target, and analyzing variance.Trend Analysis – It helps analyze the business trends using various techniques of budgeting and forecasting.Capital Budgeting Decision – Managerial accounting through its capital budgeting analysisCapital Budgeting AnalysisCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds.read more technique, helps management decide on the proposal for acquiring fixed assets & equipment. Based on this, the management can decide which financing proposal is better for the organization.Identifying Profitable Projects – It helps determine the rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more, which ultimately helps management select the most profitable project or proposal. The project that yields better results is selected after that.Cost Allocation – It also helps in inventory valuation by calculating and allocating overhead costOverhead CostOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more and assessing direct costs relating to the cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.
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Conclusion

Thus, it is clear that managerial accounting is an important function and plays an integral role in decision-making in the organization. It helps managers make informed business decisions and prepares them for any future contingencies. Their functions are also called advisory functions since they help the managers handle upcoming issues and determine possible profitable business opportunities.

This has been a guide to the Functions of Managerial Accounting and its definition.  You may learn more about financing from the following articles –

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