When Is Managerial Accounting Appropriate?
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.
Managerial accounting is different from financial accounting in that financial accounting is centered on providing quarterly or yearly financial information to investors, shareholders, creditors and others outside the organization.
Here’s When Managerial Accounting Makes Sense
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.
Since managerial accounting is concerned with short-term accounting that helps managers make operational decisions — which are intended to help increase the company’s operational efficiency — any scenario where a budget is needed to make a decision is the right scenario for managerial accounting. Individuals in managerial accounting will often use performance reports to detect deviations of actual results from budgets.
As an example, let’s say an Internet company subscribes to cloud computing services with Amazon Web Services. Prices to rent out space in the cloud from Amazon 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.
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