Managerial accounting tools help a company manage its financial information for internal purposes. Among the most common tools are costing methods, budgets, standard costing, variance analysis, capital analysis and accounting workflow management. A major difference between financial accounting and management accounting is the latter does not need to follow and external standards or principles. As long as companies use managerial accounting tools that are reasonable and accurately track financial information, the company’s system is acceptable. Companies can also change to different tools if they discover their current tools are not providing the most accurate reporting.
Costing methods represent the methods by which a company allocates costs to products. Direct materials, direct labor and manufacturing overhead are the main cost categories. A few different costing systems are available for use by companies. Job order costing systems allocate costs on a per-project basis. Each item used is easily traceable to goods produced; accountants can allocate costs based on the price paid for goods. Process costing systems work best for a production system that produces goods on a continuous basis. Raw materials are difficult to trace to individual goods. Companies will therefore allocate costs based on the processes in the production processes, rather than individual jobs.
Budgets, standard costing and variance analysis are managerial accounting tools that work in tandem. Budgets represent the financial road map a company expects to follow when spending money on its production system. Owners and managers will often work with accountants to create dollar limits for each stage in the production process or other business operation. Standard costing can lead to standard budgeting, a common form of budgeting among managerial accounting tools. Companies will look at their historical costs for producing goods and services. They will then apply these costs to each product produced, creating a standard expectation of expenditures. Variance analysis is a tool used after a company creates a budget. Accountants will compare the standard costs and budget levels to the actual costs of producing goods or services. The differences — favorable or unfavorable — help the company discover where problems exist with overspending in the production process.
Managerial accounting tools also include capital analysis and workflow management. Managerial accountants may work with the corporate finance team to determine if debt or equity financing works best for financing business operations. Accountants will compare the cost of capital paid on loans to the changes in economic value from issuing stock. The accountants will then make a recommendation on how to finance operations. Workflow management also works in this process as accountants must create systems to manage the information flowing through the company.