If accounting is the language of business, then managerial accounting is the language inside a business. Accountants establish very specific definitions for terms such as revenue, expense, net income, assets, and liabilities. Everyone uses these same definitions when they announce and discuss these attributes, so that when a company reports sales revenue, for example, investors and other businesspeople understand how that figure was calculated. This way, companies, investors, managers, and everyone else in the business community speak the same language, a language for which accountants wrote the dictionary.
Managerial accounting allows a company’s managers to understand how their business operates and gives them information needed to make decisions. It helps them plan their business’s activities and control its operations. For example, suppose a marketing executive needs to set a price for a new product. To set that price, the executive needs to understand how much the product costs; that’s where managerial accounting comes in. Furthermore, the price needs to be set at such a level that at the end of the year, when the company sells all the products it’s supposed to sell at whatever prices it sets, it earns the profit and cash flow that it has projected for itself. That, too, is where managerial accounting comes in.
When I teach managerial accounting, I always take care to point out who the users of managerial accounting information usually are. They’re the managers, ...