- Explain the key components of managerial accounting
Managerial accounting revolves around three primary components:
- Decision making
All companies have requirements around these components from the very beginning. Budgeting and business planning are the very first steps in beginning a business, and these are managerial accounting tasks! But what would happen if you just jumped into a business, without planning anything?
Let’s look at a small business start-up:
The first step is planning. Let’s assume we are going to start that restaurant Tony talked about in the video. First, we will create a budget for our new venture. This budget provides us with milestones.
- How much in sales do we need to bring in each month?
- What will our menu look like?
- How many employees do we need and how much will we pay them?
- What will our cost of product be?
- What will we pay for rent and utilities?
Once we have the plan, and we operate our business for a while, we can then move on to the control portion of the managerial accounting process.
- Did we meet our sales goals?
- Did we stay within our budget for payroll?
- Did we meet our cost of product budget and goals?
Then we get to move on to decision making.
- We didn’t make our sales goals, so how will we adjust costs?
- Should we adjust costs, or should we rethink our marketing plan to increase sales?
- Are we pricing our product correctly?
- Are we reaching our customer base effectively?
- Do we need to change our menu to better meet customer needs?
- If we didn’t meet payroll budget, are we providing the correct training and direction for our employees to do their jobs effectively?
So, hopefully this gives you a better understanding of the importance of planning, controlling and deciding! If you never did the budget, or review it, how would you be able to make decisions that will create a profitable business?