Managerial Accounting and Activity-Based Costing

Managerial accounting processes information used by economic organizations to plan and control operations. Managerial accounting involves analysis at a profit-center level, such as customers and products, instead of an organizational level, such as marketing, administration, and manufacturing.

Activity-based costing enables you to analyze information and costs from multiple departments and internal organizations to improve business processes. With activity-based costing, you can identify activities, processes, and cost objects, and then calculate total and unit costs by cost objects using cause-and-effect relationships.

Even though business practices have evolved significantly during the last ten years, cost accounting techniques have remained relatively static. In today's highly competitive and changing business environment, companies need the ability to analyze cost structures in more detail than they could by using the methods that are provided by traditional cost accounting systems.

All companies want to maximize profitability by either reducing costs (wastes) or increasing sales. Often, high costs are due to cross-departmental processes, but identifying these sources of waste can be difficult and time intensive.

To increase income, companies might find it difficult to identify the most profitable customers without gathering customer profit/loss information. In manufacturing environments, companies have been able to reduce direct costs for material and labor by implementing techniques, such as just-in-time, automation, total quality management, and outsourcing, at the expense of increasing indirect costs.

These changes have affected cross-departmental process costs drastically. Market competition and globalization have added complexity to business management and coordination, resulting in additional support activities. This shift in today's market requires that companies focus on indirect costs, cross-departmental processes, and customer profitability-rather than direct costs and sweeping mandates-to increase company-wide sales, regardless of customer profitability.