introduction to managerial accounting

introduction to managerial accounting

Introduction to Managerial Accounting

1. I. Understanding the Basics of Managerial Accounting

Firms employ managerial accounting in order to formulate plans, produce periodic reports, direct operations, and create or maintain an appropriate accounting structure for their business activities. Companies prepare financial statements and the required supporting record-keeping data as a secondary task (objective) to meet the minimum disclosure requirements for meeting their responsibilities to outside users. In performing this ostensibly secondary but actually essential function, they provide the basis for informed management decision making. Inherent in managerial accounting is the establishment of appropriate objectives and the subsequent development of a plan or plans. Upon the completion of managerial accounting’s planning stage, practices are established for controlling the particular activities deemed essential to accomplish the preset objective.

A. The Foundations and Importance of Managerial Accounting

Managerial accounting plays an important role in a firm’s planning, directing, and controlling the day-to-day operations of the business. This function is structured to service the particular needs of corporate management. The corporate entity is then free to make objective judgments upon the information presented. The figure looks intimidating at first, but remember, you have all seen this before. As a matter of fact, managerial accounting is a field which is simply mostly familiar accounting concepts properly used and presented. There are two categories of accounting objectives for a company which must be satisfied and employed for the reality of today’s business world to continue inferring the general welfare that it does for most of the people.

2. II. The Role and Importance of Managerial Accounting in Business

Managerial accounting, on the other hand, has a different purpose. It focuses on the future and on the internal need of the organization. The types of reports generated by management accountants reflect the needs of specific departments within an organization, such as division managers, purchasing supervisors, and production control personnel. Since these users are generally employed to carry out the policies established by the owners and top management of the business, management accountants help these users make more informed decisions by providing them with relevant financial and nonfinancial data. Calls for managerial accounting techniques and concepts are not new. These users have always had the need for such information to assist them in planning and controlling their affairs. However, in today’s complex and fast-moving world of business, it has become increasingly obvious that intelligent decision making on the part of all business users is essential for business survival and growth. This is due, in no small part, to the many areas of risk that fall within a manager’s decision-making authority.

We now talk about the role and importance of managerial accounting in business. It is not the role of managerial accounting to produce the financial statements for the company. Financial accounting is charged with this responsibility and is extremely important to business because investors, creditors, and other outsiders all have a vital interest in the annual reports of publicly held corporations. These documents include a government agency and contain summaries of the financial operations of the firm. They give results of business operations for the year and discuss these results in material detail outlining the major risk of business, as well as such factors as sales, costs of goods sold, trial balances, and so forth. These external reports are prepared according to standardized rules stipulated by various accounting standards and regulatory bodies.

3. III. Key Concepts and Techniques in Managerial Accounting

Information from cost accountants leads to profit-improving decisions because cost data serve as the basis for many short-run and long-run decisions. Cost accountants perform a variety of functions, but, in general, they focus on two major questions: “Is the costing and pricing of products and services under our present capacity and operating conditions efficient?” Given present and expected future conditions, the best pricing and costing decisions will lead to question one. “Would the unit benefit or suffer from increased sales activities that will add to the cost of products and services beyond the present capacity and operating conditions?” Financing the future capacity needs and the relative importance of long-run results enter into question two.

In this section, we briefly introduce several key concepts and techniques in managerial accounting, such as: – Distribution Costing and Break-Even Analysis – Financial Statement Analysis – Timeliness – Quality and Efficiency Measures – Economic Value Added – Balances Between Product and Period Costs – Differential Level in the Planning Horizon

4. IV. Using Managerial Accounting for Decision Making

In order to provide information useful for managerial decisions, we will be drawing heavily on concepts discussed in earlier chapters. These concepts include product costing, product volume and production planning, cost control, job-order costing, break-even analysis and transfer pricing. Initially, we will extend these concepts to deal with problems of estimating costs and revenues. Much of our discussion will be general in nature since data and experience are hard to categorically state. However, some discussions will be more specific identifying where various programs or practices may have been experiencing difficulties. Also, many other decisions could be addressed in this chapter using the kinds of information and techniques we present in this monograph.

Good decision-making is the $2 million challenge. For some companies, it’s real money. There are many kinds of decision making. One of the most important of these is the capital budgeting decision for which managers try to find the best investment opportunities. It is generally believed that the quality of managerial decisions is only as good as the quality of the information available for analysis. It is also believed that information is relatively easy to obtain if only we know how to gather it. This chapter will focus on providing the information managers use when making business decisions.

5. V. Implementing Managerial Accounting Systems in Organizations

A. Core Competency. The information contained in these systems is often viewed by company management as a core competency. Rarely will a company use available software to meet its ongoing priority needs; these information systems are sufficiently ingrained within the enterprise and are considered part of its expertise. They are often considered crucial for maintaining the strategic direction of the company. In fact, some companies will invest substantial amounts in state-of-the-art software simply for the value of having the latest technology in place, just in case a need ever arises. Software is also in place to capture other, less frequent, more indirect, and farther-reaching benefits that are difficult to measure and quantify; related software is custom designed to fit unique aspects of the business.

Given the substantial investments made in the human and physical capital of a company, it would be very short-sighted to fail to allocate sufficient resources to financial information systems. During the standard business cycle, a company will make many important business decisions. Managerial accountants create and provide the data for the decision-making process. Their work entails continuous communication and interaction with the other staff members in all the company’s departments and divisions.