is managerial accounting hard

is managerial accounting hard

Demystifying Managerial Accounting: A Comprehensive Guide for Students

1. Introduction to Managerial Accounting

Managerial accounting focuses on the information needed for excellent decision making. To understand the work of the manager, it will be helpful to select a decision that managers make in order to improve their stock price. This will help you see why managerial accounting is important in making this decision. However, we need to first identify what stock price means.

Financial accounting is a field of accounting that provides users with financial statements in order to have a concise and clear understanding of financial performance and position. Those unfamiliar with financial statements will be presented with virtually all of the accounting information that they use to make business decisions. This information mostly consists of income measures and overall size. With the help of financial accounting, users are able to answer right questions about value, performance, and liquidity.

Once the introductory accounting course is finished, many accounting students are confused about the difference between financial accounting and managerial accounting. Others feel that they are experts in one area and know very little about the other. Although this box does not provide you with enough space to answer all of your questions, it will hopefully provide a good fundamental explanation of what the difference is.

2. Key Concepts and Principles

Product Cost versus Period Cost One common cost classification is product cost versus period cost. Product costs are the costs that are identified with products or services produced in the period. Because product costs create or “work” the period’s offering, that material, labor, and overhead cost that for product cost need to be accumulated to each product as it is worked. To be useful, the product cost classification must fulfill three objectives. First, cost data must explain the changes in profits that happen as sales change. It needs to summarize costs in a way useful for this explanation. Second, these aggregated costs should carefully follow cost behavior, whether that behavior is related to variations in sales, production, activity, or serving customers. Finally, costs should allow a cost-benefit analysis of every cost driver. For each important cost driver, costs should be available for just the part of the decision to be made. That is, cost costs need to be sectionalized in a way that deactivates only the costs changed by the decision.

Key Terms 1) Product cost: The cost of items such as raw materials, labor, and factory overhead that are associated with producing and/or purchasing a product for resale. 2) Period cost: The cost of items such as salaries for office personnel and advertising that are expensed in the period in which they are incurred and are not associated with producing and/or purchasing a product for resale. 3) Differential costs: Costs that differ between alternatives and will vary depending on the decision made. 4) Differential revenues: Revenues that differ between alternatives and will vary depending on the decision made. 5) Sunk costs: Past costs that are not relevant to the making of additional decisions. 6) Variable costs: Costs that change in total as the volume of activity changes but generally remain constant on a per-unit basis. 7) The contribution margin: The difference between sales and total variable costs.

3. Analyzing Costs and Decision Making

Sandler Suits It Up is a small manufacturing company that manufactures men’s casual clothing. Sandler Suits and other small manufacturers have the flexibility to add new styles and designs just as fashion requirements change. This flexibility should allow them to adjust promptly to changing customer desires. And Sandler Suits is doing well, having more than tripled its sales in the last five years.

In this chapter, we illustrate the principles of analyzing how costs behave both in a manufacturing company and in an organization. We examine how creating a cost-volume-profit equation can help a business spot trends and make educated guesses. By breaking variable and fixed costs down into two main components, we can also analyze these costs and make better management decisions. Indeed, it is remarkable how many decisions in business can be simplified by analyzing costs. This is a benefit of managerial accounting that should not be taken lightly.

4. Budgeting and Performance Evaluation

Expenses are incurred based on the production of a product or the provision of a service. This is not a simple issue because most businesses that are focused on profitability are trying to engage as few people (in as few departments) as possible to do the job. Few people equal low expenses. Consequently, one of the best ways to measure the contribution a business makes to making excellent products or providing excellent service is to track the relationship between profitability and the size of the support mechanism. Put simply—profitable businesses have the smallest support mechanisms. Rarely will businesses rely on comparing actual expenses relative to planned expenses—because they often disregard the changes in the business that were not known or discernible when the budget was developed. Nonetheless, this is precisely what you will be doing during this action plan.

At the foundation of cost accounting and managerial accounting is the decision to measure, account for, and explain the expenses that managers use to make products or provide services—and the future expenses associated with that activity. This action plan explicitly deals with budgeting, regardless of the spending that occurs in the future.

In Action Plan 4, you will develop an understanding and a working capability that will enable you to work with financial and operating budgets and use them as performance evaluation tools.

5. Emerging Trends in Managerial Accounting

The involvement of the customers that is seen as a critical part of continuous improvement theories, and customer involvement helps clarify what information and judgments are important. Contemporary developments such as Small Manufacturing facilities must use an integrated management accounting system that has been suggested in response to the information and decision needs of firms that are committed to some of the advanced manufacturing modes. The improved flexibility of Information Technology, and the associated restructuring of business accounting processes, have the power to greatly improve the relevance and quality of management information, thereby improving the management decision-making needed in today’s fast-changing and competitive business environment.

Several intriguing trends are evident in managerial accounting. Given the rapidly changing manufacturing and service environments, cost management is receiving much greater attention in the 21st century. New managerial accounting techniques and concepts have been developed to respond to these changing conditions. As financial accounting standards increasingly move toward fair values of assets and liabilities, and greater disclosure of financial and nonfinancial information, the possible role of management accounting in supporting external reporting also increases. The probability of growth in the management accounting role increases as ideas from the Balanced Scorecard companies, and Activity-based Accounting report improved company performance through better management processes and more informed decision-making. There is no single managerial accounting approach that is “best”. Companies apply a variety of approaches based on the specific needs and strategies of the company.