managerial accounting course

managerial accounting course

The Fundamentals of Managerial Accounting: A Comprehensive Guide

1. Introduction to Managerial Accounting

Many of the decisions made by managers require the analysis of “what if” scenarios for products and services, production methods, marketing techniques and strategies. This is no different than the problems faced by a coach of a football team who must decide who to start, what to run and when, and other decisions about what might happen during a football game. The following part of this chapter explains in more detail when the information provided by managerial accounting is used, who uses it, and how it is presented.

Managers use managerial accounting to make a wide variety of business decisions. This includes decisions about the development and pricing of products or services, their production, marketing, distribution and servicing, as well as business strategy formulation for firms and not-for-profit organizations. Managerial accounting also includes quality or performance measurement systems, both financial and non-financial. There is, after all, a strong belief in the adage “you can’t manage what you can’t measure.” Finally, and with increasing importance, the field of managerial accounting is used to learn about and manage the competitiveness of business organizations in today’s global marketplace.

2. Cost Behavior and Analysis

Variable costs are constant on a per unit basis but change in total in direct proportion to changes in volume. Total variable cost is found by multiplying the variable cost per unit by the number of units. Graphically, this results in a straight line with variable costs and total costs rising steadily as volume increases. Managers sometimes think that the cost of an additional unit of production is the variable cost per unit. This is not accurate. In the short run, there are costs that increase with volume changes, just as variable costs do. However, these other costs are not variable costs because the increase or decrease in these costs does not coincide with the increased or decreased level of production.

Understanding the behavior of costs is an essential element of accounting. This understanding is also important from a decision-making viewpoint. To maximize net income for a given product mix, management must understand how costs behave. The product mix that the company produces will have different impacts on costs, since fixed and variable cost types respond differently to changes in sales and production volume. Understanding the behavior of fixed and variable costs is a basic element of operational planning and control decisions. Variable costs vary per unit of activity, while fixed costs remain constant in total regardless of changes in the activity level. Understanding variable costs is important as variable costs are the first costs that change and cause changes in profit. However, fixed costs are also important. Efficient use of fixed assets improves profitability. Understanding how fixed and variable costs behave will help the company forecast profits, price the company’s products correctly, and identify appropriate levels of fixed costs. Understanding cost behavior is essential for management.

3. Budgeting and Performance Evaluation

Considerable time and effort are required to develop a budget system suitable for the needs of a company. Before the budget process is initiated, careful consideration should be given to the objectives of the system. This chapter provides a discussion of the mechanics of typical budget systems, and a detailed talk about the formulation of operating budget.

The operation of a company consists of hundreds of separate activities, many of which are difficult to measure or evaluate. A well-conceived budget system makes it possible for all managers to know the limits of their authority. Properly executed, it serves as a communication device, a coordinating device, an authorization device, a control device, and a motivational device. As a control device, budgets provide a reference point or standard by which to assess actual company performance.

4. Decision-Making Tools and Techniques

4.2. The taxonomy of decisions One general way of classifying the different types of decision processes that need to be incorporated into the efficient operations of the firm is according to the consequences of the decision. There are typically three basic types of management decisions: control or direction, coordination, and optimization. Control or direction decisions are usually short-run and are aimed at improving or maintaining the current situation. Coordination decisions involve the acquisition/manufacturing and collection of products and services. The firm must frequently make this type of decision in order to match production operations to changes in the level of demand. Finally, optimization decisions are usually binding, are long-run in nature, and involve deciding on the maximum or minimum levels of resource usage that the various activities are allowed to have. Control or direction, coordination, and optimization decisions are not mutually exclusive and encompass an almost infinite number of decisions. All management decisions can be grouped into one of these three large categories.

The viability, growth, and prosperity of the firm depend on the effectiveness and efficiency of its operations. At the core of management’s responsibilities are the continuous and difficult tasks of directing, executing, and controlling the wide variety of functions that ensure the productive use of the firm’s resources. For that reason, efficient and effective decision making is a basic building block of the firm. The main purpose of the decision-making process should be to make decisions that lift the performance of the firm by utilizing or allocating resources.

4.1. The need for decision making The potential for gain exists whenever a firm plans to convert cash into earning streams that exceed the returns anticipated from buying ready-made earning streams, known as investment opportunities. It is this potential for gain that gives the firm’s performance such speculative nature.

5. Strategic Management Accounting

Strategic management accounting, in simple terms, looks at how management can use management accounting processes and techniques effectively in formulating and implementing organization strategies. Strategic management accounting aims to improve the cost and revenue drivers of the organizational strategy while monitoring the critical success factors with relevant strategic performance targets. Its focus is to provide a clearer understanding of the impact and the potential results of implementing the organization’s strategies for the long term.

Strategic management accounting is a key contributor to the decision-making process. It expands on the activities of management accounting to bring management’s focus to the long-term progress of the organization. Management accounting, according to CIMA (The Chartered Institute of Management Accountants), is “the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources.”