Managerial Accounting: An Overview | Managerial Accounting | CMA Exam | CPA Exam BEC

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These lectures cover managerial accounting versus financial accounting, planning controlling and decision making, corporate governance and IMA statement of ethical professional.

Managerial Accounting Versus Financial Accounting

Planning Controlling and Decision Making

IMA statement of of Ethical Professional

Corporate Governance

Managers make numerous decisions during the day-to-day operations of a business and in planning for the future. Managerial accounting provides much of the information used for these decisions. Some examples of managerial accounting information along with the chapter in which it is described and illustrated follow:

  • Classifying manufacturing and other costs and reporting them in the financial statements
  • Determining the cost of manufacturing a product or providing a service
  • Estimating the behavior of costs for various levels of activity and assessing cost-volume- profit relationships
  • Evaluating operating performance using cost behavior relationships
  • Planning for the future by preparing budgets
  • Evaluating manufacturing costs by comparing actual with expected results
  • Evaluating decentralized operations by comparing actual and budgeted costs as well as computing various measures of profitability
  • Evaluating special decision-making situations by comparing differential revenues and costs, and allocating product costs using activity-based costing
  • Evaluating alternative proposals for long-term investments in fixed assets
  • Evaluating the impact of cost allocation on pricing products and services
  • Planning operations using just-in-time concepts

Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements. These financial statements—the income statement, retained earnings statement, balance sheet, and statement of cash flows—are prepared according to generally accepted accounting principles (GAAP). These statements are used by external users such as the following:

  • Shareholders
  • Creditors
  • Government agencies
  • The general public

Managers of a company also use general-purpose financial statements. For ex- ample, in planning future operations, managers often begin by evaluating the current income statement and statement of cash flows. Managerial accounting information is designed to meet the specific needs of a company’s management. This information includes the following:

  • Historical data, which provide objective measures of past operations
  • Estimated data, which provide subjective estimates about future decisions Management uses both types of information in directing daily operations, planning future operations, and developing business strategies.
  • Unlike the financial statements prepared in financial accounting, managerial ac- counting reports do not always have to be:
  • Prepared according to generally accepted accounting principles (GAAP). This is because only the company’s management uses the information. Also, in many cases, GAAP are not relevant to the specific decision-making needs of management.
  • Prepared at fixed intervals (monthly, quarterly, yearly). Although some management reports are prepared at fixed intervals, most reports are prepared as management needs the information.
  • Prepared for the business as a whole. Most management reports are prepared for products, projects, sales territories, or other segments of the company.

Planning Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action.

Operational planning, which develops short-term actions for managing the day-to-day operations of the company.

Directing The process by which managers run day-to-day operations is called directing. An example of directing is a production supervisor’s efforts to keep the production line moving without interruption (downtime). A credit manager’s development of guidelines for assessing the ability of potential customers to pay their bills is also an example of directing. Controlling Monitoring operating results and comparing actual results with the expected results is controlling. This feedback allows management to isolate areas for further investigation and possible remedial action. It may also lead to revising future plans. This philosophy of controlling by comparing actual and expected results is called management by exception.

Improving: Feedback is also used by managers to support continuous process improvement. Continuous process improvement is the philosophy of continually improving employees, business processes, and products. The objective of continuous improvement is to eliminate the source of problems in a process. In this way, the right products (services) are delivered in the right quantities at the right time.

Decision Making: Inherent in each of the preceding management processes is decision making. In managing a company, management must continually decide among alternative actions. For example, in directing operations, managers must decide on an operating structure, training procedures, and staffing of day-to-day operations. Managerial accounting supports managers in all phases of the management pro-cess. For example, accounting reports comparing actual and expected operating results help managers plan and improve current operations. Such a report might compare the actual and expected costs of defective materials. If the cost of defective materials is unusually high, management might decide to change suppliers.