2 2.2: Characteristics of Managerial Accounting

2.2: Characteristics of Managerial Accounting

  1. Last updated
    Dec 28, 2020
  • vendetta-157703_960_720.png
  • Contributed by No Attribution by request
  • Anonymous by request

 Learning Objectives 

  • Compare characteristics of financial and managerial accounting

Question: The issue facing the president at Sportswear is a common one. Companies prefer not to disclose more information than is required by U.S. GAAP, but they would like to have more detailed information for internal decision-making and performance-evaluation purposes. This is why it is important to distinguish between financial and

managerial accounting.  What is the difference between information prepared by financial accountants and information prepared by managerial accountants?

 

Managerial accounting3 focuses on internal users—executives, product managers, sales managers, and any other personnel within the organization who use accounting information to make important decisions.  Managerial accounting information need not conform with U.S. GAAP. In fact, conformance with U.S. GAAP may be a deterrent to getting useful information for internal decision-making purposes. For example, when establishing an inventory cost for one or more units of product (each jersey or hat produced at Sportswear Company), U.S. GAAP requires that production overhead costs, such as factory rent and factory utility costs, be included. However, for internal decision-making purposes, it might make more sense to include nonproduction costs that are directly linked to the product, such as sales commissions or administrative costs.

Question: It’s clear that financial accounting focuses on reporting to outside users while managerial accounting focuses on reporting to inside users. What specific characteristics would we expect to see in managerial accounting information?

Another characteristic of managerial accounting data is its high level of detail. As noted in the opening dialogue between the president and accountant at Sportswear Company, the financial information in the annual report provides a general overview of the company’s financial results but does not provide any detailed information about each product. Information, such as product profitability, would come from the managerial accounting function.

Finally, managerial accounting information often takes the form of nonfinancial measures. For example, Sportswear Company might measure the percentage of defective products produced or the percentage of on-time deliveries to customers. This kind of nonfinancial information comes from the managerial accounting function.

Table 2.1 summarizes the characteristics of both managerial and financial accounting.

Table 2.1 – Comparison of Financial and Managerial Accounting
Managerial Accounting Financial Accounting
Users Inside the organization Outside the organization
Accounting rules None U.S. Generally Accepted Accounting Principles (U.S. GAAP)
Time horizon Future projections (sometimes historical if in detail) Historical information
Level of detail Often presents segments of an organization (e.g., products, divisions, departments) Presents overall company information in accordance with U.S. GAAP
Performance measures Financial and nonfinancial Primarily financial

Follow-Up at Sportswear Company

Question: What did the president at Sportswear Company learn about product profitability from the information provided by the managerial accountant?

There are many issues associated with determining product profitability, including how to allocate costs that are not easily traced to each product and whether the product revenue and cost information is accurate enough to make important managerial decisions. These important issues will be addressed throughout the book.

 Key Takeaway 

Financial accounting provides historical financial information for external users in accordance with U.S. GAAP.

Managerial accounting provides detailed financial and nonfinancial information for internal users who use the information for decision making, planning, and
control purposes.

Review problem 2.1

  1. Suppose you are the co-owner and manager of a retail store that sells and repairs mountain bikes. Provide one example of a financial accounting report that would be useful to you and your co-owner. Provide two examples of managerial accounting reports that would be useful to you as the manager.
  2. Provide two examples of nonfinancial measures used by a pizza eatery that serves food in the restaurant and offers delivery services.
  3. For each report listed in the following, indicate whether it relates to financial or managerial accounting. Explain the reasoning behind your answer for each item.
    1. Projected net income for next quarter by division
    2. Defective goods produced as a percentage of all goods produced
    3. Income statement for the most current year, prepared in accordance with U.S. GAAP
    4. Monthly sales broken down by geographic region
    5. Production department budget for the next quarter
    6. Balance sheet at the end of the current year, prepared in accordance with U.S. GAAP

Definitions

  1. Provides historical financial information to external users.
  2. A set of accounting rules that must be followed to provide consistency in reporting financial information to external users.
  3. Focuses on internal users, including executives, product managers, sales managers, and any other personnel in the organization who use accounting information for decision making.

License

Icon for the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License

Cost Accounting Copyright © 2023 by William (Bill) Bonner is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Share This Book