Differences between managerial accounting and financial accounting
Financial accounting is mandatory since some external parties like tax authorities’ creditors and shareholders’ require such periodic statements, while managerial accounting, is not mandatory. Managerial accounting reports are prepared for use by managers while financial accounting reports are made for external parties. The former must be prepared according to the GAAP standards, while in managerial accounting some provisions are ignored. Though the two procedures use the same data, the relevance is different; financial accounting data are verifiable and objective and used when to solve situations at hand (Tulsian, 2002). On the other hand, managerial accounting data is flexible and only provides data that are relevant for situations. Financial accounting provides information about past transactions that can be used in planning though to a point, while managerial accounting has a stronger orientation for future growth. Managerial accounting data focuses more on segments while the former reports for the institution as a whole (Jiambalvo, 2009).
Needs and use of financial information for internal purposes
Accurate accounting is exceedingly beneficial for internal use. The information is used in deriving strategies for growth. In order to achieve the key aim, a business must maintain adequate levels of profit and liquidity. This is made easier by the use of the information provided by accounting. Accounting information is relevant for daily transactions of a company. This allows users to determine daily profits and make decisions that are future oriented. However, the information is critical for these internal users only when they make provisions and decisions.
The managerial accounting profession
Until recently, when the role of managerial accounting was recognized, companies relied heavily on their financial reports in making decisions. There were no streamlines between the external and internal users of the financial accounts. With the growth in the free market, the issue of competition and globalization led to the introduction of managing internal controls in the formulation of policies and strategies that contribute to growth. There was the need for restructuring accounting so that internal decisions that focus on the future can be made without necessarily getting contributions from the stakeholders (Jiambalvo, 2009).
Managerial accounting has expanded its purpose with the use of latest technological developments. This has allowed the managers in the collection, processing and passing of the relevant information that leads to making competitive decisions. This information assists in planning, evaluation of business and company strategies and controls. Currently, to become a managerial accountant, one has to qualify as a Certified Management Accountant.
Certified Management Accountant (CMA) in comparison to CPA certification
Accountants who acquire CMA certification are considered more specialized in accounting. They have a capability of offering similar services as CPA’s, but with an additional advantage of being leaders. CMA’s have specialized certification and training procedures that include performance training, financial analysis, budgeting, planning etc, that enhance decision making process. Unlike in CPA, CMA’s seldom works with the public and are usually employed directly by the management of a company.
Absorption and contribution (behavioral, variable) income statements
Absorption income statements include fixed and variable manufacturing costs as part of the inventory costs thus the costs of goods sold are much higher. In contribution income statements’ variable costs are considered as manufacturing costs thereby contributing to overhead costs and not as product costs. As a result, the two income statements derive a difference in the net income margin. The net income under absorption is usually higher than that under contribution costing. This is because of the omissions of the variable costs that add to the manufacturing overhead. This makes the overall fixed expenditure to be higher. Such costs are omitted in absorption costing making the expenses are much lesser.
Need for creation of another income statement in a different format
Absorption costing makes no division between the variable and fixed costs. This makes it difficult for CMA’s to derive proper computations for Cost Volume Profit Analysis (CVP). In order to generate data suitable to derive the CVP, companies find it crucial to develop contribution income statements so as to classify these costs to develop policies that are suitable for planning (Pinson, 2008).
Break-even analysis is a tool used: when determining the profitability of products, when finding profitable unit costs, and in choosing strategies. In determining the profitability levels, a set of break even points are used to find the optimal point of profits. In unit pricing, the costs per unit are left as variables in the formulation of an equation that sets the price per unit (Tulsian, 2002). The most favorable equation is that which brings the profitability faster. If a company’s profitability level is determined by more than a single product, break-even analysis is used to determine the timeline for each product. This derives the overall strategy on which product is favorable.
At the break-even point, the total revenues are equal to total costs and the contribution margin is equal to total fixed costs.
PX = profit + FC+ VX, where
P is the unit price, x is the number of units, v is the variable cost, and FC is the fixed costs.
At this point, the profit is zero, thus
PX= FC + VX
Example, Refer to excel sheet attached.
Tulsian, P. (2002). Financial Accounting. Pearson Education India: Delhi.
Jiambalvo, J. (2009). Management Accounting. John Wiley & Sons: San Francisco.
Pinson, L. (2008). Anatomy of a Business Plan: The Step-by-Step Guide to Building a Business and Securing Your Company's Future. Aka associates: Washington.