a. Purpose of Managerial Accounting
Managerial accounting is the process of preparing accounts and management reports that provide timely and accurate statistical and financial information. Managers require such information in making short and long term decisions (Wild, Shaw and Chiappetta, 2013). Unlike financial accounting that produces annual reports used by external stakeholders, management accounting generates reports means for an internal audience and use.
The objective of management accounting is to improve on the effectiveness of both control functions and management planning. Management accounting serves four functions; cost control, cost evaluation, management planning and performance evaluation. It provides information to internal users for making decisions regarding development of resources, and exploitation of opportunities. Although managerial accounting reports contain financial data collected from financial accounting, much of the information and decisions made are non-monetary (Corey, 2011). The reports include estimates and plans for future cost and responsibility centers, as well as information about past performance. b. Nature of Managerial Accounting
Managerial accounting is the most effective tool for the management as it enhances planning, controlling, and decision making. It deals with the collection of accounting data, analysis, interpretation, and communicating all relevant information to the management (Corey, 2011). It is a guide to managers as it supplies information and facts, and not decisions.
Managerial accountants forecast the future of an organization; this involves an analysis of historical accounting information from financial ratios, financial statements, and accounting data for measuring the probability of future occurrences. Managerial accountants aim at increasing efficiency through setting up goals for each department. It scans all points of inefficiencies through an analysis of accounting information, and takes actions for improving to increase on efficiency.c. Managerial Decisions
These are decisions that concern the operations of an organization such as the size, growth rates, employee compensation, and policy implementation, amongst others (Corey, 2011). Managerial decisions involve a process of identifying problems affecting the productivity of an organization, and the determination of opportunities to solve them. Managers derive the decisions from a choice of alternatives. This follows a selection of alternatives that fit the organizational goals and objectives are selected.
Managerial decisions may either be structured or unstructured. The former implies decisions made under a pre-determined program or set of instructions while the latter implies decisions made without a pre-determined set of instructions (Corey, 2011). Such decisions result from unique and unexpected situations such as employee strike or increased competition. Managerial decisions have a long-term impact on an organization. They are used to forecast and plan for the future of an organization with the target of achieving the goals and objectives.
d. Fraud and Ethic in Managerial Accounting
Just like in any other professional disciplines, upholding and understanding ethics is a crucial aspect in managerial accounting. Internal and external stakeholders depend on the integrity and ethics of managerial accountants in the collection and delivery of financial information, and are placed at risk if managerial accountants do not preserve ethics.
Fraud and the role played by ethics in reducing it are crucial factors in running an organization. Fraud involves the use of one’s job for personal gains through a deliberate misappropriation of the employer’s assets (Jackson, Sawyers and Jenkins, 2009). Fraud by managerial accountants increase an organization’s operating and running costs (Corey, 2011). If undetected, the inflated costs result in poor pricing, improper product mix, and faulty performance evaluation. Combating such acts require accounting ethics, which are codes of conduct that highlight the acceptable and non-acceptable standards. The Institute of Management Accountants (IMA) acts as a guideline for managerial accountants to the expected ethical standards, and how to solve ethical dilemmas.
e. Types of Cost Classifications
Costs may be classified according to behavior, traceability, relevance, controllability, or function (Corey, 2011). Behavioral costs include fixed and variable costs classified according to changes in volume of activities in a firm. Fixed costs do not change with increase or decrease in volume of activity while variable costs are determined by the level of activities. Traceability involves classifying costs according to a cost object, which is a process, product, department, or customer to which the costs are assigned. This may include direct costing traceable on unit cost objects or indirect costing where costs cannot be traced to a unit.
Costs can either be controllable or non-controllable. Whether controllable or non-controllable depends on an employee’s responsibilities: Classification by controllability is useful when assigning and evaluating managerial duties. Cost classification by functions includes inventory costs or by expenses incurred. Capitalized inventory costs are referred as product costs, which refer to the amounts necessary to produce finished products. Such include direct material, direct labor, and overhead costs. Cost expenses or period costs refer to expenditures that are identifiable with time periods rather than with finished products (Corey, 2011).
Classifying costs by relevance implies identifying cists as either sunk or out-of-pocket costs. Sunk costs are costs that an organization incurs but cannot be changed or avoided. An example is purchase of office equipment. Out-of-pocket costs require an outlay of the future, and can be used for decision making (Wild, Shaw and Chiappetta, 2013).. For example, future purchases of office equipment. Opportunity costs are potential benefits that may be lost by choosing an action between alternatives. f. Identification of Cost Classifications
Costs can be identified using any or a combination of the classifications above. It is, however, crucial to understand operations of the five classifications for proper implementation of costs. Accountants must have the ability to identify activity for behavior costs, management hierarchy for controllability, cost objects for traceability, benefit period for function costs, and opportunity costs for relevance (Wild, Shaw and Chiappetta, 2013). g. Cost Concepts for Service Companies
The classifications of costs given above apply in both product and service industries. For instance, the cost of food in an airline company depends on the number of passengers on board. The costs of food may be classified as variable since they depend on the number of passengers or the level of activity. Managers in both product and service industries must understand the cost concepts, and apply them accordingly if the objectives of a company are to be realized (Corey, 2011).
The understanding of cost concepts provide managers with platforms and basis for accurate cost estimations that are applicable in decision making (Corey, 2011). Managers must also have the ability to estimate costs faced out as a result of cancellation of production, for example, cancellation of a flight. The ability to differentiate between fixed costs and other costs is also crucial in costing for the aspect of decision making. h. Reporting Manufacturing Activities
The activities carried out in manufacturing companies differ significantly with those undertaken in product and service companies. The difference between product companies and manufacturing companies is that the former buys products or goods ready for sale while manufacturers produce them from material and labor (Corey, 2011). This implies that the financial statements of product and service companies differ from those in manufacturing industries.
In a manufacturer’s balance sheet, for example, the assets have three inventories in comparison to single inventories in product companies. This includes raw materials, work-in-progress, and finished products. Another difference is in the income statements between product and manufacturing industries (Wild, Shaw and Chiappetta, 2013). The items making the cost of goods sold differ in both statements. The cost of goods sold in a product industry consists of the difference between purchases and closing stock. A manufacturer, on the other hand, adds the opening stock to the finished inventory then subtracts the closing stock to get the cost of goods sold.
The costing of direct material, labor, overheads, and conversion costs are also different in product and manufacturing industries. This implies that financial reporting in manufacturing industries provide different results when compared to reporting in service and product sectors. Managerial decisions may, therefore, vary in the three industries.
- The convergence of U.S. GAAP and IFRS
Since 2002, the U.S Financial Accounting Standards Board (FASB) and IASB have worked together to achieve a convergence of GAPP and IFRS principles. A common set of quality standards remains the core concern for both FASB and IASB. The convergence has a significant role in the future of accounting. However, its impact has been challenged with the considerable slippage from what was initially put into place (Wild, Shaw and Chiappetta, 2013). Many challengers provide that perhaps the two boards have taken too much, and this might affect the due process as they may hurry in an attempt to meet their deadlines.
The main aim of the convergence was to achieve a worldwide accounting diversity, and consequently change the international accounting and reporting standards. GAAP provides a set of guidelines in an attempt to establish criteria or rules for any contingency while the role of IFRS provides the objectives of proper reporting, and guidance on how the specified objectives relate in different situations (Wild, Shaw and Chiappetta, 2013).
Corey, R. (2011). Managerial Accounting Concepts and Principles. Work cited, http://sites.csn.edu/bgutschick/MGR_ch01.pdf
Wild, J. J., Shaw, K. W., & Chiappetta, B. (2013). Financial and managerial accounting: Information for decisions.