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Managerial Accounting
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This website explains some of the most important concepts of managerial accounting. Site is helpful to students of business and management accounting and management professionals. (Definition, managerial accounting verses financial accounting, need for managerial accounting, history of managerial accounting)
is concerned with providing information to managers-that is, people inside an organization who direct and control its operation. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization.
Managerial accounting provides the essential data with which the organizations are actually run. Financial accounting provides the scorecard by which a company's overall past performance is judged by outsiders.
Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed-comparing actual results to plans and to benchmarks. Some reports provide timely, frequent updates on key indicators such as orders received, order blocking, capacity utilization, and sales. Other analytical reports are prepared as needed to investigate specific problems such as a decline in the profitability of a product line. And yet other reports analyze a developing business situation or opportunity. In contrast financial accounting is oriented toward producing a limited set of specific prescribed annual and quarterly financial statements in accordance with generally accepted accounting principle.
Managerial accounting is manager oriented therefore its study must be preceded by some understanding of what managers do, the information managers need, and the general business environment. Accordingly we shall briefly examine these subjects.
Managerial accounting differs from financial accounting in a number of ways that are briefly discussed below.
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Managerial Accounting 1)Reports to those inside the organization planning, directing and motivating, controlling and performance evaluation. 2)Emphasis is on decisions affecting the future. 3)Relevance is emphasized. 4)Timeliness of information is required. 5)Detailed segment reports about departments, products customers and employees are prepared.6)Need not follow generally accepted accounting principle (GAAP) 7)Not mandatory.
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Financial Accounting 1)Reports to those outside the organization owners, lenders, tax authorities and regulators 2)Emphasis is on summaries of financial consequences of past activities. 3)Objectivity and verifiability of data are emphasized. 4)Precision of information is required. 5)Only summarized data for the organization is prepared
7)Mandatory for external reports
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Every organization-large and small-has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations. Every where mangers carry out three major activities-planning, directing and monitoring, and controlling.
Planning involves selecting a course of action and specifying how the action will be implemented. The first step in planning is to identify the alternatives and then to select from among the alternatives the one that does the best job of furthering the organization's objectives. While making choices management must balance the opportunity against the demands made on the companies resources.
The plans of management are often expressed formally in budgets, and the term budgeting is applied to generally describe the planning process. Budgets are usually prepared under the direction of controller, who is the manager in charge of the accounting department.
In addition to planning for the future, managers must oversee day-to-day activities and keep the organization functioning smoothly. This requires the ability to motivate and affectively direct people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and make many small decisions that affect customers and employees. In effect, directing is that part of the manager's work that deals with the routine and the here and now. Managerial accounting data, such as daily sales reports are often used in this type of day-to-day decision making.
In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals operations are on track, is the key to effective control. In sophisticated organizations, this feedback is provided by detailed reports of various types. One of these reports, which compares budgeted to actual results, is called a performance report. Performance report suggest where operations are not proceeding as planned and where some parts of the organization may require additional attention.
The work of management can be summarized in a model such as the one shown in Exhibit 1-1. The model, which depicts the planning and control cycle, illustrates the smooth flow of management activities from planning through directing and motivating, controlling, and then back to planning again. all of these activities involve decision making. So it is depicted as the hub around which the activities revolve.
Managerial accounting has its roots in the industrial revolution of the 19th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets. Since there were no external shareholders and little unsecured debt, there was little need for elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and provided the essential information needed to manage the early large scale production of textile, steel, and other products.
After the turn of the century, financial accounting requirements burgeoned because of new pressures placed on companies by capital markets, creditors, regulatory bodies, and federal taxation of income. Johnson and Kaplan state that "many firms needed to raise funds from increasingly widespread and detached suppliers of capital. To tap these vast reservoirs of outside capital, firms' managers had to supply audited financial reports. And because outside suppliers of capital relied on audited financial statements, independent accountants had a keen interest in establishing well defined procedures for corporate financial reporting. The inventory costing procedure adopted by public accountants after the turn of the century had a profound effect on management accounting.
As a consequence, for many decades, management accountants increasingly focused their efforts on ensuring that financial accounting requirements were met and financial reports were released on time. The practice of management accounting stagnated. In the early part of the century, as product line expanded operations became more complex, forward looking companies saw a renewed need for management-oriented reports that was separate from financial reports. But in most companies, management accounting practices up through the mid-1980s were largely indistinguishable from practices that were common prior to world war I. In recent years, however, new economic forces have led to many important innovations in management accounting. These new practices are discussed in other chapters.
The last two decades have been a period of tremendous upheaval and change in the business environment, including the explosive growth of the internet. Competition in many industries has become world wide in scope, and the space of innovation in products and services has accelerated. This has been good news for consumers, since intensified competition has generally led to lower prices, higher quality and more choices. However, the last two decades have been a period of wrenching change for many businesses and their employees Many managers have learned that cherished ways of doing business don't work any more and that major changes must be made in how organizations are managed and in how work gets done. These changes are so great the some observers view them as a second industrial revolution.
This revolution is having a profound effect on the practice of managerial accounting-as we will see through the rest of the text. First, however. it is necessary to have an appreciation of the ways in which organizations are transforming themselves to become more competitive. Since the early 1980s, many companies have gone through several waves of improvement programs, starting with just-In-Time (JIT) and passing onto Total Quality Management (TQM), Process reengineering, and various other management programs-including in some companies The Theory of Constrains (COT), When properly implemented, these improvements programs can enhance quality, reduce cost, increase output, eliminate delays in responding to customers, and ultimately increase profits. They have not, however, always been wisely implemented, and there is considerable controversy concerning the ultimate value of these programs.
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