What Is Managerial Accounting? Information About Management Accounting and Financial Cost Reporting
If you're taking a class in managerial accounting or you just want to know more about the definitions and principles of accounting management, this article may help you. Topics covered include cost reporting (direct materials, indirect/direct labor, etc), overhead, the balance sheet, and the income statement.
Managerial Accounting vs Financial Accounting: What Are the Differences?
Below is a comparison of managerial accounting and financial accounting, highlighting some of the differences.
Managerial accounting information is, as the name implies, designed for use by managers. In contrast to financial accounting, managerial accounting is not subject to any specific code of rules – instead, it is prepared in whatever fashion suits managers’ needs. It may be subjective as well as objective, and is prepared when needed. It may represent the company as a whole, or just a single department (say, sales or marketing).
Financial accounting information is designed for external users (shareholders, government, creditors) as well as management. It is generally purely objective, representing the state of the company as a whole. In the United States, it is prepared at fixed intervals according to GAAP (generally accepted accounting principles). Financial statements include the balance sheet, statement of cash flows, retained earnings statement, and income statement.
Managerial Accounting: Financial Function in Management
Departments in a company can be defined in two ways: line departments and staff departments. Line departments are directly involved in providing goods or services to the customer (think an actual factory line) whereas staff departments provide assistance (accounting, human resources, etc). Managerial accountants are staff employees, not line employees.
In most companies, the controller is the chief managerial account, responsible for overseeing all management accounting. The management process is composed of multiple interacting phases:
- · planning (what it says on the tin: developing strategies for long-term growth and day to day operation)
- · controlling (comparing operating results with expected results, providing data for analysis)
- · directing (running daily operations by minimizing inefficiencies)
- · decision making (again, relatively straightforward: making decisions that affect company operations and strategy)
- · improving (analyzing data, such as cost-volume-profit (CVP) calculations, collected from controlling and other methods, and utilizing it for the company’s benefit)
While financial accounting and managerial accounting are separate fields with unique responsibilities and goals, they do have some overlap: financial statements such as the balance sheet are often important starting points for managerial accounting reports.
Uses of Managerial Accounting
Uses of managerial accounting include the following:
- · appropriately pricing items for sale (selling price determined by costs)
- · tracking employee performance and waste
- · controlling overhead expenditures and costs
- · cost/benefit analyses of proposed machine purchases and facility rentals
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Managerial Cost Accounting for Operations: Terminology and Explanations
Costs are cash payments made by an organization for the purpose of acquiring something (materials, labor, etc) that will hopefully generate revenue. Costs can be classified in two ways: direct costs and indirect costs.
Direct costs are costs that can be traced to a direct cost object – a product, department, or activity. Indirect costs are overhead-type costs that cannot be traced to a direct cost object.
More specific costs can be assigned in the case of manufacturing: overhead cost, direct materials cost, and direct labor cost.
Overhead costs include miscellaneous costs that are incurred regardless of the level of production. Examples include:
· rent or lease payment
· utilities payments
· payments for support staff such as security, janitors, etc
· property taxes (if property is owned)
· building/machine maintenance
Direct materials cost is the cost of materials used in any finished product. For example, in furniture manufacture, the direct materials cost would be the sum of the cost of all the wood, leather, and other components that are used to make up the piece of furniture in question.
Direct labor cost is the cost of employees that are directly responsible for turning the raw materials into the finished product. Note that the employees must be directly responsible – a factory line worker’s wages would be factored into direct labor cost, but the support staff (like the HR department) is counted separately.
Other Ways of Classifying Costs
For the sake of simplicity, costs can be grouped into categories. For example, costs can be classified as:
- · Product costs (manufacturing costs)
- · Period costs (selling and administrative expenses incurred during the period that are necessary but not directly tied to production)
- · Prime costs (cost of direct materials + direct labor)
- · Conversion costs (cost of direct labor + overhead)
Why is Cost Classification Important?
Depending on how costs are classified, they will be reported in different venues. For example, period costs are reported as expenses on the income statement, but are not reported on the balance sheet. However, product costs are recorded as cost of goods sold on the inventory section of the balance sheet as well as the income statement.
Costs are reported on the balance sheet based on the stage they are in. There are three inventory stages:
- · Raw materials inventory, which consists of the costs of as-of-yet unused materials (that is, materials that have been purchased but not yet used for anything)
- · Work in process (WIP) inventory, which consists of materials costs + overhead for partially manufactured items
- · Finished goods inventory, which consists of all costs for finished goods that are as of yet unsold
All of these costs are reported under the current assets section.
Income Statement Reporting
In merchandising businesses, merchandise available for sale is determined by adding purchases and beginning inventory and subtracting sales. Cost of merchandise sold is determined by subtracting ending inventory from this figure.
In manufacturing businesses, cost of goods manufactured is the key difference. The other two reported costs, cost of finished goods available for sale and cost of goods sold, work similarly to their merchandising counterparts.
Statement of Cost of Goods Manufactured
Preparing a statement to describe the cost of goods manufactured is relatively simple. Three pieces of information are needed: cost of materials, manufacturing costs, and cost of goods manufactured.
Cost of materials is found with the following equation:
Beginning materials inventory + materials purchased – ending materials inventory = cost of materials
Manufacturing costs are found with the following equation:
Cost of materials + direct labor + factory overhead = manufacturing costs
Cost of goods manufactured is found with the following equation:
Beginning WIP + manufacturing costs – ending WIP = cost of goods manufactured
Managerial accounting is a useful tool for both anyone in any level of management. The definition of managerial accounting is, after all, accounting as used by managers. Keep these terms and procedures in mind as you make your way forward in the business world.
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