Principles of Managerial Accounting

Accounting is the system of recording and keeping track of financial
transactions in a business and summarizing this information in reports. These
reports provide information to people who are interested in knowing about the
financial aspects of a business. The information guides business managers,
investors, and creditors in planning and decision making. In fact, accounting
is often referred to as “the language of business” because business people
communicate, evaluate performance, and determine value using dollars and
amounts generated by the accounting process.
Financial accounting involves producing periodic reports called financial
statements to inform such external groups as investors, boards of directors,
creditors, and government/tax agencies about a company’s financial performance
and status. The income statement, retained earnings statement, balance sheet, and
statement of cash flows are published at fixed intervals to summarize the historical
earnings performance and current financial position of a company. Financial
statements are prepared according to Generally Accepted Accounting Principles
(GAAP), which helps ensure the information is relevant (useful and timely for
making decisions), reliable (accurate and unbiased), consistent (prepared the
same way each time information is reported), and comparable (prepared the
same way by different companies).
Managerial accounting is targeted more toward a company’s managers and
employees. The information gathered and summarized for these internal groups
is customized to provide feedback for planning, decision making, and evaluation
purposes. Managerial reports do not necessarily follow any particular format, but
instead are uniquely designed to meet the needs of specific users. Analyses are
often focused on targeted segments of a business rather than on a company as
a whole. Information may be published over periodic time intervals or on an asneed basis. Managerial accounting involves not only actual financial data from
past periods, but also current estimates and future projections.
A manager’s responsibilities in a business include making decisions related
to planning (identifying goals and strategies for accomplishing them), leading
(directing daily operations and carrying out plans), and controlling (comparing
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PRINCIPLES OF MANAGERIAL ACCOUNTING MANAGERIAL ACCOUNTING CONCEPTS
expected and actual results and taking action for improvement). Since human,
financial, and time resources are limited, managers must select from among many
alternatives, foregoing other options. They try to optimize the collective outcome
of their choices. Managerial accounting provides timely and relevant financial
information that contributes to effective decision making.
A business’s operations are classified as one of three types - service,
merchandising, or manufacturing - depending on what it has for sale. A service
business sells expertise, advice, assistance, professional skills, or an experience
rather than a physical product. A merchandising business purchases finished
and packaged products from other companies, marks up the costs of these items,
and sells them to customers. A manufacturing business assembles and packages
products for sale to merchandisers or end users.
Managerial accounting is relevant to all three types of businesses. In this
document, we will focus on manufacturing since that type of business involves
the most in-depth facets and examples of managerial accounting. We will also
discuss managerial accounting for service businesses where appropriate. Topics
will fall into four broad categories: accumulating costs, analyzing costs, evaluating
performance, and comparing alternatives.
The goal of a business is to generate profit, which is the difference between
income and costs in a particular time period. Costs are the result of paying cash
or committing to pay cash in the future in order to earn revenue. Costs may be
accumulated for a product, sales territory, department, or activity. It is critical to
analyze costs because controlling them directly impacts profitability. Costs are also
used to determine selling prices of products, and they are monitored over time to
evaluate progress and discover irregularities.

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