Question

Managerial Accounting: Define and discuss in detail managerial accounting. What is its purpose? How is it used? What are the primary responsibilities of a management accountant? Discuss some of the differences between financial accounting and managerial accounting. Summarize the ethical standards of management accountants.

Answer 1

Managerial Accounting

Managerial accounting is the process of identifying, analyzing, recording and presenting financial information that is used internally by the management for planning, decision making and control. The reports generated are accesible and are used internally by the managers of a business, rather than by any external entities, such as shareholders or lenders.

The purpose of Managerial Accounting is to identify, measure, analyze, interpret and communicate information for the pursuit of an organization's goals.

How is it used? Managerial accountants use information relating to the costs of products or services purchased by the company. Budgets are also extensively used as a quantitative expression of the business’ plan of operation. Performance reports are used to note deviations of actual results from budgets.

The primary responsibilities of a management accountant include:

• Margin analysis. Management accountants can determining the amount of profit or cash flow that a business generates from a specific product, product line, customer, store, or region.
• Breakeven analysis. They need to calculate the contribution margin and unit volume at which a business exactly breaks even, which in turn is useful for determining price points for products and services.
• Constraint analysis. Understand where the primary bottlenecks are in a company, and how they impact the ability of the business to earn revenues and profits.
• Target costing. Assist in the design of new products by accumulating the costs of new designs, comparing them to target cost levels.
• Inventory valuation. Determine the direct costs of cost of goods sold and inventory items, as well as allocating overhead costs to these items.
• Transaction analysis. After spotting a variance through trend analysis, a managerial accountant can dive deeper into the underlying information and examine individual transactions, in order to understand exactly what caused the variance. This information is then aggregated into a report to management.
• Capital budgeting analysis. Examining proposals to acquire fixed assets, both to determine if they are needed, and what the appropriate form of financing may be with which to acquire them.

Difference between managerial and financial accounting:

The other type of accounting is financial accounting, which is concerned with the proper recordation and reporting of accounting transactions to be in compliance with the applicable accounting framework (such as Generally Accepted Accounting Principles or International Financial Reporting Standards). The primary output of financial accounting is the financial statements.

In contrast to financial accounting, managerial accounting is concerned with providing helpful information and reports to internal users such as managers and entrepreneurs etc. so that they can control and plan the business activities. The primary difference between these 2 main branches of accounting is the audience for the financial and managerial accounting information. Financial accounting information is geared toward external users, and managerial accounting information is geared toward internal users. Managerial accounting is integral to making operational and strategic decisions. The other differences between financial and managerial accounting fall into the following categories:

• Reporting. Financial accounting reports on the results of an entire business. Managerial accounting reports at a more detailed level, such as profits by product, product line, customer, and geographic region.
• Efficiency. Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.
• Reporting pattern. Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.
• Standards. Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.
• Systems. Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.
• Time period. Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.
• Valuation. Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.
• Timing. Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away.

Ethical standards of management accountants:

Management accountants should behave ethically. They have an obligation to follow the highest standards of ethical responsibility and maintain good professional image.

The Institute of Management Accountants (IMA) has developed four standards of ethical professional conduct.

1. Competence

• Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
• Perform professional duties in accordance with relevant laws, regulations, and technical standards.
• Provide decision support information and recommendations that are accurate, clear, concise, and timely.
• Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

2. Confidentiality

• Keep information confidential except when disclosure is authorized or legally required.
• Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates' activities to ensure compliance.
• Refrain from using confidential information for unethical or illegal advantage.

3. Integrity

• Mitigate actual conflicts of interest; regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
• Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
• Abstain from engaging in or supporting any activity that might discredit the profession.

4. Credibility

• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.
• Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law