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Chapter 15 Extra Credit

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Mastery Problem: Introduction to Managerial Accounting
Able Baker Charlie Company
Charles Maxwell is starting a cheesecake bakery, Able Baker Charlie Company, to produce and sell different flavored cheesecakes to restaurants and the general public. He has just begun his study of accounting, and is a bit confused about the many types of reports he has read about and how they will help him run his business. He asks you to help him clarify what the differences between managerial accounting and financial accounting are. He’s also wondering how to set up his inventory, how to classify the costs of his business, and how to fill in some missing information.

Managerial vs. Financial
Select whether the following characteristics are most often associated with managerial accounting or financial accounting.
Primarily used for internal decision makingManagerial Accounting Generally Accepted Accounting Principles (GAAP) must be usedFinancial Accounting Prepared statements usually pertain to the company as a whole rather than individual departments or productsFinancial Accounting Information provided will often be subjective, such as estimated future resultsManagerial Accounting Often prepared on an as-needed basis rather than at fixed intervalsManagerial Accounting

Feedback

Review the differences between managerial and financial accounting, and how each type of accounting is used in the organization and for management processes.

Cost Classification
Charles has provided some of the costs he expects to incur as follows. Decide on the classifications that could be applied to each of these costs using the table provided. The cost object in each case is the cheesecake.
(Select "Yes" or "No" from the below dropdowns.)
CostProduct
CostPeriod
CostDirect
MaterialsDirect
LaborFactory
OverheadSelling
ExpenseAdministrative
ExpenseDirect
CostIndirect
CostPrime
CostConversion
CostEggs used to make cheesecakes  Yes         Baker’s wages   Yes        Delivery driver wages     Yes      Depreciation of office computers      Yes     Power to run the cheesecake ovens    Yes   No    President’s salary      Yes     Sales commissions      No     Factory supervisor salary    Yes

Answer 1

DIFFERENCE BETWEEN MANAGERIAL ACC​​​​​OUNTING AND FINANCIAL ACCOUNTING

In general, financial accounting refers to the aggregation of accounting information into financial statements while managerial accounting refers to the internal processes used to account for business transaction. There are a number of differences between financial and managerial accounting, which fall into the following categories:

• Aggregation. Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, products line, cutoners 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.

• Proven information. Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

• Reporting focus. 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 AS, 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 budget & forecast and so can have a future orientation.

• 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.

• Valuation. Financial accounting addresses the proper valuation of assets and liabilities and so is involved with impairment, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity. BENEFITS OF MANAGEMENT ACCOUNTING TO ORGANISATION AND FOR MANAGEMENT PROCESS

• Decision Making
• Planning
• Controlling business operations
• Organizing
• Understanding financial data, No GAAP is used here.
• Identifying business problem areas
• Strategic Management BENEFITS OF FINANCIAL ACCOUNTING FOR AN ORGANIZATION AND FOR MANAGEMENT PROCESS :-  
• Financial planning

• Allocation and utilisation of funds and financial resources3

• Cash Flow management and Fund Flow Management

• Disposal of Surplus

• Working capital management and risk management   In managerial accounting, costs are classified into fixed costs, variable costs or mixed costs (based on behavior); product costs or period costs (for external reporting); direct costs or indirect costs (based on traceability); and sunk costs, opportunity costs or incremental costs (for decision-making). In financial accounting, costs are classified into material cost, labour cost,, overhead costs. Cost classification that could be applied :-

  CostProduct YES
  CostPeriod YES
  CostDirect YES
  MaterialsDirect YES
  LaborFactory YES
  Overhead YES

  Selling Expense NO

  Administrative NO
  ExpenseDirect NO
  CostIndirect YES
  CostPrime YES
  CostConversion YES
  CostEggs used to make cheesecakes  Yes Baker’s wages   Yes        Delivery driver wages     Yes      Depreciation of office computers No Power to run the cheesecake ovens No President’s salary      Yes     Sales commissions      No     Factory supervisor salary    Yes