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Essentially, managerial accounting is done to inform an internal audience while the financial accountant’s records are focused on the needs of an external audience with respect to the organization. Managerial accounting emerges as an operational tool compared to financial accounting that serves the primary purpose of communicating financial data. Though the financial data that builds up the reports is essentially the same, managerial accounting can narrow down to departmental and product line level cost accounting and find out for instance the reason behind declining performance or profits, emphasizing the short term profit focus. Financial accounting on the other hand is limited to Generally Accepted Accounting Principles (GAAP), to provide overall performance in fiancés to interest parties such as investors and stakeholders.
Financial accounting records are therefore periodical based on the set standards while managerial accounting is based on the financial information required for prompt action and decision making on the operational level. Financial accounting therefore cannot be used in decision making as it only provides insight into the past through a record of past transactions. Managerial accounting is also subjective and not always bound to accounting rules such as the verifiability that is a major concern in financial accounting. Apart from the orientation of the two fields, and their similar underlying financial data, managerial accounting does not adhere to purely monitory data relying on other information to inform financial management decisions where relevance is more critical compared to precision(Angrawal, 2010). The scope of managerial accounting is also wider as managerial accounting employs methods such as ABC methods to detail segment reports inclusive of employee and customer data, while financial accounting sticks to overall organizational financial summary. It is also noteworthy that as opposed to financial accounting, an organization can decide to abscond from any managerial accounting.
As highlighted by the facts setting apart financial accounting from managerial accounting, the focus and orientation of the data obtained from the latter does not require mandating. Managerial accounting informs future oriented decisions making and keeps the financial transactions relevant and in time for each sector. It is therefore, the operational accounting system available for decision making by managers in everyday activities. Planning is one core function managers cannot perform effectively without adequate information on the relevance of initial action. Selection of alternative in financial matters would also have to be informed by more than just history since opportunities come with change in demands as challenges do yet preparations have to be made before all the information is available. One aspect for instance, budgeting utilizes internal reports from managerial accounting to make annual quantitative preparations. Managerial accounting could also be a useful method of incentivization of employee and personnel development though the provision of internal records on daily throughput for appraisal purposes or motivation needs identification. Internal reports are also a critical control tool as they are used to analyze results based performance benchmarks against budgets so that underperforming departments or implementations behind financial schedule can be identified. Essentially report generated for internal purposes provide managers with data relevant to activity based decision making for instance planning and control lifecycle.
Managerial accounting today serves the role of providing manger with timely financial information regarding internal sectors for smooth operation. Since its emergence out of the need to evaluate cost of internalized processes, the field has evolved and in the contemporary business environment, the field has conceptually joined other disciplines such as economics, marketing and statistics among other managerial disciplines. As the broadest accounting field, it is as controversial as it has played a key role in today’s business environment (Martin). Over time, the filed has become dynamic, and now includes other fields of accounting under managerial accounting.
With the increased diversity in the conceptual design of managerial accounting, there has been a distinctive disparity in the scope of the Cost Management Accountant (CMA) and Certified Public Accountant designations. While the CPA is focused on general public accounting and general purpose financial records, this scope is narrow. CMA allows for the entire range of possible accounting activities within the field. Under CMA, tax, financial and managerial accountings are inclusive while auditing is limited to internal control systems. With the broader description, certified managerial accounts can offer financial decision support such as planning and control.
Absorption income statements rely on the capability to track and divide costs across periods and include all transactions. These income statements can therefore be used for external financial reporting such in matters of tax returns. The net income when calculated using this costing system is prone to influence by different attributes such as production and sales. In variable income calculation, only sales would affect the income. Net income is therefore bound to vary for instance where the manufacturing overhead is fixed, disrupting production schedules to produce more inventory eventually leads to less operating income. This creates a major distinction in the handling of fixed cost which is excluded in variable costing.
The dominant format of income statements is a matter of requirement and is used to represent revenue and expenses. The format also is limited to accounting standards and financial rules that protect outside parties. Within such a format it is therefore only possible to aggregate costs but without any relationship to sales changes. While using the variable income format, however, the net income cut off line remains though there is more visibility into the relationship between operations and income variation. From this perspective, a company can be able to control financial transaction in a specific operation.
A break even situation features zero profit margins between sale made and all cost. Analyzing the situation at such a point offers critical insight into the working of the environment regarding production, cost and returns. At this point, it is very clear that any changes that could avert losses could create profits in case of similar business activity. Break even analysis therefore is a very reliable tool for managerial accountants to work on a product line that has been performing poorly considering the analysis is limited to a single product at any one instance. Once a breakeven analysis has been done it is possible to apply the same when other functions have changed. At a breakeven point, the profit is what remains after subtracting variable and fixed expenses from the returns in sales; in such as case zero. For instance for a company Y producing house warming devices each valued at a unitary price of $60 having made $1200000 in the recent year, might be interested it find out their breakeven point between sales and units. With a contribution margin of $300000 and $15 per item after deducting $900000 variable expenses at $45 per item, would leave an operating income of $60000 when the fixed expenses are at $240,000. Using the break even formula, it is clear that the company would have to beat 16, 000 items in sales at the same unit price.
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