A Look at The Ideology of Cost Accounting

Introduction to Managerial and Financial Accounting

Essentially, managerial accounting is conducted to inform an internal audience, while the financial accountant’s records focus on the needs of an external audience concerning the organization. Managerial accounting emerges as an operational tool compared to financial accounting, which 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. It can identify, 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 financial performance to interested parties such as investors and stakeholders (Angrawal, 2010).

The Ideology of Cost Accounting

Financial accounting records are therefore periodical based on set standards, while managerial accounting is based on the financial information required for prompt action and decision-making at 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 verifiability, which 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 monetary data, relying on other information to inform financial management decisions where relevance is more critical compared to precision (Martin, 2010). The scope of managerial accounting is also wider as it employs methods such as Activity-Based Costing (ABC) to detail segment reports inclusive of employee and customer data, while financial accounting sticks to overall organizational financial summaries. Notably, as opposed to financial accounting, an organization can decide to abscond from any managerial accounting.

Decision Making and 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 do not require mandating. Managerial accounting informs future-oriented decision-making and keeps the financial transactions relevant and timely 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 actions. Selection of alternatives in financial matters would also have to be informed by more than just history since opportunities come with changes in demands as challenges do, yet preparations have to be made before all the information is available. For instance, budgeting utilizes internal reports from managerial accounting to make annual quantitative preparations. Managerial accounting could also be a useful method of incentivizing employee and personnel development through 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 underperforming departments or implementations behind financial schedules can be identified. Essentially, reports generated for internal purposes provide managers with data relevant to activity-based decision-making, such as planning and control lifecycle.

The Role of Managerial Accounting in Contemporary Business

Managerial accounting today serves the role of providing managers with timely financial information regarding internal sectors for smooth operation. Since its emergence from the need to evaluate the cost of internalized processes, the field has evolved, and in the contemporary business environment, it 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, 2010). Over time, the field has become dynamic and now includes other fields of accounting under managerial accounting.

Differences Between CMA and CPA

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 (CPA) designations. While the CPA focuses 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 (Angrawal, 2010).

Income Statements and Costing Methods

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 in matters such as 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 handling fixed costs, which are excluded in variable costing.

Break-Even Analysis in Managerial Accounting

A break-even situation features zero profit margins between sales made and all costs. 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 is therefore 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 break-even analysis has been conducted, it is possible to apply the same when other functions have changed. At a break-even point, the profit is what remains after subtracting variable and fixed expenses from the returns in sales; in such a case zero. For instance, for a company Y producing house warming devices each valued at a unitary price of $60, having made $1,200,000 in the recent year, might be interested in finding out their break-even point between sales and units. With a contribution margin of $300,000 and $15 per item after deducting $900,000 variable expenses at $45 per item, it would leave an operating income of $60,000 when the fixed expenses are at $240,000. Using the break-even formula, it is clear that the company would have to sell 16,000 items at the same unit price to break even.

Conclusion

In conclusion, managerial accounting provides a crucial framework for internal decision-making processes by focusing on future-oriented financial insights. This field's integration with other business disciplines highlights its significance in navigating the complexities of modern business environments. Through tools like break-even analysis and comprehensive income statements, managerial accountants empower organizations to optimize performance and strategic planning (Angrawal, 2010; Martin, 2010).

References:

• Angrawal, A. (2010). Understanding Managerial Accounting. Journal of Business Management, 15(3), 45-67.
• Martin, J. (2010). The Evolution and Role of Managerial Accounting in the Business World. International Journal of Accounting, 25(4), 78-92.