Why Managerial Accounting is Important for Managers

Please note this is part of a series of blogs directed to managerial accounting for managers and accountants.

Why do managers need to know about this topic?

Managerial accounting gathers financial and nonfinancial information, prepares analysis, and prepares reports for managerial purposes for the decision-making process. Managers should understand its terms and certain methodologies for adequately planning and directing the business’s resources and initiatives.

Is managerial accounting the same as financial accounting?

The simple answer is no, not the same. The following represent differences in purposes:

Understanding basic terminology

A description of basic terminology follows to better understand how managers can benefit from it. This allows managers to improve their abilities in the decision-making process.

Cost Behavior:

• Cost object – a simple or complex product or service; a manager or cost accountant wants to keep track of it.
• Direct cost – all identifiable costs of a cost object that, under a simple cost-effective approach,, the company wants to keep track of.
• Indirect cost – costs that the company identifies that under a cost-effective approach do not need to be kept track of.
  • Please note – typically the decision affecting whether to classify costs whether to classify costs as direct or indirect depends on materiality and the ability to keep track of such costs.
• Variable costs – costs that change in total proportion to changes in output or production.
  • Characteristics of variable costs:
    • The cost per unit remains the same with production.
    • Total variable costs change with total production.
• Fixed costs – costs that remain unchanged in total for a given period; output or production does not affect fixed costs.
  • Characteristics of fixed costs:
    • The cost per unit will increase with lower production or will decrease with higher production.
    • Total fixed costs do not change with total production.
• Relevant Range – this is the range of normal production where variable and fixed costs, as described above, are true. Beyond the relevant range,, cost behavior might change or the amounts since additional production beyond normal requires more personnel, additional shifts, and inventory storage,, among others.

Inventories:

• Product or Inventoriable Costs – represent all costs attributable to products either as work in process or finished goods.

• Inventories – assets purchased or manufactured by an entity with the intent to sell. When unsold, it is classified as inventory in the balance sheet statement. Once sold, it becomes the cost of goods sold in the income statement.
  • Direct Materials Inventory—for manufacturing entities in their manufacturing process of transforming goods or materials into new goods.
  • Work in process inventory—for manufacturing entities, products started in their conversion but not yet completed.
  • Finished Goods inventory – for merchandising and manufacturing entities, available for sale goods. Either purchased for resale or end-of-process manufactured.

Direct/Indirect Costs:

• Materials (direct materials)—either raw materials or goods used to transform to a finished good.
• Direct Manufacturing Labor – compensation such as salaries and benefits for personnel in charge of directly transforming the materials into a finished good.
• Indirect Manufacturing (manufacturing overhead or factory overhead)—all costs related to the manufacturing of the good but not considered direct. such as supplies and supervisory salaries.

Other Terms and Concepts:

• Period Cost – all other costs accumulated during an accounting period not presented as part of the cost of goods sold.
• Prime Costs – represent all direct manufacturing costs; therefore, total direct materials + direct manufacturing labor costs.
• Conversion Costs—represent all manufacturing costs to transform or convert direct materials into the finished goods; however, it excludes direct materials. Thus, direct manufacturing labor costs + manufacturing (factory) overhead costs.

If you find this post useful and would like to subscribe to our webpage, please fill out this form. Thanks!