Managerial accounting is a branch that provides relevant and timely information to internal decision-makers within an organization. It uses financial and non-financial data to support planning, decision-making, and control. In contrast, financial accounting provides financial information to external stakeholders, such as investors, creditors, and regulatory agencies (Gardi, Abdullah, & Al-Kake, 2021). An illustration of managerial accounting can be a company considering switching from one supplier to another for a critical raw material used in its production process. The managerial accounting department can use cost analysis techniques, such as activity-based costing, to identify the costs associated with each step of the production process and determine the total cost of the raw material for the company (Warren et al., 2019). Management can use this information to evaluate the potential cost savings of switching to a new supplier and make an informed decision about whether to do so.
The Customization and Detail of Managerial and Financial Accounting
One key difference between financial and managerial accounting is the detail and customization of the information provided. In financial accounting, specific guidelines are generally accepted accounting principles (GAAP) that must be followed to produce financial statements that can be compared across various organizations (Warren et al., 2019). Managerial accounting, on the other hand, is more flexible and tailored to the needs of the specific organization. It can provide detailed information on specific cost centers, such as departments or products, and it can use various techniques, such as budgeting, variance analysis, and cost-volume-profit analysis, to support decision-making (Warren et al., 2019). This customization allows managerial accounting to be more relevant and valuable for the internal decision-makers within the organization.
Reports Produced by Managerial and Financial Accounting
In terms of reports, financial accounting produces statements that are meant to be publicly available, such as the balance sheet, income statement, and statement of cash flows. These statements are typically prepared quarterly or annually (Warren et al., 2019). Managerial accounting, on the other hand, produces internal reports that are not meant to be publicly available. These can include budget, variance, and cost analysis reports, which can be produced on a regular or ad-hoc basis, depending on the organization’s needs (Vărzaru, 2022). These reports are used to inform and support decision-making within the organization rather than being used to communicate financial information to external stakeholders.
Classifying Costs in Managerial Accounting
When classifying costs, managerial accounting uses various systems to understand an organization’s expenses better. One standard classification system is based on the cost function, such as direct materials, direct labor, and manufacturing overhead (Warren et al., 2019). Another classification system is based on cost behavior, such as fixed, variable, or mixed (Warren et al., 2019). These classifications are helpful for different purposes, such as cost-volume-profit analysis and budgeting.
Recording and Allocating Costs in the Accounting System
One of the primary functions of an accounting system is to record and classify costs in a way that is useful for decision-making. The accounting system typically records costs in general ledger accounts and is allocated to specific cost centers or products through cost drivers (Warren et al., 2019). This allows managers to see how each product or cost center contributes to the organization’s overall costs. In a retail organization, the cost classification and recording may be slightly different, as the focus is on tracking the cost of goods sold rather than the production process (Warren et al., 2019). This information is critical for managerial decision-making and helps managers understand the organization’s cost structure and identify opportunities for cost savings or efficiency improvements.
Conclusion
Overall, managerial accounting and financial accounting serve different purposes and produce various reports for diverse audiences. Managerial accounting provides more detailed and customized financial information to internal stakeholders for decision-making, while financial accounting provides standardized financial statements to external stakeholders for accountability and transparency. Understanding the various classifications of costs and how they are recorded in the accounting system is essential for managers to analyze and control the expenses of their organization effectively.
References
Gardi, B., Abdullah, N. N., & Al-Kake, F. (2021). Investigating the Effects of Financial Accounting Reports on Managerial Decision Making in Small and Medium-sized Enterprises. SSRN Electronic Journal. Web.
Vărzaru, A. A. (2022). Assessing Artificial Intelligence Technology Acceptance in Managerial Accounting. Electronics, 11(14), 2256. Web.
Warren, C. S., Jones, J. P., & Tayler, W. (2019). Financial and managerial accounting (15th ed.). Cengage Learning.