- Book & Article Categories
- Collections
- Custom Solutions
- Main Menu
Book & Article Categories
- Main Menu
Book & Article Categories
Home
Managerial Accounting For Dummies
Author:
Published:
February 11, 2013
Overview
An easy-to-understand guide to making informed and effective business decisions
With clear explanations and real-life examples, Managerial Accounting For Dummies gives you the basic concepts, terminology, and methods you need to fully grasp this important area of business, anywhere. You'll know how to identify, measure, analyze, interpret, and communicate the data that drives decision making in every industry. Understand and manage costs, plan, budget, and use these accounting skills for business evaluation and control.
This approachable guide covers all the content in a typical managerial accounting course, making it perfect for students preparing for accounting careers. Professionals looking for a refresher will also benefit from this straightforward resource.
Inside:
- Get clear descriptions of managerial accounting techniques and processes
- Learn how to collect, report, and analyze financial data to drive effective business decisions
- Discover how managerial accounting can improve sustainability and reduce risk
Managerial Accounting For Dummies, 2nd Edition provides comprehensive information on global strategic management, basic data analysis techniques, and beyond—you'll understand all parts of the managerial accounting process and why it matters with this accessible resource.
Managerial accounting helps managers and other decision-makers understand how much their products cost, how their companies make money, and how to plan for profits and growth. To use this information, company decision-makers must understand managerial-accounting terms. When planning for the future, they follow a master budgeting process.
About The Author
Mark P. Holtzman, CPA, PhD, is an Associate Professor and Chair of the Department of Accounting and Taxation at Seton Hall University. He is also Associate Principal for Technical Resources with the national accounting firm WithumSmith+ Brown PC.
Articles From The Book
3 results
General Accounting
Articles
A wide variety of factors can cause overhead to increase. To gain a better understanding of these factors, managerial accountants use activity-based costing. The assumption that the more direct labor your employees work, the more overhead your company incurs made sense in the days before automation, but today completely automated factories operate with little or no direct labor.
General Accounting
Articles
A critical step in the budgeting process is to compute projected product cost, or the expected cost of each unit made during the budget period. To calculate Forever Tuna’s projected product cost, add together the costs of direct materials per unit, direct labor per unit, and overhead per unit.
On average, each unit costs $76.
General Accounting
Articles
Information about product cost helps managers to set and adjust prices and to decide how to best utilize limited production capacity. Here you use only two credit accounts: Accounts payable (which are moneys owed to suppliers), and Wages payable (moneys owed to employees). To increase one of these credit accounts, credit it to the right.
General Accounting
Articles
Factories and other companies typically must pay costs that include variable and fixed components, challenging accountants to figure out which camp these costs belong in. These mixed costs typically change with the level of activity, but not proportionately. Therefore, in order to predict cost behavior, you need to split mixed costs into variable and fixed components.
General Accounting
Articles
Manufacturers aren’t the only companies that need master budgeting. Retailers and service providers have to plan ahead, too. Here are some tips on how to adapt the manufacturer’s master budgeting process for other industries.
Budget a retailer
Remember that a retailer buys and sells goods. Unlike a manufacturer, it doesn’t make goods.
General Accounting
Articles
A company may set the transfer price at full cost (also known as absorption cost), which is the sum of variable and fixed costs per unit. In order to ensure that the selling division earns a profit, they can also add a markup.
Suppose that HOO Water Company produces both spring water and soft drinks. The Clor division produces spring water, and the Shpritz division makes soft drinks.
General Accounting
Articles
A master budget is a plan created to manage a company's manufacturing and sales activity to meet profit and cash flow goals. Creating a master budget requires careful coordination of several smaller budgets covering all parts of the organization; that way, the master budget is realistic but not complacent.
Th
General Accounting
Articles
The overhead budget estimates the coming year’s total overhead costs and sets an overhead allocation rate. To prepare it, you need detailed information about the company’s overhead, including an analysis of fixed and variable components of the overhead.
Overhead consists of the costs of making products above and beyond direct materials and direct labor.
General Accounting
Articles
Most capital projects are expected to provide a series of cash flows over a period of time. Following are the individual steps necessary for calculating NPV when you have a series of future cash flows: estimating future net cash flows, setting the interest rate for your NPV calculations, computing the NPV of these cash flows, and evaluating the NPV of a capital project.
General Accounting
Articles
You can separate businesses into three basic categories: Service companies, retailers, and manufacturers. Because companies provide many different services and products to their customers, some companies fit more than one of these categories. For example, restaurants are manufacturers and service companies; they prepare meals and serve them.
General Accounting
Articles
Process costing handles the same types of manufacturing costs as job order costing. Both systems deal with tracking how manufacturing costs such as direct materials, direct labor, and overhead flow through work-in-process to finished goods and finally, when the goods are sold, to cost of goods sold.
Some manufacturers make unique products, such as aircraft, made-to-order suits, or custom teddy bears.
General Accounting
Articles
Another key test of a budget is the budgeted income statement. Here, you can check to see whether all the predictions and assumptions you made about sales, materials, direct labor, overhead, and S&A will bear fruit next year to generate net income. Like the cash budget, a budgeted income statement that predicts a loss indicates that you need to take the master budget back to the drawing board.
General Accounting
Articles
Budgeting helps you plan your business’s operations. However, you also need to control your business —– to monitor what’s actually happening. Controlling involves constantly comparing actual activity to your budget and carefully analyzing and understanding any differences. To accomplish this task, you need budget reports that compare your budgets (what should have happened) to what actually happened.
General Accounting
Articles
Managerial accounting provides useful tools, such as cost-volume-profit relationships, to aid decision-making. Cost-volume-profit analysis helps you understand different ways to meet your company’s net income goals. This image describes the relationship among sales, fixed costs, variable costs, and net income:
The bottom axis indicates the level of production — the number of units you make.
General Accounting
Articles
The cash budget summarizes all your cash inflows and outflows for the period, adding cash receipts and subtracting cash payments. Positive cash projections assure you that your company will have enough cash to make it through the next period. If your cash budget comes out negative, though, you may have to start all over again from the beginning.
General Accounting
Articles
In order to convert direct materials into finished goods, you need direct labor. The direct labor budget tells you how many direct labor hours of work you’ll need, indicating whether you have enough workers or need to hire more.
To prepare a direct labor budget, multiply the number of units to be produced (from the production budget) by the direct labor time needed to make each unit.
General Accounting
Articles
Variable-cost pricing offers an adventurous variation on cost-plus pricing. Instead of adding a markup on total cost, variable-cost pricing adds a markup on just the variable cost. It disregards fixed costs altogether. The figure compares variable-cost pricing with boring old cost-plus pricing.
How to work out variable-cost pricing
When you use variable-cost pricing, your markup must cover both the desired profit and expected fixed costs.
General Accounting
Articles
Sales don't happen by themselves; instead, you need a sales force, paid with a combination of salaries and commissions. The selling and administrative expense budget predicts the amount of selling and administrative expenses (abbreviated S&A) needed to generate the sales forecasted in the sales budget.
You may also have to pay freight to ship goods to customers.
General Accounting
Articles
Obviously, companies hold most long-term investments for longer than one year. To determine the future value of this investment for longer periods of time, just multiply the interest factor by itself for each year the investment is held. In other words, take the interest factor to the power of the number of years’ held, n:
PV(1 + i)n = FV
Suppose a company invests $400 today for five years, at an interest rate of 12 percent.
General Accounting
Articles
Unlike total variable costs, total fixed costs remain the same regardless of changes in activity. For example, a factory may need to pay a fixed amount of property taxes and supervisor salaries regardless of how many units it actually produces. You don’t connect any cost driver with fixed costs because these costs don’t change.
General Accounting
Articles
If you plan to sell inventory, you need some inventory to sell. That’s why you need a production budget. The production budget computes the number of units the company needs to produce in order to meet its sales budget. To prepare a production budget, you estimate how much inventory the company wants to keep in stock at the end of each period.
General Accounting
Articles
Asset turnover measures a company’s productivity. The higher the asset turnover, the more productive the company. To calculate asset turnover, divide sales revenue by average assets:
Asset turnover = Sales revenue/Average assets
Suppose a company earned $100,000 in sales. Average assets during the same year equaled $50,000.
General Accounting
Articles
Variable costs change in response to certain stimuli, called cost drivers. Get it? Cost drivers drive up the cost. For example, a common cost driver is the number of units produced. Units produced is the cost driver for total direct materials; the more units that you produce, the more direct materials you need.
General Accounting
Articles
To earn money and succeed, a business — whether it’s a service company, a retailer, or a manufacturer — needs to create profits. To generate profits, companies must make sales to customers that exceed however much those sales cost. The three key components of profits are revenues, the cost of sales, and other types expenses.
General Accounting
Articles
Not all companies manufacture products that require the same amount of overhead, and as a managerial account, you need to be able to calculate the overhead allocation. The following example is relatively simple because each product gets an equal amount of overhead.
Suppose a simple factory makes two products — call them Product A and Product B.
General Accounting
Articles
Net present value techniques use time value of money tools to estimate the current value of a series of future cash flows. Consider a company that has $100 right now, on which it can earn 12-percent interest:
PV = $100
i =0.12
To determine the future value of this investment after one year, just multiply the present value by one plus the interest rate:
PV(1 + i) = FV
100(1 + 0.
General Accounting
Articles
Contribution margin measures how sales affects net income or profits. To compute contribution margin, subtract variable costs of a sale from the amount of the sale itself:
Contribution margin = Sales – Variable costs
For example, if you sell a gadget for $10 and its variable cost is $6, the contribution margin for the sale would be $4 ($10 – $6 = $4).
General Accounting
Articles
After you know the cost of goods manufactured for a product, the next phase for the product is to store it as finished goods until your customers buy it — at which point you can figure out cost of goods sold. Cost of goods sold is a key figure on the income statement. It’s most companies’ largest expense and an important determinant of net income.
General Accounting
Articles
Although some purchased direct materials are put into production, some are stored for future use. Therefore, the amount of direct materials purchased is probably different from the amount of direct materials actually put into production.
Your simple outputs formula helps explain this relationship:
In this case, Beginning equals beginning inventory on the first day of the time period.
General Accounting
Articles
One of the benefits of flexible budgeting is that it helps you to understand the reasons for your company’s variances, the differences between actual and budgeted amounts.
Always indicate whether a variance is favorable or unfavorable. A variance is usually considered favorable if it improves net income and unfavorable if it decreases income.
General Accounting
Articles
Cost of goods manufactured is based on the amount of work-in-process completed. This work-in-process includes costs of direct materials put into production, plus direct labor and overhead.
To determine work-in-process, you enter the number of units or costs into the same outputs formula that you use to calculate direct materials put into production.
General Accounting
Articles
If you have set a specific goal for net income, contribution margin analysis can help you figure out the needed sales. This goal for net income is called target profit.
To compute target profit, just adapt one of the three net income formulas. Then simply plug target profit into one of these formulas as net income.
General Accounting
Articles
In the realm of budgets and costs, the budget should carefully designate which departments have authority over and are responsible for which costs. If a department has authority and responsibility for certain costs, those costs are called controllable costs. The noncontrollable costs are those costs that a department doesn’t have authority over and can’t change.
General Accounting
Articles
When manufacturing a product, you can easily trace certain costs to individual products that you make. Call these expenses direct costs. On the other hand, certain costs don’t easily trace to an individual product; these costs are called indirect costs.
For example, consider a good-old-fashioned paper book. To make it, the publisher needs a certain amount of paper and ink, some glue for the binding, and an employee to put the physical book together.
General Accounting
Articles
Efficiency measures how little waste is created when producing and selling a product. Productivity, on the other hand, considers how to maximize sales and profits while using as few assets as possible. The difference between efficiency and productivity? Efficiency tries to reduce waste, while productivity tries to use assets to generate more revenues and net income.
General Accounting
Articles
Managers sometimes must decide whether to eliminate certain products or even a segment of their operations. For example, Keebler discontinued Hydrox Cookies a few years ago, ending the Oreo versus Hydrox debate once and for all.
A decision to discontinue a product line or segment requires you to consider how your decision affects both revenues and expenses.
General Accounting
Articles
In order for both divisions to share profits more equally, managers may prefer to set the transfer price at variable cost plus a markup. At Ernie’s Western Dairy, President Ernie Hill decides to set the transfer price at variable cost plus a $1 markup, resulting in a transfer price of $4 ($3 variable cost plus $1 markup).
General Accounting
Articles
How much do you need to sell in order to break even? The break-even point (BE) is the amount of sales needed to earn zero profit — enough sales so that you don’t earn a loss, but insufficient sales to earn a profit. You can use a couple of different ways — graphs and formulas — to analyze where your break-even point falls.
General Accounting
Articles
To compute variances that can help you understand why actual results differed from your expectations, creating a flexible budget is helpful. A flexible budget adjusts the master budget for your actual sales or production volume.
For example, your master budget may have assumed that you’d produce 5,000 units; however, you actually produce 5,100 units.
General Accounting
Articles
Before getting into the nitty-gritty of process costing, you may benefit from reviewing a few basics — namely, how to use debits and credits, how to keep track of the costs of goods that you make and sell, and how goods and their costs move through a typical production line.
Enter debits and credits
Remember that when costing goods, almost all accounts are either assets or expenses, such that in most cases, debits increase balances and credits decrease balances.
General Accounting
Articles
Manufacturing — and even services — often work a lot like traffic bottlenecks on your local freeway. To improve production, you need to focus on and then break the bottleneck or constraint. Dr. Eliyahu Goldratt, the founder of the theory of constraints, identified five steps for managing processes:
Identify system constraints.
General Accounting
Articles
When evaluating a capital project, internal rate of return (IRR) measures the estimated percentage return from the project. It uses the initial cost of the project and estimates of the future cash flows to figure out the interest rate. In general, companies should accept projects with IRR that exceed the cost of capital and reject projects that don’t meet that guideline.
General Accounting
Articles
To negotiate a transfer price between two divisions, lock the managers of the selling and purchasing divisions into a room and don’t let them out until they agree on a number or discover that no mutually beneficial price is possible.
Of course, these negotiations aren’t based on numbers the purchasing and selling divisions have pulled out of thin air.
General Accounting
Articles
In managerial accounting, inventory that comes into a production department must do one of two things: stay in the department or, when complete, move on to the next department. The same holds true for the cost of inventory: Costs must either stay in a department or move on to the next. To keep track of units and costs, managerial accounting uses a four-part document called the cost of production report.
General Accounting
Articles
The second part of the cost of production report accounts for the units that the first part indicates the department is responsible for. During April, the Balloon department finished working on 1,900 clowns, sending them to the next department. At the end of April, the Balloon folks still had 800 clowns of WIP on the assembly line, waiting for their balloons.
General Accounting
Articles
In Part 3 of a cost of production report, you determine the total costs that were assigned to the department, including the cost of any beginning inventory; the cost of goods transferred from other departments; and any direct materials, direct labor, and overhead assigned directly to the department. You divide these total costs by the number of equivalent units the department produces to compute the cost per equivalent unit.
General Accounting
Articles
Part 4 of the cost of production report requires you to compute the costs accounted for, also called the cost reconciliation schedule. This schedule computes the cost of goods transferred out (based on the number of units transferred out times the cost per equivalent unit calculated in Part 3) plus the cost of WIP inventory remaining in the department at the end of the month.
General Accounting
Articles
Managers often want to know how much they need to sell in order to break even or in order to earn a target level of profit. To get this information, managers derive something called a break-even point (BE) — the amount of sales necessary to earn zero profit.
Why bother? Because knowing the break-even point helps you set sales targets.
General Accounting
Articles
Contribution margin indicates how sales affects profitability. Cost-volume-profit analysis helps you understand different ways to meet your net income goals. When running a business, a decision-maker or managerial accountant needs to consider how four different factors affect net income:
Sales price
Sales volume
Variable cost
Fixed cost
The graphs provide a helpful way to visualize the relationship among cost, volume, and profit.
General Accounting
Articles
Many retailers and manufacturers set their prices at cost-plus by adding a fixed markup to their absorption cost. Cost-plus pricing ensures that prices are high enough to meet profit goals. The figure illustrates how cost-plus pricing computes the sales price by adding markup to a product’s fixed and variable costs.
General Accounting
Articles
To prepare a master budget, managerial accountants collaborate with managers throughout the organization to develop a realistic plan, in numbers, for what will happen during the next period. The master budget counts on your understanding of cost behavior, the results of capital budgeting, pricing, and other managerial accounting information in order to plan a concrete strategy to meet sales, profit, and cash-flow goals for the coming year.
General Accounting
Articles
One simple approach to setting a transfer price is to use the item’s variable cost. After all, in a negotiation, this amount would have been the seller’s minimum price anyway.
Suppose that Ernie’s Western Dairy has two divisions: Milk and Ice Cream. The Milk division produces milk for a variable cost of $3 per gallon.
General Accounting
Articles
A simple formula explains how goods and their costs flow through a business. Retailers purchase products from other companies and then sell those products in stores, online, or through catalogs to their customers. For example, Wal-Mart and almost every mall store are considered retailers.
Products flow through a retailer in the following order:
The supplier ships purchased products to the retailer.
General Accounting
Articles
When you need to choose between two alternatives, incremental costs change depending on which alternative you choose. Managerial accountants sometimes refer to incremental costs as relevant costs. Other costs don’t change — you can just treat these expenses as irrelevant.
For example, suppose you’re deciding whether to travel to Cancun, Mexico, for vacation.
General Accounting
Articles
A manufacturer who makes unique goods — or batches of goods — to order usually uses a job order cost system to determine how much each job costs to make. Such goods may include custom teddy bears, made-to-order suits or aircraft, catered affairs, or new feature films; the individual units or batches are called jobs.
General Accounting
Articles
In accounting, a cost measures how much you pay/sacrifice for something. Managerial accounting must give managers accurate cost information relevant to their management decisions. Here are several cost-related terms you encounter in managerial accounting:
Direct cost: Cost that you can trace to a specific pro
General Accounting
Articles
Managerial accounting helps managers and other decision-makers understand how much their products cost, how their companies make money, and how to plan for profits and growth. To use this information, company decision-makers must understand managerial-accounting terms. When planning for the future, they follow a master budgeting process.
General Accounting
Articles
Constraints are anything that limits a system from achieving higher performance. On the highway, accidents that prevent you from driving 65 miles per hour to work in the morning are constraints. Constraints can occur in any process, whether in manufacturing or service industries.
Manufacturing constraints
In a manufacturing plant, constraints slow down assembly line production, gumming up the works so that you can’t produce as many units as you need.
General Accounting
Articles
Companies usually have limited resources, such as limits on space, on the number of workers, or even on the machine capacity needed to produce goods. This reality means that in order to best use limited production capabilities, managers must choose which products to make and sell.
Managerial accountants use a simple technique of dividing contribution margin by a measure of the constrained resource to indicate which products squeeze the most profitability out of constrained resources.
General Accounting
Articles
In managerial accounting, margin of safety is the difference between your actual or expected profitability and the break-even point. It measures how much breathing room you have — how much you can afford to lose in sales before your net income drops to zero. When budgeting, compute the margin of safety as the difference between budgeted sales and the break-even point.
General Accounting
Articles
Managerial accountants know that when faced with two or more alternatives, incremental costs are those costs that change depending on which alternative you choose. Suppose you want to buy a new bicycle. Incremental costs of buying the bike include the actual price of the bike plus any accessories. You also need to pay for gas and tolls to drive to and from the bike store — another incremental cost.
General Accounting
Articles
Companies and other organizations establish goals that they plan to meet, such as benchmarks for sales, profitability, new products, and even employee satisfaction. Ideally, all employees know the organization’s goals and understand their roles in meeting them. The plan to meet the company’s goals is called the strategy.
General Accounting
Articles
In managerial accounting, operating leverage measures how changes in sales can affect net income. For a company with high operating leverage, a relatively small increase in sales can have a fairly significant impact on net income. Likewise, a relatively small decrease in sales for that same company will have a devastating effect on earnings.
General Accounting
Articles
The cash payback method is a tool that managerial accountants use to evaluate different capital projects and decide which ones to invest in and which ones to avoid. The cash payback method estimates how long a project will take to cover its original investment. You can calculate the cash payback method whether you have equal payments each period or unequal payments.
General Accounting
Articles
Most larger companies decentralize, treating each division as its own business earning its own net income. As these different divisions do business with each other, buying and selling different products, the transfer prices they set play a critical role in determining how they’ll share profits.
Companies usually organize themselves into divisions that provide different goods or services and often do business with each other.
General Accounting
Articles
Managerial accountants understand that net present value (NPV) techniques use time value of money tools to estimate the current value of a series of future cash flows. Over time, the value of money changes. Given the choice between receiving $1,000 today and receiving $1,000 a year from now, most people would take the cash now because the value of money decreases with time.
General Accounting
Articles
Responsibility centers are identifiable segments within a company for which individual managers have accepted authority and accountability. Responsibility centers define exactly what assets and activities each manager is responsible for.
How to classify any given department depends on which aspects of the business the department has authority over.
General Accounting
Articles
Decentralization is the process of moving decision-making powers down the chain of command. In a highly decentralized organization, frontline managers and staff often make important decisions. On the other hand, in a highly centralized organization, senior managers at the top of the organization chart make the decisions.
General Accounting
Articles
The master budget process starts with the sales department, which estimates expected sales for the coming period. The sales budget uses this information to project total sales revenue.
Consider the case of Forever Tuna, a company that processes and cans tuna fish. A single case of Forever Tuna sells for $100. Here are the Sales department’s projection of the next four quarters’ sales.
General Accounting
Articles
Sometimes choosing one alternative means losing money because you turned down another alternative. These costs are called opportunity costs. For example, suppose you can either visit your mother in Peoria or work on an internship. Choosing to go to Peoria means you lose the internship income. You don’t actually have to pay for this choice because you never got the internship income in the first place.
General Accounting
Articles
Setting the transfer price at market value solves many of the problems that crop up with the other methods of setting transfer price. If an outside market exists for the transferred goods, managers can set the transfer price equal to the listed market value of the goods. This listed market value is often readily available through listings published with commodity markets.
General Accounting
Articles
A scattergraph helps you visualize the relationship between activity level and total cost. To scattergraph, just follow these steps (with explanations for creating the scattergraph in Microsoft Excel):Set up a table that shows production level and total cost by time period.To prepare a scattergraph, you need basic data about the number of units produced and the total costs per time period.
General Accounting
Articles
Making inventory? You need to get direct materials (as well as direct labor and overhead). First tackle the direct materials budget, which specifies the amount of direct materials that the company must buy in order to meet its production budget. To prepare this document, you need to know the following:
The level of production: You find this info in the production budget.
General Accounting
Articles
Following the balanced scorecard, management accountants do much more than predict profits (as part of budgets) or provide information for decisions about pricing products or buying new equipment; they also provide information to help managers and investors assess how closely a company is moving toward meeting a broad range of goals and objectives.
General Accounting
Articles
Absorption costing (sometimes also called full costing) is the predominant method for costing goods the companies manufacture and sell. United States Generally Accepted Accounting Principles (GAAP) require all U.S. companies to use absorption costing in their financial statements. International accounting standards have similar requirements worldwide.
General Accounting
Articles
Most students choose accounting careers because of the consistently high hiring demand for accountants. In its Occupational Outlook Handbook, the U.S. Bureau of Labor Statistics projected 16-percent growth for accountants and auditors between 2010 and 2020.
The starting salaries aren’t bad, either. Cost accountants’ starting salaries with large companies are projected to range between $43,000 and $53,750 per year, according to the 2013 Salary Guide published by Robert Half.
General Accounting
Articles
Believe it or not, managerial accountants have a number of legends to admire. A few people have made great contributions to the profession and to business as a whole through ingenuity, persistence, and a willingness to stand up for the principles that they believe in.
These creative individuals found new and better ways to solve old problems, were famous whistleblowers who reported financial wrongdoings, and congressmen who led the U.
General Accounting
Articles
Managerial accountants compute and provide information within a company. Managerial accounting information is numeric, calculated using certain formulas. The following list summarizes some of the most important formulas in managerial accounting.
The accounting equation
The accounting equation equates assets with liabilities and owners’ equity:
Assets = Liability + Owners' Equity
Assets are things owned by the company — such as cash, inventory, and equipment — that will provide some future benefit.
General Accounting
Articles
Recording journal entries and posting them to general ledger accounts in a managerial cost accounting system isn’t difficult. Because almost all accounts in managerial accounting are either assets or expenses, debits increase most balances and credits decrease balances. Accordingly, a T-account lists increases in the debit column to the left and decreases in the credit column to the right.
General Accounting
Articles
Accountants split all costs into two categories — product costs and period costs — depending on whether these costs go toward making products. Product costs include all the costs of making products:
Direct materials
Direct labor
Overhead
You classify product costs as inventory, an asset on the balance sheet, until you actually sell the product.
General Accounting
Articles
Managerial accounting provides internal reports tailored to the needs of managers and officers inside the company. On the other hand, financial accounting provides external financial statements for general use by stockholders, creditors, and government regulators. The table compares the differences between managerial and financial accounting based on the information prepared.
General Accounting
Articles
Statistical regression allows you to apply basic statistical techniques to estimate cost behavior. Don’t panic! Excel (or a statistical analysis package) can quickly figure this information out for you.
Before starting, make sure you’ve installed the Microsoft Office Excel Analysis ToolPak. To confirm whether you already have it, click on “Data” and look for an item in the drop-down menu that says “Data Analysis.
General Accounting
Articles
The high-low method enables you to estimate variable and fixed costs based on the highest and lowest levels of activity during the period. Just follow three steps:
Based on a table of total costs and activity levels, determine the high and low activity levels.
Look at the production level and total costs to identify the high and low activity levels.
General Accounting
Articles
W. Edwards Deming popularized a tool called the PDCA cycle for continuous improvement. Managerial accounting runs in cycles of different lengths. Certain sales reports and controls may be repeated every day. Some reports may be prepared every month, or each quarter. Others may be prepared just once a year.
Deming’s PDCA cycle comes from the scientific model of forming hypotheses and then testing them, and it follows these steps:
Plan.
General Accounting
Articles
Managerial accounting plays a critical role in running a business because it provides valuable information about the business to help managers make educated decisions. The process of gathering information involves
Analyzing costs to understand how they behave and how they will respond to different activities
Planning and budgeting for the future
Evaluating and controlling operations by comparing plans and budgets to actual results
After gathering information, managerial accountants then report the facts and figures to the company’s managers, who need this information to run the business.
General Accounting
Articles
Sometimes paying another company to make the product — outsourcing — is more profitable for a company than making the product in its own factory is. Although news reports tend to focus on outsourcing to other countries, outsourcing actually refers to any time you pay another company to do something that you used to do yourself — regardless of where the actual work gets done.
