Part I
Introducing Managerial Accounting
In this part . . .
Part I gives a brief overview of all topics in managerial accounting. I first explain what managerial accountants do, why they do it, and what you can do to become a managerial accountant. Then I give you some background about business and management to help you understand managerial accounting, including how different kinds of companies operate; how accountants measure profits, efficiency, and productivity; and how managers apply continuous improvement.
Chapter 1
The Role of Managerial Accounting
In This Chapter
Understanding why managerial accounting is important
Costing business activities
Planning for profits and cash flow
Monitoring and evaluating performance
Considering the tasks and accreditation of managerial accountants
After months of work, you find yourself on your long-anticipated road trip, cruising down the highway for a relaxing week at the shore. Your goal is to enjoy a quiet week of sand, surfing, and fun. To reach your goal, you need a strategy, which in this case is loading up your car with luggage, tying the surfboards to the roof, filling the tank with fuel, and hitting the gas.
But you can’t forget to attend to important details along the way: Drive carefully, don’t speed, follow the directions, and fill up the tank before you run out of gas. Watch for important road signs. Make sure the surfboards stay securely attached to the roof. And out of excitement, try to predict what time you’ll reach your destination. Fulfilling your strategy (that is, actually getting to the shore) requires keeping an eye on a wide range of factors, many of which are critical to reaching your goal.
If you set aside the sand, sun, surf, and relaxation, managerial accounting is actually quite similar to going on a long road trip to the shore. Managerial accounting is the collecting and monitoring of information about a venture to make sure that it’s on its way to successfully meeting its goals.
This chapter explains what managerial accountants do and why they do it. It also explains what costs are and considers different ways of measuring them. Then you explore the important managerial accounting tasks of planning, budgeting, and monitoring and evaluating operations. You also find out the differences between managerial accounting and financial accounting.
Checking Out What Managerial Accountants Do
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. In the following sections, I delve into each aspect of a managerial accountant’s job.
Analyzing costs
Managerial accountants carefully collect information about a company’s costs in order to understand how costs behave. What causes costs to increase? How can the company decrease them? Managerial accounting offers many useful tools to help understand what drives costs and how different events affect net income.
For example, consider Grux Company, which manufactures grout. Every year, Grux must pay for raw materials, executive salaries, and sales commissions. The cost of raw materials varies with the volume of grout produced — the more grout you want to make, the more raw materials you need to buy. Executive salaries are probably fixed — they don’t change at all. Sales commissions vary with the amount of sales — the more sales, the more commissions. Managerial accounting helps Grux understand how different events affect costs and how they affect the company’s profits.
Planning and budgeting
After managers set goals and strategies for a company, managerial accountants get to work developing a realistic plan — with numbers, of course — to implement these strategies and ultimately meet their goals. This budgetary process requires coordinating all of a company’s functional areas, predicting sales, scheduling production, setting up purchases, planning staff levels, forecasting expenditures, and projecting cash flows.
The end result is a budget that predicts what will happen during the next period, explicitly laid down in dollars and cents.
Evaluating and controlling operations
Planning is one thing, but execution is another. Managerial accountants are responsible for continuously monitoring performance, evaluating it, and comparing it to the budget. This p...
