Managerial Accounting Overview

Introduction to Managerial Accounting

• Purpose of Managerial Accounting: Provides information for internal decision-making within a company.

• Differentiation from Financial Accounting: Managerial accounting focuses on internal users (management), while financial accounting targets external users (investors, creditors).

• Use of Past, Present, and Future Data: Managerial accounting looks at historical data but also how it can be utilized for future planning and decision-making.

Financial Accounting Overview

• Nature of Financial Accounting: Involves reporting financial data of an entity to external users based on past transactions.

• Key Financial Statements:

  • Income Statement

  • Balance Sheet

  • Statement of Changes in Stockholders' Equity

  • Cash Flow Statement

• GAAP Compliance: All reports must comply with Generally Accepted Accounting Principles (GAAP).

• Focus Areas:

  • Primarily deals with external users.

  • Emphasizes financial reliability and conservatism.

  • Historical focus with periodic reporting (year-end and quarterly).

  • Information is audited, leading to delayed reporting.

Managerial Accounting Features

• Internal Focus: Aims to improve company operations using data for decision-making.

• Flexibility with Data: Unlike financial accounting, there are no stringent rules or GAAP restrictions.

• Use of Various Data Types: Incorporates both financial and non-financial data.

• Decision Types:

  • Costing products and services.

  • Determining profitability of products.

  • Employee motivation strategies.

Product Costing Example: Manufacturing a Car

• Cost Components:

  • Direct Materials: All materials directly tied to production (e.g., steel, plastic, tires).

  • Direct Labor: Wages for workers directly involved in production.

  • Overhead Costs: Indirect costs not directly linked to a specific product (e.g., factory utilities, management salaries).

• Cost Allocation: Indirect materials/labor are captured in overhead and allocated to products through various methods.

Product Costs Accounting

• Inventory Handling: Product costs contribute to inventory; they are expensed as Cost of Goods Sold (COGS) when sold.

• Inventory Formula:

  • Direct Materials + Direct Labor + Overhead = Total Manufacturing Cost.

• Cost of Goods Sold: Recognizes product costs only when goods are sold, distinguishing from operating expenses which are recognized immediately when incurred.

Overhead Allocation

• Allocation Methods: Overhead must be allocated based on drivers such as direct materials or labor.

• Tactics to Optimize: Identifying the main cost drivers helps ensure accurate distribution of overhead costs across multiple products.

Upstream, Midstream, and Downstream Costs

• Upstream Costs: R&D and product design costs incurred before manufacturing begins.

• Midstream Costs: Costs incurred during the production process (direct materials, labor, overhead).

• Downstream Costs: Costs related to selling the product post-production (marketing, distribution).

• Merchandising vs. Service Companies: Similar cost structures, but merchandising companies do not manufacture products; they purchase them for resale.

Just-in-Time (JIT) Inventory System

• Concept: Inventory is ordered and produced only when needed, thus minimizing storage costs and waste.

• Benefits of JIT:

  • Cost efficiency by eradicating excess inventory and associated costs.

  • Enhanced product customization for customers.

• Case Study - Dell Corporation: Transition to JIT reduced inventory from 40% of assets to 4%, leading to increased revenue and enhanced operational efficiency.

Role of Managerial Accounting in Corporate Governance

• Corporate Governance Purpose: Framework that ensures company management aligns with stakeholder interests.

• Importance of Information: Managerial accountants safeguard the accuracy and dissemination of internal information crucial for decision making and evaluation.

Cost Misclassification Impact

• Financial Statements Impact: Incorrectly classifying costs (e.g., misclassifying an upstream cost as a product cost) can inflate profits in the current period but leads to reduced profits in subsequent periods.

• Management Incentives: Incentives tied to net income can lead to misclassification pressures, impacting bonuses and overall financial reporting integrity.

Fraud Triangle in Corporate Governance

• Key Components:

  • Opportunity: Circumstances that allow fraud to occur.

  • Incentive: The pressure to commit fraud due to personal or professional reasons.

  • Rationalization: The capability of the individual to justify their dishonest actions.

• Preventive Measures: Strong internal controls (separation of duties, hiring practices, and ethical guidelines) help in reducing opportunities for fraudulent activity.

Sarbanes-Oxley Act

• Legislation Impact: Introduced post-2001 accounting scandals, emphasizing the need for strong internal controls and accountability in financial reporting.

• Requirements: Quarterly certification of financial reports by CEOs/CFOs and establishment of internal control processes to avoid fraudulent reporting.