Accounting: The Language of Business - Vol. 1 (Part 108)

"False accounting is not growth; it is growth`s mirror image." - Morgen Witzel 

 

 Introduction to Managerial Accounting and Job Order Cost Systems (Part A)

by

Charles Lamson

Suppose you go down to the local bakery and buy a bagel and coffee. How much should the bakery charge you? The purchase price must be greater than the costs of producing and serving the bagel and coffee. Moreover, the bakery needs to be able to answer additional questions, such as:

• How many bagels must be sold in a given month and at given prices to cover costs?

• How should the price for a single bagel differ from the price for a dozen bagels?

• How many employees should be in the shop at different times of the day?

• How much should be charged for delivery service?

• Would a larger oven be a good investment?

• Should the shop stay open 24 hours per day?

All of these questions can be answered with the aid of cost information. In the next several posts you will be introduced to cost concepts used in managerial accounting, which help answer questions like those above. In addition, we will see how cost information is developed and used when work is performed on a specified quantity of product.

We will begin by describing managerial (or management) accounting and its relationship to financial accounting. Following the overview, the organizational role of management accountants in the management process will be described. Lastly, you will be introduced to the basic cost terms and apply them within a job order cost system.

The Differences Between Managerial and Financial Accounting

Although economic information can be classified in many ways, accountants often divide accounting information into two types: financial and managerial. The diagram in Exhibit 1 illustrates the relationship between financial accounting and managerial accounting. Understanding this relationship is useful in understanding the information needs of management. 

Financial accounting information is reported in statements that are useful for persons or institutions who are "outside" or external to the organization. Examples of such users include shareholders, creditors, government agencies, and the general public. To the extent that management uses the financial statements in directing current operations and planning future operations, the two areas of accounting overlap. For example, in planning future operations, management often begins by evaluating the results of past activities as reported in the financial statements. The financial statements objectively and periodically report the results of past operations and the financial condition of the business according to generally accepted accounting principles (GAAP).

Managerial accounting information includes both historical and estimated data used by management in conducting daily operations, planning future operations, and developing overall business strategies. The characteristics of managerial accounting reports provide both objective measures of past operations and subjective estimates about future decisions. Using subjective estimates in managerial accounting reports assists management in responding to business opportunities. Second, managerial reports need not be prepared according to generally accepted accounting principles. Since only management uses managerial accounting information, the accountants can provide the information according to management needs. Third, managerial accounting reports may be provided periodically, as with financial accounting, or at anytime management needs information. For example, if senior management is deciding on a geographical expansion, a managerial accounting report can be developed in a format and within a time frame to assist Management in the decision. Lastly, managerial accounting reports can be prepared to report information for the business entity or a segment of the entity, such as a division, product, project, or territory.

The Management Accountant in the Organization

In most large organizations, departments or similar units are assigned responsibilities for specific functions or activities. This operating structure of an organization can be diagrammed in an organization chart. Exhibit 2 is a partial organization chart for Callaway Golf Company, the manufacturer and distributor of Big Bertha woods and irons.

The individual reporting units in an organization can be viewed as having either (1) line responsibilities or (2) staff responsibilities. A line department or unit is one directly involved in the basic objectives of the organization. For Callaway Golf, the vice-president of manufacturing and the manager of the Carlsbad plant occupy line positions because they are responsible for manufacturing Calloway's products. Likewise, the vice-president of global sales and other managers are in line positions because they are directly responsible for generating revenues.

A staff department or unit is one that provides services, assistance, and advice to the departments with line or other staff responsibilities. A staff department has no direct authority over a line department. For example, the manager of pro tour relations is a staff position supporting the sales organization. In addition, the vice-president of new products occupies a staff position because new products are developed to support sales and manufacturing. Likewise, the vice-president of finance (sometimes called the chief financial officer) occupies a staff position to which the controller reports. In most business organizations, the controller is the chief management accountant.

The controller's staff often consists of several management accountants. Each accountant is responsible for a specialized accounting function, such as systems and procedures, general accounting, budgets and budget analysis, special reports and analysis, taxes, and cost accounting.

Experience in managerial accounting is often an excellent training ground for senior management positions. This is not surprising, since accounting and finance bring an individual into contact with all phases of operations. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 738-740*

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