1.1 The Role of Accounting in the Basic Management Process

Managerial accounting helps managers make good decisions. Managerial accounting provides information about the cost of goods and services, whether a product is profitable, whether to invest in a new business venture, and how to budget. It compares actual performance to planned performance and facilitates many other important decisions critical to the success of organizations.

The remaining chapters in this book focus on managerial accounting. This chapter provides an overview of managerial accounting and shows how to determine the cost of a particular type of product known as a job.

Compare managerial accounting with financial accounting

Whereas financial accounting provides financial information primarily for external use, managerial accounting information is for internal use. By reporting on the financial activities of the organization, financial accounting provides information needed by investors and creditors.

Most managerial decisions require more detailed information than that provided by external financial reports. For instance, in their external financial statements, large corporations such as General Electric Company show single amounts on their balance sheets for inventory. However, managers need more detailed information about the cost of each of several hundred products.

We show the fundamental differences between managerial and financial accounting in the chart and video.

Financial accounting Managerial accounting
Users External users of information – usually shareholders, financial analysts, and creditors Internal users of information – usually managers.
GAAP Must comply with generally accepted accounting principles. NO generally accepted accounting principle requirements
Time Period Uses historical (or past) data. May use estimates of the future for budgeting and decision making.
Detail presented Presents summary data, costs, revenues, and profits. More detailed data are presented about product.

 

Accountants currently face a big challenge: designing information systems that provide information for multiple purposes. Some people at lower levels in the organization need detailed information, but not the big picture provided by a company’s income statement. However, managers at top levels need to see the big picture.

All of you will use accounting information in your careers. Therefore, you need to know enough about accounting to get the information you need for decision making.

Managerial accountants face many choices involving ethics. For example, managers are responsible for achieving financial targets such as net income. Managers who fail to achieve these targets may lose their jobs. If a division or company is having trouble achieving financial performance targets, managers may be tempted to manipulate the accounting numbers.

In its Standards of Ethical Conduct for Management Accountants, the Institute of Management Accountants (IMA) states that management accountants have an obligation to maintain the highest levels of ethical conduct by maintaining professional competency, refraining from disclosing confidential information, and maintaining integrity and objectivity in their work.[1]

The standards recommend that people faced with ethical conflicts follow the company’s established policies that deal with such conflicts. If the policies do not resolve the conflict, accountants should consider discussing the matter with their superiors, potentially going as high as the audit committee of the board of directors. In extreme cases, the accountants may have no alternative but to resign.